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Multiple levers to maintain margins despite inflation in input prices

While the street seems concerned about rising input prices and its likely impact on UPL’s EBITDA margin, we note the company has maintained the margin in a narrow band of 17.5-20.4% over the relatively long period from FY09 to FY21E. UPL has multiple levers to sustain the margin at the said level, the levers being: 1) selective price hikes and tweaking of trade margins; 2) improvement in revenue mix; and 3) cost-saving initiatives. Besides, while its global market share stands at ~10%, it is the leader in its key markets such as India, Chile, Mexico and Columbia, which we believe indicates strong pricing power. Company will continue to benefit from synergy benefits as well as operating leverage in FY22EFY23E too. We maintain our ADD rating on the stock with a revised DCF-based target price of Rs665, implying 13x FY23E EPS (earlier target price: Rs600).  EBITDA margin in a narrow range over FY09-FY21E: Despite volatility in prices of crude oil and crude oil derivatives, UPL has maintained its EBITDA margin in a narrow range of 17.5-20.4% over FY09-FY21E. While input prices and other costs (e.g. port handling expenses) are rising, we model the company to maintain its EBITDA margin at ~19.7% over FY22E-FY23E.

* Multiple levers to maintain EBITDA margin at existing levels: Historically, UPL has maintained its margins via: 1) selective price hikes; 2) improvement in revenue mix; 3) change in geographic mix; and 4) cost-saving initiatives. In FY22E, it will also benefit from synergy and operating leverage.

* Synergy benefits on track as per plan: Cost synergy benefits worth US$109mn were achieved in FY20 and an additional US$79mn in 9MFY21. Revenue synergy benefits worth US$240mn were reaped in FY20 followed by another US$114mn in 9MFY21. UPL is on track to achieve its targeted synergy benefits in FY21E-FY22E.

* Market leadership in key geographies: While the company has a global market share of 10%, it is the leader in its key markets such as India, Mexico, Columbia and Chile, where it enjoys stronger pricing power. Its business in other markets such as Africa and China is also on a growth path. Higher growth in these geographies will lead to the benefits of operating leverage.

* Guidance maintained: UPL has maintained its guidance of 6-8% revenue growth and 10-12% EBITDA growth in FY21. Cost-saving measures initiated post-lockdown and synergy benefits are leading to expansion in EBITDA margin. Company also expects net working capital days and net debt to decline by FY21-end.

* Maintain ADD: We model UPL to report revenue and PAT CAGRs of 8.4% and 16% respectively, over FY20-FY23E. We remain confident of value creation with RoE at 14.4% in FY23E (higher than the cost of equity). Maintain ADD with a revised DCFbased target price of Rs665 (13x FY23E EPS; earlier target price: Rs600).

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