Q2 miss an opportunity to stock up UPL

Adjusting for lower revenue growth due to currency headwinds, analysts' earnings estimates, target prices still show upside

Even as UPL’s (earlier United Phosphorus) India business continues to do well, the lower growth in export markets and adverse currency movements affected its September quarter performance. This led to lower than expected revenue. With expectations on revenue growth in FY18 also coming down, the stock lost almost three per cent on Tuesday, closing at Rs 798.60. The results were declared after market hours on Monday.

UPL’s domestic agrochemical segment revenue, slightly more than a fourth of overall, improved 10 per cent year-on-year; it could have been better but for erratic rain in southern states. Latin America (LatAm) sales (a little more than a third of revenue) could grow only five per cent. LatAm's first-half growth also remained at five per cent, influenced by monsoon delay and muted crop prices. Europe and North America, each a tenth of revenue also grew at a tepid seven and five per cent, respectively; so did Rest of the World sales. For Europe, sales growth of sugar beet herbicide again drove stable performance, said analysts at Edelweiss.

With all this, net sales at Rs 3,770 crore (up 6.5 per cent year-on-year) fell short of the Rs 3,907 crore by Bloomberg consensus estimates. Operating earnings at Rs 719 crore were up 12.3 per cent over a year, translating into a margin of 19.1 per cent. Net profit at Rs 300 crore was up 52 per cent, helped by lower tax rates. The consensus estimate was Rs 365 crore, however, and so the number impacted Street sentiment.

During the quarter, overall volumes grew 11 per cent. The gains were partly offset by exchange rate movement of three per cent, while the pricing impact was two per cent. While UPL has maintained its core revenue growth expectation at 12-15 per cent, adverse currency impact (three per cent in the first half of FY18) might dent overall revenue growth to 8-10 per cent, say analysts. While having cut their estimates in line, they remain positive on the prospects.

Margins are still expected to grow in FY18 by 50-75 basis points as expected by the management, say analysts at HDFC Securities. They believe UPL’s the long-term prospects remain positive, led by a focus on branding, new product launches, synergy benefits after the Advanta merger and a stable working capital cycle. Also, consolidation across regions and increasing share in the global agrochemicals market.

The company also expects good progress in the domestic business to continue in the rabi season. UPL said the prospects had improved after late rain. A potential three million hectares of rice is to be planted in the south.

UPL has also entered into an agreement with Bayer in Brazil to jointly promote fungicides for Asian Rust. Bayer's distributors will recommend use of UPL’s product (Unizeb) with theirs' (Fox). This arrangement will help UPL increase its reach, say analysts at Edelweiss.

The company says there is a positive response to its new fungicide in LatAm and expects a better December quarter, as distributors and farmers were playing wait and watch before ordering. With all this, the company might see a better second half.

Analysts at Elara Capital expect earnings to grow annually by 20 per cent over FY17-19. Led by more focus on the product portfolio and synergistic benefits from the seeds business of Advanta. Those at Edelweiss, factoring in lower revenue growth and higher losses of associate entities, have cut the expected FY18/19 earnings per share (EPS) by six-seven per cent but value UPL at 18 times the FY19 estimated earnings, with a target price for the stock at Rs 963 (Rs 1,026 earlier). Elara’s target price is Rs 929. That's 16-20 per cent higher from the current level.