UPL: Buyout side-effects

Efficiencies in some of its purchases will take more time.

A series of global acquisitions has resulted in United Phosphorus' (UPL) consolidated top line rising by 75.8 per cent in Q1 FY08.

However, its operating margin declined 525 basis points to 19.8 per cent as it would typically take a few quarters for bringing in efficiencies in some of its purchases.

The top line was higher by about Rs 277 crore owing to Cerexagri, which it acquired in November 2006. The France-based company had an operating margin of less than 10 per cent in the quarter, which pulled down UPL's consolidated margin.

Like other companies that derive a large part of their income from international operations, UPL too was adversely affected by the rupee appreciation.

After Cerexagri, about 80 per cent of UPL's revenues come from international markets and North America accounted for 35 per cent of consolidated revenues.

With Cerexagri, its operations in the US and Europe are posting robust growth"" revenues went up by 88 per cent y-o-y in the US and 126 per cent in Europe (without Cerexagri, growth in both regions was around 13 per cent y-o-y).

Acquisitions like the recent one in Argentina or its earlier ones in Africa, fit well with its strategy to increase revenues from the rest of the world, which grew 25 per cent y-o-y (without including Cerexagri). But it was its domestic operation which was the highest on a like-to-like basis at an impressive 26 per cent.

Its acquisition engine is still running fast-it bought Argentina-based Icona, which has two plants and sells crop protection products for 0.8 times revenues (enterprise value of $10 million), as well as a fungicide and an acaricide from DuPont over the past two months.

UPL has provided a guidance of 15-20 per cent revenue growth this year and 25 per cent operating margin excluding Cerexagri. Now, UPL will have to integrate Cerexagri and improve its margin.

At its current price of Rs 326, the UPL stock trades at about 17 times estimated FY08 earnings and about 12 times FY09 earnings and should be an outperformer.

Mico: Automotive push

Mico, a leading manufacturer of diesel injection systems and spark plugs, reported an improved performance in the June 2007 quarter. As a result, operating profit grew 27.5 per cent y-o-y to Rs 248 crore in the last quarter, while total operational income grew 18.2 per cent to Rs 1093 crore.

This growth in the company's top line has come at a time when its key customers such as Tata Motors and Ashok Leyland have been grappling with sluggish offtake for their CVs.

However, analysts highlight that part of Mico's top line growth could be explained by improved demand for its components from clients like Maruti, for its Swift range. Mico's operating profit margin also improved 170 basis points y-o-y to 22.7 per cent in Q2 CY07.

Meanwhile, Mico's automotive products segment (which comprises nearly 90 per cent of total operational income) saw revenues rise 15.6 per cent y-o-y to Rs 977.4 crore in the last quarter. This division also benefited from increased outsourcing to its parent, Robert Bosch in the last quarter, add analysts.

In late June 2007, its parent had revised its buyback price from Rs 4,000 a share to Rs 4,600. At the end of the June 2007 quarter, the German parent held a 60.55 per cent stake in the company, which has increased to 69.73 per cent after the open offer.