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Strong volume growth maintained

Highlights from Q4FY21 result:

(1) All regions except North America have reported strong growth during FY21. In-spite of forex fluctuations, the company reported strong growth in Brazil and normal monsoon helped India business report strong 22% growth; (2) change in revenue mix, cost-saving measures post-covid and synergy benefits helped EBITDA margin expand 230bps YoY; and (3) synergy benefits are as per the company’s stated plan and the net working capital days reduced to 66 in FY21 vs 90 in FY20. 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 Rs735 implying 13.8x FY23E (earlier TP: Rs665).

* Q4FY21 performance:

The company reported revenue, EBITDA and adjusted PAT growth of 14.9%, 28.6% and 1.3%, respectively, YoY. Gross margin expanded 200bps due to improvement in revenue mix. EBITDA margin expanded 230bps YoY. During the year volume growth was 11%, but realisations were flat, and there was 3% impact of forex fluctuations.

* All regions ex-North America performed well:

In FY21 the company has reported strong growth in India (22%), Europe (12%), Latin America (8%) and Rest of World (3%). However, due to supply constraints, UPL’s revenue were stable in North America. In-spite of Forex devaluation, it reported strong growth in Brazil.  Guidance for FY22: UPL has guided of 7-10% revenue growth and 12-15% EBITDA growth in FY22. Cost-saving measures initiated post-covid and synergy benefits are leading to EBITDA margin expansion. The company also expects to reduce net debt to EBITDA ratio below 2X.

* Synergy benefits on track as per plan:

Cost synergy benefits worth US$109mn were achieved in FY20 with additional US$126mn in FY21. Revenue synergy benefits worth US$240mn were reaped in FY20 with additional US$203mn in FY21. We believe the company is on track to achieve its targeted synergy benefits in FY22E-FY23E.

* Expect improvement in return ratios:

UPL is working on three broad strategies to improve return ratios: (1) Improve revenues via market share gains, (2) improve margins via synergy benefits and lower input prices, and (3) reduce working capital days, which corrected to 66 at the end of FY21 from 90 in FY20. We expect RoE to increase to 15.5% in FY23E from 10.3% in FY20.

* 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 Rs735 (13.8x FY23E; earlier TP: Rs.665).

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