Strong growth outlook, valuations point to further upside for UPL

Buyback could support the price in the near term

The stock of the country’s largest agricultural inputs company, UPL is up about 4 per cent in trade on Thursday taking its cumulative gain over the last four trading sessions to about 13 per cent. While a buyback proposal and reports of UPL attracting takeover interest from global rivals are the immediate triggers, a strong growth outlook on the back of improved prices and higher volumes going ahead is expected to support earnings and valuations going ahead.
 

The company approved a buyback proposal yesterday earmarking up to Rs 1,100 crore for the same through the open market route. The price at which the buyback will be carried out is for a maximum of Rs 875 per share which represents a 27 per cent premium to the closing price on March 2.

The company, according to a Bloomberg report, is attracting a takeover interest from global rivals though the same is in early stages. The company could also look at tie-ups with overseas companies or focus on organic growth, the report adds. Any takeover would bring to play foreign investors who are the largest owners in the company accounting for 42.4 per cent of shares while promoters of UPL are the second largest with holdings of 28.2 per cent.

UPL, which has a market capitalisation of just over $7 billion, became the world's fifth largest crop protection company after Bayer, DuPont, Syngenta, and BASF post the acquisition of Arysta Lifescience for $4.2 billion three years ago.  

While any deal will have a bearing on the stock, the December quarter performance and the positive near term outlook bode well for the Indian market leader. Aided by a 11 per cent growth in volumes and 13 per cent higher pricing, the company delivered a robust 24 per cent revenue growth in Q3FY22. The healthy demand environment drove volume growth across key markets with the exception of India which delivered a flattish performance.  

In fact it was the pricing power or the improvement in realisations which helped UPL partially offset the sharp rise in costs both on the raw material and freight costs. While operating profit margins improved sequentially they were down 249 basis points over the year ago quarter. One factor that has worked in the company’s favour is its robust backward-integrated set up. Says Prashant Biyani of Elara Securities in a post results note, “UPL’s continued investment in manufacturing has ensured minimal supply chain shock amidst robust demand environment, thus propping up its business. Its collaborative approach (+70 projects under evaluation), product pipeline, both for traditional chemical pesticide and biologicals, and digital platform investment will make it more agile.”  

While North America, Europe and Latin America saw a growth jump (22-56 per cent), the street will keep an eye on the India business which stagnated at year ago levels. While erratic rains dented the performance of the sector in the first half of FY22, brokerages believe the government support and higher procurement at minimum support prices, and expectation of normal monsoons are positives. At a global level, Edelweiss Research expects remunerative crop prices (across soybean, maize, cotton and wheat) to help improve overall demand for agri-inputs. They expect UPL and Sharda Cropchem to remain the key beneficiaries of this.

One thing which works in favour of UPL both from an investor and an acquirer point of view are valuations which are trading at 22 per discount to 10-year average valuations. At under 10 times its FY24 earnings estimates, UPL, according to Elara Securities, is one of the most inexpensive global scale agrochemicals stocks.