Strong volume growth boosts UPL's revenue

Forex losses result in higher finance costs and lower other income, hitting net profit

UPL’s results for the quarter ended September were broadly in line with expectations, with revenue growing 14 per cent to Rs 2,662 crore on the back of robust growth in the Latin American, European and rest-of-the-world markets.

Most of the gains came from higher volumes, which rose 15 per cent; price increases stood at only two per cent. The devaluation of currencies in Latin America (Brazil, Argentina) had a two per cent hit on the company’s revenue. As expected, revenue growth for the Indian market was a muted eight per cent.

India and Latin America account for 60 per cent of the company’s overall revenue. Going ahead, the company expects both these regions to fare well.

At Rs 166 crore, net profit was below the consensus estimate of Rs 210 crore. The profit was hit by forex losses, which led to higher finance costs and lower other income. Interest costs, at Rs 140 crore, rose 16 per cent on a year-on-year basis, with its forex impact (related to interest on foreign loans) pegged at Rs 49 crore. Expenses related to restructuring of Latin American operations and prior period items of about Rs 17 crore also impacted profits. Other income fell 39 per cent year-on-year to Rs 17 crore. But for the exceptions, the adjusted net profit stood at Rs 230 crore (according to Emkay’s estimate).

Other expenses rose 24.4 per cent to Rs 632 crore, hitting the company’s operating profit margin by 25 basis points (18 per cent). This was despite the fact that raw material costs, as percentage of revenue, fell 127 basis points to 48.6 per cent.

For the April-September period, the margin increased 9.5 basis points to 18.5 per cent. Considering the falling prices of crude oil and its derivatives, the margin could rise further. Given the lag effect of prices impacting various derivatives, UPL might see the benefit from the next quarter, as a major part of raw material costs are linked to crude oil and derivatives.

The UPL management has indicated for FY15, margins are expected to be 18-19 per cent, with revenue estimated at 12-15 per cent.

For the first half of this financial year, annual growth in sales was 13.2 per cent. Traditionally, the second half is better, with growth and margins expected to rise, primarily aided by European and US markets.

The UPL stock, which fell 1.1 per cent on Tuesday after the results were announced, closed at Rs 326.75. However, the stock recovered on Wednesday. Given the better outlook for the second half, expect the stock (which is off its all-time high of Rs 388 seen last month) to see gains, as most analysts are bullish, with an average target price of Rs 388.