United Phosphorus

Sorry about the boring ‘stock forecast’ type of posts, but the United Phosphorus (UPL) chart set-up has caught my eye and I thought I should record this here today to come back and revisit the idea at a later date to check if the hunch was right. The chart clearly shows a very reliable support level of 125 – the stock has always bounced up a bit from that level giving returns in the range of 21% to 36% each time it has touched that level (see dotted red line on the chart). To me this looks like a good short term opportunity to pick up a 10% till the stock’s relationship with its 200 DMA becomes clearer. On their part various brokerage houses have come out with predictions for the stock ranging from 172 to 196 so there indeed looks like sustained buying interest.

UPL ranks 4th amongst the top global agrichemical generics companies with presence across the US, EU, Latin America and India. The market is divided into innovators who sell patented molecules and the generics. Given that a lot of patent expires are due in the next couple of years, this should serve as a good pipeline of opportunities for the generics companies. UPL gets 80% of its revenues from international markets and 20% from domestic sales. So buying this company again means that we are effectively shorting the INR. And important factor in this case since forex benefit due to favourable exchange rate movement contributed to ~19% of UPL’s 3Q12 revenue growth when compared to its 3Q11 revenues. The company is selling for a price of ~INR 127 per share today and given an expectation of a FY12 EPS of INR 14, this implies a P/E of 9 (looks attractive on this front). Equity research reports point out that its other Indian competitor, Rallis India Limited is ~50% – 60% higher on the 1 yr forward P/E front.

What is not clear to me is the company’s ability to hike prices in case it experiences margin pressures. I doubt it would have too much of pricing power – which means that if the exchange rate turns unfavourable (RBI cuts repo rates even more) or if their working capital requirements continue to zoom up, then UPL may have to take a hit on its margins. Since most brokerages are targetting a price range of 172 – 196, this target range could scale down to the 165-168 range in case these risks materialize. Incidentally, 165-168 may also be the resistance level for the stock. Regardless, the prospect of a 10% short term and a 35% medium term gain isn’t bad.