UPL: Seeds of growth

UPL's stake in Advanta will reduce to 49.9 per cent post-IPO

Advanta's IPO will bring the necessary capital to expand the business, and reduce United Phosphorus' (UPL) exposure to the seeds business. Since the acquisition of Advanta's seeds business in February 2006, the UPL management has clearly indicated that they would be looking at an IPO.

The reason is two-fold""the IPO brings capital for Advanta's growth and it would reduce UPL's stake in the company to 49.9 per cent. The UPL management has not consolidated Advanta's financials with itself in the past four quarters for the same reason.

In January 2007, group company Uniphos Seeds and Biogenetics was merged with Advanta, and last month, the company raised an additional Rs 104.8 crore at a price of Rs 625 a share.

Subsequently, UPL's stake in Advanta has come down to 62.43 per cent, which will further reduce to 49.9 per cent. By getting Advanta listed, UPL will end up sitting on an enhanced valuation of its own stake in the company which it had bought in February 2006.

UPL had acquired Advanta in February 2006 through a wholly owned Bio-win Corporation, and the stake was transferred later to UPL.

UPL has paid an average of Rs 281 per share for its holding in Advanta India, and with the IPO being priced between Rs 600 and Rs 650 at the lower and upper end just a year later, UPL has done well for its shareholders.

Advanta was formed when Zeneca Seeds and Royal Vanderhave, the Netherlands, came together. It has operations in Australia, Argentina, Thailand and India.

The Indian arm of the company, formerly known as ITC Zeneca, was made into the parent holding company, while Advanta Netherlands Holdings BV, the erstwhile parent company based in the Netherlands, was turned into a subsidiary.

Advanta is a leading supplier of seeds and seed technologies to major global and regional markets, and has a well-diversified product portfolio consisting of crops like rice, cotton, canola, corn, sunflower, sorghum and wheat.

For the seven-month period ended October 31, 2006, Advanta India reported revenue of Rs 237.91 crore, with an operating profit of Rs 52.3 crore "" about 22 per cent of revenues and a net profit of Rs 35.3 crore amounting to a 15 per cent margin.

The company expects the Indian commercial seeds market to grow at a compound rate of about 10 per cent over the next four-five years and to maintain its operating margins at about 18-19 per cent annually. For investors, Advanta provides an opportunity to participate in the seeds business.

Pfizer: Lacklustre results

Pfizer has reported lacklustre results for the quarter ended February 2007, as it had to grapple with higher operational costs, coupled with its sales in Maharashtra being affected in December 2006 due to trade related issues.

Senior company management said that sales in its consumer healthcare business in the last quarter declined on a y-o-y basis, due to uncertainties in the marketing network due to the expected sale of this division shortly.

As a result, the company's operating profit (including service income) declined one per cent y-o-y to Rs 42.68 crore in the last quarter, as compared to a 4.4 per cent growth in its total operational income to Rs 160.27 crore. Its operating profit margin also fell 147 basis points y-o-y to 26.6 per cent in the February 2007 quarter.

The pressure on margins was also due to adjusted raw material costs as a percentage of net sales rose 843 basis points y-o-y to 20.8 per cent in the last quarter. The stock was unchanged at Rs 725 on Thursday, in contrast to the bullish sentiment on the street.

In the quarter ended November 30, 2006 too, the company had to grapple with trade related issues in Maharashtra. As a result, its operating profit margin had remained flat on a y-o-y basis at 18 per cent in the November 2006 quarter.

The US parent had earlier announced that it had sold its worldwide consumer healthcare business to Johnson & Johnson and Pfizer India is also expected to exit from this business shortly.

For the Indian arm, analysts say this business was estimated to provide about 21.8 per cent of the company's total revenues in the year ended November 2006.

Without considering the transfer of the consumer healthcare business, the Pfizer India stock trades at 21.5 times estimated November 2007 earnings, which leaves little room for further upside.

With contributions from Niren Shah and Amriteshwar Mathur