United Phosphorus: Spreading wings

United Phosphorus will buy three crop protection products from Bayer with annual sales of euro 27 million.

United Phosphorus is spreading its wings, acquiring manufacturing and distribution across the world. In line with this strategy, the company will now acquire three crop protection products from Bayer CropScience, Germany for 43.5 million euros or about Rs 260 crore.

The three products include herbicidal active ingredient asulam, and two insecticide products trichlorfon and oxydemeton-methyl (Metasystox brand). UPL believes that with this acquisition, its product portfolio will improve.

In terms of valuation, these three products had annual sales of 27 million euros, which may seem a tad expensive in terms of the sales multiple. But with a 25 per cent margin and UPL's plans to improve sales further, the deal seems reasonable.

These products have a footprint in 30 countries. Asulam accounted for about 60 per cent of the sales, with most of the Asulam sales coming from the US and Europe.

Trichlorfon has a large proportion of its revenues coming from Japan, while Metasystox is sold in India and some other smaller countries. Bayer will retain marketing rights related to non-agricultural uses in strategic markets.

International business accounts for nearly three-fourth of UPL's consolidated sales. Earlier this month, the company had increased its stake in Cropserve from 19 per cent to 100 per cent, through which it acquired distribution in Zambia, Mozambique and Malawi. In the second half of 2005, it had acquired three companies and Advanta's seeds business.

The Bayer news saw the stock rising nearly 4 per cent on Wednesday. But over the past year, the stock has underperformed the market""the UPL stock has appreciated 28 per cent, while the Sensex is up 54 per cent. At its current price, UPL trades at 15.5 times estimated FY07 earnings, and is not expensive considering its prospects.

BHEL & L&T: Expansion spree

With the capex cycle, both in India and neighbouring countries, continuing to be strong, the two largest engineering companies""BHEL and L&T-- have recently outlined their expansion plans.

BHEL announced a roadmap for expanding equipment manufacturing capacity to 10,000 mw annually, at an investment of more than Rs 1,600 crore.

Analysts at domestic brokerage houses estimate 54,000 mw of power projects to be awarded in the 11th plan (2007-12), as compared to nearly 34,000 mw in the 10th plan (2002-07). BHEL has already supplied equipment for projects amounting to about 19,500 mw capacity in the 10th plan.

The company's outstanding order book amounted to Rs 39,300 crore in June 2006, as compared to Rs 30,600 crore a year earlier.

Meanwhile, Larsen & Toubro is gearing up for the growth opportunities in the West Asia and China in the hydrocarbon, infrastructure and power sectors via a capex plan of Rs 1,200 crore.

As part of this strategy, the company is setting up manufacturing facilities in China for selected machinery and industrial products, coupled with a modular fabrication facility in Oman for the hydrocarbon sector. L&T's export order book more than doubled in FY06 to Rs 3,975 crore and is expected to improve further, going forward.

Considering the growth opportunities, both stocks are trading at high valuations""BHEL trades at about 26 times estimated FY07 earnings, while for L&T it is 25 times.

Titan: Robust growth

Titan's sales growth of 54 per cent y-o-y in the June quarter to Rs 440 crore has been impressive. However, the operating profit margin is down sharply 160 basis points to 3.7 per cent on of the reasons for which has been the rally in the gold prices which have gone up 50 per cent.

Material costs as a percentage of sales are up from 64 per cent to 67 per cent. This coupled with higher marketing spends have dented margins overall.

The high gold prices have resulted in a fall in the operating profit in the jewellery business. Titan now straddles both ends of the watches market and the segment has grown fairly well at 18 per cent y-o-y during the quarter.

The growing consumerism will continue to keep the sales momentum going while increasing sales of higher value watches should ensure that margins remain stable.

There has also been an improvement in Titan's sales mix, which has shifted from the cheaper Sonata watches to higher priced watches, and from gold jewellery to studded jewellery, which will bring better margins.

Going forward, Titan will be able to leverage the Indian consumer story thanks to its strong brand name as well as retail presence. The Titan stock has risen 40 per cent since its results in mid-July.

However, at the current price of Rs 797, the stock trades at 28 times estimated FY07 and 22 times FY08 earnings and is valued a tad expensively.

With contributions from Amriteshwar Mathur and Shobhana Subramanian