Q4 recovery, debt reduction likely to drive gains for UPL: Analysts

December quarter was impacted by currency headwinds, dry weather in the key LatAm market

Strong agrochemical demand aided by higher commodity prices, and sustained balance sheet deleveraging are the key factor which may help sustain gains for India’s largest agrochemical company, UPL. 

The company sounded confident of healthy growth in the ongoing January-March quarter, supported by firm commodity prices. “When prices are low, farmers tend to save money or down trade. However, that is not the case right now. Crop prices across the board —whether soybean, corn, or wheat — are strong. So, the sentiment is positive and farmers are going to use as much technology as possible to increase the yield. Additionally, our order book position is also good which will translate to improved performance in Q4,” said Jai Shroff, chief executive officer (CEO), UPL in an interview to Business Standard. 

This was, to an extent, reflected in its December quarter (Q3) results. The company witnessed 7 per cent growth in volumes over the corresponding period, driven by healthy sales across all regions but Latin America (LatAm). Sales from the region declined close to 8 per cent over the previous year as late monsoon and dry weather delayed the crop season in Brazil.

Shroff indicated this was not lost sales but a mere postponement due to the late onset of monsoon in the region, and expected to more than make-up for this delay in the March quarter. This is positive as Q4 (because of seasonality) is one of the strongest quarters for the company, said experts.  

Another factor that impacted the company’s performance in Q3 was the sharp drop in the Brazilian currency. The Brazilian real declined more than 30 per cent over the previous year and that had a 5 per cent impact. To offset this, the company went for price hikes in local currency. The company enjoys considerable pricing power and remains open to the idea of further price hikes to pass on the impact of currency depreciation or even the rising raw material prices. This, coupled with increasing contribution from high margin markets such as North America and Europe, is seen aiding the company’s operating margins. 

The company has maintained its revenue and Ebitda growth guidance of 6-8 per cent and 10-12 per cent, respectively, for the current financial year.  

In Q3, UPL said it had reduced its gross debt by Rs 3,980 crore, which converts to about $550 million. Gross debt now stands at Rs 27,830 crore; at the net level, it is at Rs 24,200 crore. The company remains on track to meet its earlier guidance of overall debt reduction in the range of $700-750 million and bring down the net debt-to-operating profit ratio to 2x. This appeared to address a key investor concern as the debt on the company’s books had increased substantially after the acquisition of Arysta LifeSciences in July 2018. 

Lower finance cost is seen boosting the company’s bottom line and analysts at brokerage firm Emkay have raised their earnings per share (EPS) estimate by 13 per cent on a compound annual basis over FY21-23.  

Valuation, too, remains attractive. At 6x its FY22 estimated enterprise value-to-Ebitda, the fifth-largest global agrochemical maker trades at a steep discount of 40 per cent to its five-year historical average. Even after a 23 per cent rise in shares of the company over the past month, analysts maintain their positive stance and see further upside. Long-term investors with a risk appetite are advised to buy now and accumulate on dips.