We upgrade United Phosphorous (UPL) to ‘add’ (from 'sell') and raise our target to Rs 250 (R155 earlier), thus, valuing the stock at 10x one-year forward EPS. We have raised earnings multiples due to the management’s efforts to improve the balance sheet, which we hope will continue. Initial efforts are visible in improved 2014 RoCE. We have increased our estimates, led mainly by a lower tax rate.
UPL’s Q4 results beat estimates, led by a sequential decline in staff costs and low-tax rate of 10%. With the exception of Latin America and Europe that reported subdued revenue growth (Latin America sales were flat y-o-y in the rupee terms; Europe sales were flat y-o-y in euro terms), the other regions grew strong. India and US sales were up 31% and 12% (US dollar terms) y-o-y, respectively. UPL reported Q4 ebitda of R670 crore (+25% y-o-y, +45% q-o-q); Ebitda margins of 20% were up 110 bps y-o-y. Beat on margins was led completely by lower employee costs, which fell from R260m crore in Q3 FY14 to R230 crore in Q4 FY14, aiding ebitda margins by 144 bps y-o-y.
Employee costs in the quarter were almost the same as in Q1 FY14 whereas the rupee depreciated almost 10% from Q1 FY14 levels, which itself would have inflated employee costs outside India. Reported consolidated PAT of Rs 360 crore (after extraordinary costs of R41.3 crore) was higher than estimated. Apart from a beat at the ebitda level, a lower tax rate of 10% was responsible for outperformance at the PAT level.
Kotak Institutional Equities