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Strong performance across regions

Takeaways from Q2FY22: (1) Favourable weather conditions resulted in strong revenue growth in Europe (30.7%). North America sales were up 23.9% due to better price realisations, (2) Gross margin expanded 103bps YoY but EBITDA margin declined 32bps due to higher other expenditure (likely higher freight costs) and (3) Working capital days increased to 114 at Sept’21. The company continued to invest and improve its ESG parameters. We model steady improvement in return ratios due to (i) reduction in finance costs and higher margins, and (ii) reduction in net working capital days. We model revenue and earnings CAGR of 9.5% and 13.6%, respectively, over FY21-FY24E with RoIC > cost of equity. We maintain ADD rating on the stock with a revised DCF-based target price of Rs800 implying 12x of FY24E EPS.

* Q2FY22 performance: The company reported revenue and EBITDA growth of 18.2% and 16.3%, respectively, YoY. Adjusted PAT declined 13.9% YoY. Gross margin expanded 103bps due to improvement in revenue mix. EBITDA margin declined 32bps YoY due to higher other expenditure. During the quarter, volume growth was 15% and price hike was 3% YoY.

* Strong growth in India and Latin America: Despite supply chain challenges globally, the company reported strong revenue growth across all geographies - India (5.3%), Latin America (19.5%), Europe (30.7%), North America (23.9%) and rest of world (13.2%), in Q2FY22 YoY. Favorable weather conditions led to growth in higher Europe sales. Brazil business grew 27% YoY.

* Update on Nurture farm: The company has stepped up its digitization efforts. In H1FY22, Nurture farm witnessed at least 90% farmer bookings through apps. The acres served more than doubled. It has >60k farmers on the platform and reported gross market value of Rs6bn in H1FY22. The company has also commenced a program to end stubble burning practice in Punjab and Haryana (~500k acres) by offering free spray service of the PUSA decomposer.

* Higher working capital investments: The net working capital days increased from 106 to 114 YoY, due to higher inventory levels and increase in input prices. However, we model the company to reduce its working capital investments and remain confident of healthy cash flow generation ahead.

* Market share gains: UPL has maintained its leadership and likely gained market share across geographies. We believe investments in innovation and launch of new products will help the company to accelerate market share gains.

* Maintain ADD: We model UPL to report revenue and PAT CAGR of 9.5% and 13.6%, respectively, over FY21-FY24E. We remain confident of value creation with RoIC > cost of equity. We maintain ADD rating on the stock with a revised target price of Rs800 (implied P/E 12x of FY24E EPS).

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