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The stock market didn't react positively to United Phosphorus' decision to buy 50 per cent in a Brazilian agrochemicals company, beating the stock down 5 per cent for the day.
However, the deal to acquire a 50 per cent stake in Sipcam Isagro Brazil from erstwhile joint owner Isagro may have the potential to add sizeably to the company's export revenues over the long term.
The move is strategically important as it allows United Phosphorus entry into one of the top five agrochemical markets in the world.
Brazil is one of the most sought-after markets for crop protection products globally with a rapidly growing farm sector that is focussed on cash products (sugarcane, coffee and soyabean), status as one of the world's largest exporters of agri-products and rapid improvements in agricultural productivity through use of technology and mechanisation.
In fact, the current market size in Brazil for crop protection products is pegged at $7 billion, roughly five times the Indian market for crop protection chemicals ($1.5 billion).
Entry barriers
The purchase of stake in an operational joint venture may also allow United Phosphorus to sidestep the formidable entry barriers that exist for any new player entering the Brazilian market.
Gaining entry into a new geography for marketing of agrochemicals is a long winded process requiring substantial investments, data generation about individual products and registration of each new product proposed to be marketed.
United Phosphorus' entry through an established player in Brazil with approved manufacturing facilities may hasten the scaling up of its Brazilian operation.
Given the company's status as a low-cost manufacturer and exporter of generic agrochemicals and formulations worldwide, United Phosphorus may even be able to source basic ingredients from its Indian facilities and use them to manufacture intermediates or final products at its Brazilian subsidiary to earn good profit margins.
While Brazil is a formidable market for agrochemicals, it does face a shortage in inputs and intermediates, importing roughly half its requirements.
Issues regarding the integration or running of the newly acquired facilities, which would usually pose a problem with an acquisition, too may be more easily resolved for United Phosphorus given that it is no stranger to the inorganic route.
The Sipcam-Oxon acquisition is the company's third buyout this financial year, having bought out the Mancozeb fungicide business from DuPont in June 2010 and purchased RiceCo LLC in the US in December.
The financial details of this deal have not been disclosed.
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