Latin America performance steadies the ship for UPL, say analysts

India, European biz underperformed, but the firm has maintained its FY20 revenue guidance

UPL’s moderate 7 per cent growth and below-expectation profit in the June quarter have affected the Street’s sentiments. The stock has corrected about a fifth over the past month, given the underperformance in key markets, one-offs, and higher taxes.

India sales, which constitute about 15 per cent of the total, were down 8 per cent year-on-year due to the delays in crop sowing because of a deficient monsoon. Even European sales (about a fifth of overall) were affected due to the unprecedented heat wave, which led to uncertainty among farmers. Sales in Europe declined 3 per cent.

Despite a subdued domestic environment and challenging global market conditions, Latin America (LATAM) continues to support overall sales. Brazil’s growth was led by strong performance of herbicides and insecticides. Product demand in nearby geographies was also strong, with stable currencies and favourable weather conditions boosting demand. LATAM is the largest contributor (30 per cent to overall) to revenues and grew at 25 per cent.

It was the diversified global presence of UPL that provided a cushion to growth despite turbulence across geographies. The Arysta acquisition led to 91 per cent growth in revenues. However on a like-to-like basis (including Arysta sales in the year-ago quarter), growth increased 7 per cent to Rs 7,858 crore, ahead of consensus estimates of Rs 7,204 crore.

The company has stuck to its 8-10 per cent growth in FY20 and the management reiterated that it would achieve the same, along with debt reduction of close to $500 million during the year. This is a positive signal and provides confidence to the Street.

Analysts say UPL clocked revenue and cost synergy of $20 million and $19 million in Q1FY20, respectively. The company has guided for $100 million and $80 million worth of synergies in FY20. The synergy benefits from the Arysta acquisition are keeping analysts bullish. Analysts at Antique Stock Broking estimate sales, operating profit and net profit growth of 35 per cent, 45 per cent, and 36 per cent annually over FY19-21, respectively. Analysts at JM Financial continue to like the geographically de-risked strategy and presence across value chain businesses.