India cheer for UPL as scrip at all-time high on BSE, LatAm worries remain

LatAm is the largest geography by sales for UPL and accounts for 32% of its top lin

The UPL stock hit an all-time high of Rs 892 on the BSE on Tuesday, on expectations that a normal monsoon will improve its volumes and boost revenue growth. India accounts for 20 per cent of its consolidated revenues.

Analysts at Emkay Research said a favourable monsoon should see a buoyant demand for agrochemicals in the coming Kharif season. Also, a shift in crop pattern towards cotton, rice and maize will benefit the sector. The management expects the growth to continue in FY18, with revenues growing at 12-15 per cent and margins expanding 50-75 basis points (bps), on the back of a strong global agrochemical demand favouring generic players such as UPL. Revenue in FY17 was up 16 per cent, while margins expanded 110 bps year-on-year. Over the past four years, the company has been able to outperform the global agrochemical sector, given the shift to generic products as farmers sought to cut their costs due to a sharp decline in global crop prices.

Over the FY17-20 period, analysts at Kotak Institutional Equities expect earnings to grow 20 per cent. Higher profits will allow a steady reduction of the company's debt levels, despite elevated capital expenditure levels, they said.

While analysts are optimistic about the company's operations in India, there are concerns about its international business. Analysts at CIMB said Latin America (LatAm), a key market for agrochemicals, is witnessing high distributor inventory, which is negative for UPL. This will make it difficult for players such as UPL to improve its volumes.

LatAm is the largest geography by sales for UPL and accounts for 32 per cent of its top line. Revenue growth from this region is also the highest among its key markets, with the company achieving 25-27 per cent in FY16 and FY17. According to analysts, in the North America region, glyphosate prices, which account for 20 per cent of global herbicide sales, are weak, and falling maize acreage will be another headwind.

Intense competition can lead to significant price falls, lowering herbicide revenue for generic players such as UPL. Thus, given high inventories and volume risk, the company could face pricing pressures in the key markets of LatAm and North America.

North America contributes 17 per cent to its sales. The company's revenue over the past four quarters was driven by its volume growth (8-21 per cent), as prices fell 2-5 per cent during the period.