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Focus on Sustainability as key business driver

We hosted Mr Anand Vora, Global CFO, Mr. Rohan Parikh, Head of Sustainability, Dr. Mritunjay Chaubey, Global VP- Environmental Sustainability and Ms. Radhika Arora, Head of Investor Relations at ICICI Securities virtual ESG conference on 25th June’21. (Presentation link) Takeaways: (1) UPL considers sustainability as key part of its business model. It is no.1 Agrochemical company in ESG by Sustainalytics, (2) Over the past 5 years, UPL has reduced specific water consumption by 21%, specific carbon emission by 26% and waste disposal by 45% and (3) UPL is working towards four well defined goals to be achieved by 2025 as (i) Reduce environment footprint, (ii) Enhance world food security, (iii) Enhance sustainable sourcing and (iv) Strengthen community well-being. We model steady improvement in return ratios due to (i) synergy benefits and higher margins, and (ii) reduction in net working capital days. We model an earnings CAGR of 8.6% over FY21-FY23E with RoIC > cost of equity. We maintain ADD rating on the stock with a DCF-based revised target price of Rs860 implying 16x FY23E (earlier TP: Rs735).

Strong focus on sustainability:

UPL considers sustainability as key part of its business model. It focusses on all factors of ESG and believes sustainability to drive its profitable growth. It is no.1 Agrochemical company in ESG by Sustainalytics.

Initiatives in manufacturing:

Over the past 5 years, UPL has been able to reduce (1) specific water consumption by 21%, (2) specific carbon emission by 26% and (3) waste disposal by 45%. It has generated 17% of the power from renewable sources at its two largest manufacturing units. It also rain-harvested 50,000 m3 rainwater annually. 60% of its manufacturing plants are zero liquid discharge.

Initiatives in Products and services:

(1) Currently 29% of the product portfolio is of differentiated and sustainable products,

(2) There is 15-20% reduction in water and inputs via patented starch-based natural product for soil enhancement (zeba),

(3) It has covered 0.3mn villages and 11,000 villages in India via Pronutiva program,

(4) It treated 4.5mn tonne potatoes to prevent sprouting and

(5) It covered 5mn acres through mechanized spraying services in India.

Sustainability goals by 2025:

UPL is working towards four well defined goals to be achieved by 2025 as

(1) Reduce environment footprint – To reduce 20% specific water consumption and 25% specific CO2 emission and waste disposal,

(2) Enhance world food security – It plans to achieve 50% revenues from, innovative and sustainable solutions to enhance yield,

(3) Enhance sustainable sourcing – Achieve 60% sustainable sourcing and

(4) Strengthen community well-being – Impact 3mn lives via livelihood, education, health and sanitization.

Reducing fresh water consumption in agriculture:

The company has introduced revolutionary patented granule intended for soil incorporation in root zone called ZEBA. It absorbs water up to 495x its own weight and forms hydrogels in and around the roots. It increases soil water holding capacity and positively impacts water use efficiency. Once Zeba is broken down, it reverts to substance which becomes food for microbes and there is no residue.

Pronutiva program:

UPL’s Pronutiva program combines natural biosciences along with conventional crop protection products. It results in less residues and better yields. It benefits the grower economics. A case study in Poland in 2018 on Apples indicates that (1) There was 15% better yield, (2) 25% lower residue and (3) 13.5% color improvement.

Maintain ADD:

We model UPL to report both revenue and PAT CAGR of 8.6%, over FY21-FY23E. We remain confident of value creation with RoIC > cost of equity. We maintain ADD rating on the stock with a revised target price of Rs860 (16x FY23E; earlier TP: Rs735).

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