Many rerating cues for UPL

Product launches, presence in high-growth markets and lower debt should help it improve revenue, earnings growth

Agri-chemicals major UPL, earlier United Phosphorus, hit its 52-week high last week on easing of rainfall deficit fears and increased sowing in India, its largest single market accounting for 21 per cent of FY14 sales. Rainfall deficit is down from 16 per cent earlier this month to about 11 per cent now and should improve demand for agri-chemicals, helping UPL. Sowing has also now improved to 95 per cent of the national cultivable area, which is just under the 98 per cent coverage of last year. While the management has forecast for an overall revenue growth of 12-15 per cent for FY15 in July, growth could be higher, given the contribution from India operations. The other key market for UPL is Latin America (including Brazil), which accounted for 26 per cent of its revenues. Analysts expect this geography to grow at 10-12 per cent annually over two-three years.

The company is now focusing on differentiated formulations and will launch nine products over three years. UPL is looking to replicate the success of its insecticide, Ulala, and will leverage its tie-up with Ishihara of Japan to launch more such products. Ulala, launched in FY13, generated revenues of Rs 68 crore in the first year. Further, in line with its focus on branded products, the company plans to launch five mega brands. Another growth area could be the $3 billion worth of products going off patent starting FY14.

To maintain its above-sector growth performance and consolidate its market share, the company is looking at tripling product launches from 27 in FY14 to 75-80 in FY15. UPL, which has a 13 per cent market share in the Indian crop protection market, has increased its global share from 2.8 per cent to 2.9 per cent in FY14 and grew at double the global sector growth rate of 8.5 per cent for the financial year. The company said the South American and Indian markets are expected to grow faster than the global average.

Thus, the company is changing focus from largely an off-patent product portfolio to differentiated value-added niche products and is focusing on the organic route (as against the earlier acquisition strategy) to improve its growth metrics and profits.

While the stock has rerated after the March quarter on good Q4FY14 results and strong forecast, analysts at HSBC believe there are multiple rerating triggers. These include strong earnings growth (average of 20 per cent), reduction in debt and stable cash flow leading to higher return on equity. Higher cash flow and lack of acquisitions should lead to further reduction of debt. As a result, UPL’s debt to equity ratio is expected to fall from the current 0.5 times to 0.2 times.  

Despite being one of the largest global companies in the space with a low-cost production base, presence across countries which de-risks its revenue streams and a large product portfolio, the stock (at Rs 353) is still available at an attractive 10 times its FY16 earnings, said an analyst at a domestic brokerage.

One issue that had held back investors was the poor utilisation of excess cash parked in current accounts. Analysts at Kotak Securities said Rs 850 crore of debt repayment in FY14 out of the surplus cash partly addressed investor concerns on the suboptimal structure of the balance sheet, leading to the re-rating of valuation multiples.

In the light of the company’s plans, analysts believe that UPL will post an average growth of 20-21 per cent in net profit over FY14-16. The Bloomberg consensus one-year forward target price is pegged at Rs 374, a six per cent upside from current levels. Given the prospects and reasonable valuations, investors can pick the stock at dips.