United Phosphorus: united we stand.. !

United Phosphorus is amongst the top 7 players in the Crop Protection business worldwide. This company is one going global. We like its businessmodel of using acquisition route for gaining entry.
Crop Protection business: A Generic opportunity.The Global Market is around $ 35 bn. of which about 70% is non patented. USand Europe consume 50% of the global sales. The Generic companies accountfor only $ 7 bn. The major sales still are made by the innovator companies.BASF, Dow, Bayer..are some of the names here.The entry barrier is high. The registration process is lengthy and involves high-cost. The capital intensity is high in this case and creates a need for strong distribution tie-ups. This has been the reason for very few serious generics players.In this scenario, the price erosion is limited to 5-10% post the product going off patent. This is very much different to the Pharma sector where there is cut throat competition in the off patent space. Post the exclusivity sales period the price erosion in the Pharma market is as much as 90%.

United Phosphorus Limited (UPL) is the largest crop protection company inIndia. The company ranks fourth amongst the generic agrochemical companiesin the world. It products include fumigants, fungicides, insecticides,rodenticides and herbicides. It is the world's largest producer of AluminiumPhosphide from India and Napropamide from UK.Size has given UPL a strong advantage over the others in the Crop Protection business. To add to this it is highly profitable. The reason for theprofitability is its backward integration and Chemistry Skills. The manufacturing costs in India are about 30% lower than in Europe and the US.This helps the company in breaking even faster in the acquisition that i tmakes.Indian crop Protection industry is 12th largest in the world. Rough sales of about Rs 3200 crores. Consumption levels are low given the lower penetration, lack of organized farming and poor understanding and the lackof risk taking capability of the farmer.

A small division: Industrial Chemicals & Intermediates: This is now only a small part of sales at about 5- 7%. Growth has been limited because ofChinese competition. The company manufactures of white phosphorus, redphosphorus and compounds used in various industries like matches, fireworks,pharmaceutical and pesticides. Almost 50% this production is used in-housefor manufacturing various technical grades.We think that the VAT story is playing out in the Pesticides as well. TheIndian Market is highly competitive. We believe that there is a large level of unorganized market. With implementation of VAT we think that this company should reap the benefits of the same. The company has a network of more than 5000 dealers and 25 offices established a distribution network in various markets, some of theminorganically. Implementation of VAT may offer an opportunity of growth inIndia

UPL has 25 generics registered across the world, and established adistribution network in various markets. So really what it has done is created a distribution engine. The idea now is to acquire smaller brands from the established players and leverage on this distribution network and its own lower cost manufacturing. The price erosion and smaller size of some brands has the bigger players looking to offload this to ready buyers. The focus of the established players is more on Seeds and higher end patentedproducts. Interesting to note that the company has almost 40% of revenues from acquired companies. We believe growth could explode here..Through acquisitions, strategic alliances and subsidiaries, UPL has built a network across the globe -- in Europe, America, Asia Pacific, CIS, Africaand Australia with fully owned subsidiaries in Argentina, Australia,Bangladesh, China, Cuba, Denmark, Honduras, HongKong, Japan, Mauritius,Mexico, Poland, Russia, South Africa, USA, UK, Zambia, Zimbabwe and representative offices in Sri Lanka & VietnamUPL has established its presence in the high consuming nations, its only amatter of time that these products will start seeing exponential growth. UPLin India was a price warrier. We think thats what brought in the volumes.The low cost Indian Manufacturing offers an opportunity to try the same in Developed Markets as well.The company recently raised $150 mn in FCCBs (convertible bonds). This has been normal for the company to raise money just ahead of an acquisition.This the company just did that by acquiring Advanta for Euro 61 mn. This company has an Ebidta margin of Euro 11 mn This company is based out ofNetherland and has 4 subsidiaries. This is a big acquisition and makes UPL abig player in the Indian Seed market as well.We believe implementation of VAT may offer an opportunity of strong growthin India. (This needs to be reconfirmed). We are not sure .. how big is the unorganized sector in this business.The reduction of subsidies to Agriculture in US and Europe is a threat which needs to be understood. One could argue.. that given UPLs higher margins manufacturing it will be able to weather the storm better.. but really would it lead to that needs to be understood well. The other risk to contend to is that India accounts for 35% of revenues and that is still prone to the vagaries of the monsoons.The green environmentalism is a threat to an extent. A ban on certain products on the back of high toxic levels of health issues could have some slowing. However given the range of products that the company has.. we think that this risk is not high ....Derisked nature of business.

Given the derisked nature of business in terms of number of products and geographies, we believe U Phos is well positioned to play the Generics game.Given the large size of this company. We think it offers a good investment play on the Global Agriculture and the low cost generic manufacturing capabilities without the inherent risks of price erosion.The sales from the subsidiaries will see good upsides as the consolidated entity begins to deliver.