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Strong growth in international business

Takeaways from Q3FY22: (1) Strong volume growth and market share gains resulted in higher YoY growth of international business; India business was flat YoY, (2) gross and EBITDA margin declined 51bps and 135bps YoY, respectively, due to higher RM and freight cost and (3) working capital days decreased to 108 in Dec’21. The company prepaid Rs9.4bn loan in Q3FY22. We model a 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 11.2% and 16.6%, respectively, over FY21-FY24E with RoIC > cost of equity. We maintain ADD rating on the stock with a revised DCF-based target price of Rs852, implying 12x of FY24E EPS.

* Q3FY22 performance: The company reported revenue and EBITDA growth of 23.8% and 17%, respectively, YoY. Net profit was up 38.1% YoY. Gross margin declined 51bps due to high commodity cost. EBITDA margin declined 135bps YoY due to higher other expenditure. During the quarter, volume growth was 11% and price hike was 13% YoY.

* Strong growth in North and Latin America: Despite supply chain challenges globally, UPL reported strong revenue growth YoY across all international geographies - Latin America (21.7%), Europe (25.5%), North America (56.6%) and rest of world (15.1%). India revenues were flat due to high sales return. Higher demand for herbicides resulted in healthy growth across geographies.

* Reduction in finance cost: UPL has focussed on reducing finance cost in two ways – (1) reducing debt outstanding and (2) replacing high interest rate debt with low interest rate sustainable loan. During the quarter, the company prepaid Rs9.4bn of loan. It also raised second tranche of $700mn sustainability loan at 35bps lower rate.

* Lower working capital investments: The net working capital days decreased from 117 to 108 YoY, due to lower receivable levels and increase in payable days. 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 11.2% and 16.6%, respectively, over FY21-FY24E, and RoE to move to 17.5% in FY24 from 10.3% in FY21. We remain confident of value creation with RoIC > cost of equity. We maintain ADD rating on the stock with a revised DCF-based target price of Rs852 (implied P/E 12x of FY24E EPS).

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