Robust sustainable solutions segment to drive growth for UPL in FY22

Market share gains, margin improvement are other positives for the stock

Led by the strong show in Latin America (Latam), its biggest market, UPL reported a better-than-expected performance in the March quarter. Despite the currency depreciation in Brazil, the Latam market delivered a 40 per cent YoY growth, largely led by higher volume and a bit of price hike.

While growth in the North American market was pegged back by supply constraints, Europe and India delivered 17-23 per cent growth due increased sales of sustainable solutions business and favourable weather respectively.

The company reported a 233 basis point expansion of operating profit margin to 21.8 in the March quarter led by higher gross profit. While it posted a 21.6 per cent margin for FY21, it is targeting an expansion to 24-25 per cent over the next three years led by improving mix, backward integration and gains from cross selling of products and solutions.  

The growth trajectory is expected to remain strong in FY22 with topline growth of 8-10 per cent and 12-15 per cent growth in operating profit. High leverage concerns are easing for the company with net debt payment of Rs 3,140 crore bringing down net debt to Rs 18,922 crore. The company has a target of bringing down leverage levels further to under 2 times net debt to operating profit from the current 2.2 times.

The key growth driver for UPL going ahead will be the sustainable solutions portfolio, according to analysts at Prabhudas Lilladher Research. More than 80 per cent of potential sales from the new product pipeline are expected to come from this. The share of differentiated and sustainable solutions has increased from 14 per cent in FY16 to 29 per cent in FY21; the company is seeking to increase this to 50 per cent in the medium term.

While the company is gaining market share from innovators and generic players on the back of volume gains and new product launches, tie-ups with global majors allows it to access various segments and geographies and position itself as a crop solution player.

Given the triggers both on the revenues and margin fronts and lower leverage, investors can consider the stock on dips.