Differentiated product focus, deleveraging to drive growth for UPL

Progress on launches, margin gains and debt reduction key for rerating

In a weak market, the stock of the country’s largest agrochemical company, UPL, was up 2.4 per cent. Focus on differentiated and sustainable (D&S) solutions, improvement in operating profit margins trajectory and deleveraging are the key reasons brokerages have recently reiterated their buy ratings on the stock.

One of the key growth drivers for the company is the change in product or business mix with a higher share of revenues coming from D&S comprising value added products and bio-solutions. The company intends to increase the share of D&S from 29 per cent in FY21 to 50 per cent by FY26. This will entail reduction in its branded generic portfolio from 70 per cent to half its sales during that period.

Even as consolidated revenue growth for the company is pegged at 8 per cent over FY22-25 by Emkay Research, D&S portfolio is expected to grow a healthy 19 per cent over this period. Among the drivers of this growth would be bio-solutions (natural products) that offer an alternative to conventional pesticides, have a lower environmental impact, fetch higher margins and are growing at a faster rate than the overall market. The company’s focus on differentiated products can be gauged from the fact that the innovation turnover (sales from new launches) has increased from 3 per cent in FY14 to 21 per cent in FY21 and is expected to go up to 30 per cent over the next five years.

International collaborations such as the ones with global crop protection majors such as the US-based FMC Corporation and Japan’s Meiji is another growth driver as it enables it to make and market innovative products in India and in the global markets. New launches from across its product categories and international tie-ups are key to hitting the 25 per cent operating profit margin target of the company in the next five years, according to CLSA. The company ended the first half of the current financial year with a 20.6 per cent margin.

Steady revenue growth and improving operating profit margins are expected to improve cash flows and help the company reduce its debt. Brokerages expect the gross debt which stood at around Rs 30,000 crore at the end of September quarter to fall below Rs 6,000 crore over the next four years.  

While CLSA expects a transition to high value products to drive a rerating of price to earning ratio and has increased the earnings estimates and the target price, investors should await progress on the deleveraging issue and margin improvement before considering the stock.