United Phos: Catalysing growth

Cerexagri's strong presence in fungicides will help United Phos up segment's contribution to sales from 7% to 34%.

For its fifth acquisition in 2006, United Phosphorus has acquired France-based Arkema's Cerexagri group of companies for euro 111 million.

At a sale of about euro 200 million for 2006, the acquisition is attractively priced and will add about a half of the company's revenues. UPL will finance the purchase through internal accruals and debt.

Cerexagri has a strong presence in North America and Europe, with 82 per cent of its sales coming from these two regions. Until now UPL has had a small presence in the fungicide segment, contributing just 7 per cent to its sales.

However, Cerexagri's strong presence in the space will help the company increase the fungicide contribution to 34 per cent.

The acquisition will also help UPL catapult itself into the 11th slot from the current 16th in the global agrochemical sales rankings.

Cerexagri has a strong presence in post-harvest fruits and vegetables treatment as well, and this will come to UPL's portfolio as a new area.

For the September 2006 quarter, UPL's consolidated sales grew 17 per cent, while its operating profit went up 15.8 per cent.

The company has been able to manage its past acquisitions well, as its operating margin still remains over 25 per cent, just down 28 basis points y-o-y. While the domestic business posted a strong growth in Q2, it saw some slowdown in the US and Europe.

Going forward, UPL will have to look for growth in markets outside the US and Europe. According to the UPL management, Cerexagri's margins are similar to UPL's, and the company expects to grow the business at 15-20 per cent a year. At about 20 times estimated FY07 earnings and 16 times FY08 earnings, the UPL stock appears reasonably priced.

BPCL: Oil bond booster

BPCL, like other oil marketing companies, has reported substantially improved performance in the September 2006 quarter, thanks to oil bonds from the central government.

The company's operating profit rose a whopping 1304% y-o-y in Q2 FY07, compared with 55.6 per cent growth in net sales. Also, its operating profit margin increased 580 basis points y-o-y to 6.5 per cent in the quarter.

Other OMCs including IOC also saw their operating profit margin rise 320 basis points y-o-y to 7 per cent in the last quarter.

BPCL's throughput grew 24.1 per cent y-o-y to 5 million tonne in the September quarter. But, its Mumbai refinery's gross refining margins fell to $2.94 a barrel from $3.77 in Q2 FY06.

In its retail fuel marketing division "� and that of kerosene and LPG sales "� the company, however, was able to offset the under-recoveries in Q2 FY07, as upstream players and refiners shared its subsidy burden "� and also the oil bonds.

Upstream players provided Rs 2,718.7 crore in the last quarter, while refiners provided Rs 29.9 crore. BPCL recently received regulatory approval for the merger of Kochi Refineries (KRL).

Going forward, synergies with KRL could help it improve the performance of the refining division. BPCL, like other OMCs, has, for the past few weeks, been making a marginal profit on blended sales of auto fuels.

However, with global crude oil prices dipping 20 per cent in the recent past, analysts say the government may need to rework the quantum of additional oil bonds for OMCs. So, given these uncertainties, the BPCL stock seems expensive at 10.5 times estimated FY07 earnings.

PNB: Better show

Punjab National Bank managed to improve its net interest margin by 6 basis points q-o-q and 16 basis points y-o-y in the September 2006 quarter, as its cost of deposits declined marginally on a q-o-q basis to 4.35 per cent.

This seems to be an impressive feat, as deposit rates have risen. The bank's low-cost deposits (current and savings accounts) improved further to nearly 49 per cent, up 300 basis points y-o-y.

The 14.4 per cent growth in the bank's net interest income is slightly disappointing. Credit growth was reasonably good at 28.9 per cent y-o-y in Q2. Retail credit grew by 47.7 per cent y-o-y and accounted for 24 per cent of total advances.

The bank has consciously chosen to maintain its margins and not chase deposit growth. Deposits grew 15.7 per cent y-o-y in the June quarter and 17.4 per cent in the September quarter.

Operating profit growth was good at 30 per cent y-o-y, as operating expenses fell 7.5 per cent owing to lower salaries and provisions.

Like other banks, PNB's investment portfolio is also declining with the loan book growing. Its net interest margin and credit quality (net NPAs halved to 0.18 per cent q-o-q) are among the best in the sector. The bank trades at 1.6 times and 1.4 times estimated FY07 and FY08 book value, and should be an outperformer.