Investment Rationale
Ø AIL, associate (post IPO) of United Phosphorus Ltd. (UPL), is major international agri hybrid seeds company with principal operation in India, Australia, Thailand and Argentina and presence in 18 countries.
Ø Combination of factors like high population growth, limited availability of land have raised concerns world over on issues of food security & affordability making this industry attractive with high growth potential; company is well placed to capitalize this opportunity.
Ø Company has de-risked business by providing variety of hybrid seeds globally which shelters it from seasonal fluctuations in revenue and cyclical crop patterns, typical to agriculture industry.
Ø AIL has proprietary germplasm and strong R&D capabilities. It is developing SUNSAT (has healthy oils without complication / cost of genetic modification), holding huge business promise (expected launch-2009).
Ø Company can benefit from vast pool of agricultural knowledge and support of UPL.
Investment Concerns
Ø Agriculture runs risks of weather conditions, pests & diseases, despite pest / disease resistant seeds presence.
Ø Genetically modified seeds, on getting requisite approval, represent a major substitution risk.
Ø Competition in industry and effect on customers’ ability to pay from commodity prices volatility.
Recommendation
Ø AIL is offering shares at P/E of 23 - 25 times FY 2007 expected EPS of Rs. 26.2 and 16 - 18 times FY 2008 expected EPS of Rs. 36.6 on fully diluted equity.
Ø Excellent future prospects in view of rising focus on sustained agriculture growth, strong parent and R&D facilities. Hence, we recommend to “Subscribe” issue.