Sunidhi calls a ‘Buy’ on United Phosporus
CMP: Rs. 119 Target Rs. 171
United Phosphorus reported just 5% revenue growth for Q2FY13 due to de-growth in India and USA geographies. EBIDTA remained flat on YoY basis as margins declined to 17.6% compared to 18.3% YoY, while on QoQ basis; margins went up by 12 bps. Bottom line grew by 108% as Q2FY12 had forex loss of Rs 1113 million, which had impacted PAT during that quarter.
USA witnessed severe drought while India too had erratic and delayed monsoon: The drought of 2012 in US is one of the worst in last few decades. Corn prices remained strong and hence area under corn remained healthy while Rice crop got significantly impacted (as it needs much more water). UPL had acquired RiceCo in 2011, which strengthened its position in USA, especially in Rice as RiceCo is single product (rice herbicide) company and had ~$30 million revenues in 2011. With area under Rice significantly impacted, it posted 9% de-growth in North Amrica on YoY.
Operating margins improves 12 bps QoQ, expect improvement in 2HFY13: Brazil has become very important in UPL’s business. Q1FY13 is seasonally weakest quarter in Brazil while it’s peak season is from Aug – Feb each year. Due to this seasonality, fixed costs in Brazilian business are apportioned on lower revenues leading to pressure on margins in Q1FY13. Operating conditions in USA and India were challenging. Despite that, margins improved 12 bps QoQ as Brazil’s contribution in topline is much more in Q2 compared to Q1.
Topline growth guidance maintained at 15%: UPL had guided for 15% topline growth in FY13 at the beginning of the year at INR: USD of 51. The management maintains the guidance of 15% growth in INR terms at exchange rate of 51. If INR remains at current levels of 53 – 54 throughout the year, growth should be much higher on account foreign exchange variation.
Fair value of Rs171/share (Upside of 45%), Maintain “Buy”: UPL is proxy play to global generic agrochemical markets. Weather is key risk to its business with unpredictable crop seasons across geographies such as draught in USA, delayed monsoon in India and very wet season in Europe in the season gone by. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may impact growth significantly. It is trading at attractive valuations though deterioration in margins, working capital is a concern. It has lower ROAE’s compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. Despite that, It’s ROaE has been 15% - 16% and Net D/E is comfortable at 0.6x. At CMP of Rs 118, UPL is trading at P/E of 8.1x and 6.9x for FY13E and FY14E EPS. We maintain estimates and target price at Rs 171 based on P/E of 10x for FY14E EPS. Maintain ‘Buy’.
SPA Securities calls a ‘Buy’ on Eclerx Services
CMP: Rs. 710 Target Rs. 874
eClerx reported 6.1% Q2FY13 revenue growth at $29.8mn (SPAe: $30.4mn) on the back of 4.6% inorganic growth through Agilyst and 1.5% organic growth. Its EBIT Margins declined by 490bps to 32.4% sequentially on the back of higher employee and amortization cost. PAT margins came down to 15.6% from 33.5% in Q1FY13, cumulatively affected due to decrease in EBIT margins coupled with other income loss of INR 187mn. Thus, we have adjusted our FY13 EPS to inculcate this drop. However, we expect FY14 numbers to be inline with our existing estimates on the back of strong order pipeline. We continue to recommend BUY with a 18-month TP of INR 874.0
Revenue Growth – Inorganic Growth Driver: eClerx reported Q2FY13 revenue of $29.8mn slightly below our expectation of $30.4mn. It’s 6.1% sequential USD revenue growth was driven by (i) Agilyst acquisition (4.6%) with Q2 being the first fully accounted quarter and (ii) Organic growth (1.5%) of which 3% was volume driven, partially offset by pricing cuts of 1.5% given to some clients as bulk discounts for business continuity. The company added 4 new clients with the total number of active clients being stable at 54.
Growth Avenues: The growth was mainly backed by US operations, with contribution of North America to overall business growing from 71% to 75%. Top-5 clients contributed less than 80% for the first time in 12 quarters. Revenues from SEZ business saw a decline causing a jump in tax rates. We expect the tax rates to stabilize at 23% for FY13.
Outlook and Recommendation: We have adjusted our FY13 EBIT and PAT numbers to inculcate the employee, integration and amortization costs for H2FY13/14. However we expect the company to clock 27% USD revenue CAGR over FY12-14E at lower but stable margins of 35.6%/34.1% in FY13E/14E. Thus, we continue to recommend BUY with 18-month TP of INR 874.0 at 12x FY14E earnings.