CA.

Sharad Patel, Dayanand House, Group I, MBF

Capital Structure of United Phosphorus Ltd. INDUSTRY STRUCTURE AND DEVELOPMENT :The Company is mainly engaged in the business of agrochemicals, other industrial chemicals and chemical intermediates. It has also got a captive power plant in Jhagadia. The agrochemical industry has several crop protection products which can be broadly divided into herbicides, insecticides, fungicides and others. Herbicides prevent or reduce weeds. They mainly replace or reduce mechanical weeding and thereby help in reducing soil erosion, water loss and providing better targeted nutrition to the plants. Insecticides are used to control insects and pests that reduce crop yields and quality. Fungicides prevent and cure fungal plant diseases which affect crop yields and quality. The agrochemical market is divided into products protected by patents and products which have gone off-patent. Majority of sales of patented as well as off-patent products are dominated by multinational corporations. Over the last few years, there have been many mergers and acquisitions among existing agrochemical companies. The primary reasons for the same are slow pace of new product development, growing generics penetration and increasing cost of regulatory compliance. The industry is regulated by strict and expensive registration processes in various jurisdictions and environmental and safety legislations. There are environmental laws prescribed for production, storage and handling of inputs, intermediates and agrochemicals. As the new products are slow to come in the market, the success of business depends largely on distribution network of the companies. Over the years, the Company has expanded its distribution network in the international market through various subsidiaries. The Company has also acquired new products, businesses and companies to successfully integrate new products to its existing business. Within India, it has got sales depots and distributors across the country to cater to the Indian market. Population has been rising everywhere. This results in higher food consumption. Farmable land is limited and hence, productivity of land has to increase. In India, agrochemical industry is set to progress very fast in the coming years. The second Green Revolution is expected. The government is concerned with the slow growth in agriculture sector. It is providing various incentives and facilities for the growth of this sector. STRENGTH, OPPORTUNITIES AND THREATS:The industry is posing high entry resistance as the industry is capital intensive, long gestation period for the product to come to the market and lengthy regulatory requirement like field trial at different environment zones. More over the company is heaving good product basket. Through acquisitions, strategic alliances and subsidiaries, UPL has built a global network spanning 86 countries. The agrochemical industry in India is poised for good growth. Increase in world population, limited arable land, growing per capita GDP, newer technology such as biotechnology, etc. are the key growth drivers. In India, the use of agrochemicals is much less as compared to most of the developed countries. Increase in population requiring more food production will need more agrochemicals to boost the food production. In India, there are significant cost advantages in production of technical grade materials as well as formulations for agrochemicals. Entry barriers in the form of registrations for the

CA. Sharad Patel, Dayanand House, Group I, MBF

new entrants, strict environment regulations, intellectual property regulations and exorbitant costs of developing any new molecule will all help the established entities to grow their business. Due to its wide spread presence and current situation in Europe and USA, company may look for better acquisition of companies at a very attractive price. For this company may increase its debt which is currently at a comfortable position at Debt Equity ratio of about 1:1. The main threat to the industry is erratic monsoon and frequent changes in government policies which may result in ban of certain agrochemicals. To protect against such ban, higher costs have to be incurred to defend and protect the molecules. Further, unscrupulous formulators are a serious threat for the genuine players in the industry. SEGMENTWISE PERFORMANCE:a) Agrochemicals Agrochemicals accounted for 80% of total sales of the company. Increase in market share of the companys products mainly consists of agrochemicals. b) Industrial chemicals and intermediates this segment accounted for 19% of total sales. c) Power Power plant is for captive. d) Exports Exports accounted for 53% of total sales. BUSINESS OUTLOOK:The world economy is coming out of the downturn. Economies of USA and European countries are picking up again. This will benefit the Company significantly. In last few years, the Companys performance had remained static on account of slackness in demand in these countries. Overall business scenario for the Company is encouraging. A big advantage for the Company is that its cost of manufacture of agrochemicals in India is competitive. Further, it offers the largest range of agrochemicals. With various acquisitions, the Company has gained access to global markets and it is in a position to offer an extensive and balanced product portfolio to its customers worldwide. The Company has also strengthened its distribution reach and access to new markets by various strategic alliances with other agrochemical manufacturers of the world. The Company holds more than 1000 registrations for its products worldwide. The senior management devotes considerable time and resources in research and development for developing new products and improvement in manufacturing processes so as to enhance the quality of its products and make them more affordable. All these factors will help the Company to perform better in coming years

CA. Sharad Patel, Dayanand House, Group I, MBF

OBSERVATION & SUGGESTION: As on 31-03-2011, company is due Rs. 709.87 Cr. from its overseas Associate Enterprises on account of Sales and Rs. 1583.82 Cr. on account of Loans and Advances. The company has suffered a loss of Rs. 114.62 Cr. on account of exchange fluctuation during 2010-11 due to revaluation of ECB of Rs. 818.50 Cr. which is falling due in 1 years time. However, there is no visible enough internal accruals from operations to repay the ECB. Therefore, the management is advised not to borrow from Indian market to repay the ECB but to avail factoring facility abroad in its subsidiaries against Rs.709.87 Cr. which can be possible @ Libor + 2% p.a. Thereby, there will be saving of at least 5% p.a. resulting in saving of Rs. 35 Cr. Moreover, the Company should reduce loans given to its subsidiary at least by Rs. 985 Cr. out of total loan of Rs. 1583.82 Cr. to repay the unsecured debentures and reduce the interest burden due to Debentures. This will save another interest amount of appx. Rs. 49.25 Cr. [985 *(11%-6%)].

Dated: 24-08-11.