A string of acquisitions over the past 10 years pump up topline, but costs soar too
United Phosphorus, a Gujarat-based ` 2,900-crore crop protection company, finds itself in an unenviable position. The push to drive up sales is facing some pressure from an unlikely quarter - dwindling profitability. And a way out currently doesn’t look that easy.
The company, which had gone for a raft of acquisitions in the past 10 years, had seen its sales and PAT numbers grow at a compounded annual growth rate (CAGR) of approximately 27%. But its PAT margins and return on equity (RoE) languished, which came in much lower compared with its peers.
In the past seven years, its average PAT margin stood at around 10% and RoE at an average of 9%. When compared with Rallis India, a Tata Group crop protection company and a subsidiary of Tata Chemicals, the numbers of United Phosphorus look substantially dwarfed. For Rallis India, the average PAT margin was 19% and the RoE 25% in the same seven years under review.
In fact, Sageraj Bariya, managing partner of Equitorials, an independent research house, said going forward, PAT and PAT margins of the company will continue to stay under pressure. Besides, its share price and margins have also not moved in tandem with sales.
“In the past ten years, the company had acquired over 24 companies worldwide which has increased its topline numbers very rapidly, but at the same time it has put pressure on its margins and profitability, of late,” he said.
Going ahead, the management still feels that the company will continue to post robust sales numbers by virtue of its entry into the Latin American market through the acquisition of Brazilian company DVA, but admitted that its margins will be under pressure.
During a conference call held recently after United Phosphorus declared its Q2 FY12 numbers, S Krishnan, chief financial officer, said: “Seeing the significant volume growth that the business has seen over the last two quarters and the transaction that we did in Brazil recently, we believe the business in terms of revenue growth will grow possibly even higher…. anywhere in the region of 30 to 35%.”
However, he added there are challenges in terms of managing working capital and margins and would manage to keep an earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin in the region of around 19% to 20%.
However, analysts are largely upbeat about the prospects of the company in the short term, which explains their ‘buy’ rating. “We are now building in 31.5% y-o-y revenue growth in FY12F and 15% in FY13F with half the growth in FY12F driven organically,” said Aatash Shah and Vineet Verma from international brokerage Nomura Equity Research in their latest report.
Analysts Rohan Gupta and Balwindar Singh from brokerage Emkay Global said they have revised their revenue estimates to reflect higher revenue contribution from DVA acquisition and higher volume growth being witnessed in Latin American markets.
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