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Strong guidance for FY22

Key takeaways from Q1FY22 result: (1) strong growth in India (27%) and North America (19%) resulted in strong growth during Q1FY22. However, unfavourable weather conditions and supply constraints affected growth in Mexico, Europe, and rest of world; (2) improved revenue mix, and better realisations helped Gross margin expand 180bps YoY; and (3) it replaced $250mn of acquisition loan with 30bps cheaper sustainable loan.

The sustainable loan now accounts for $750mn out of total $1.5bn acquisition loan. 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 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 target price of Rs860 implying 16x of FY23E EPS.

* Q1FY22 performance: The company reported revenue, EBITDA and adjusted PAT growth of 8.7%, 7.2 and 53.4%, respectively, YoY. Gross margin expanded 180bps due to improvement in revenue mix. EBITDA margin declined 30bps YoY. During the year volume growth was 6%, price growth 2%, and 3% growth was attributed to positive impact of forex fluctuations.

* Strong growth in India and Latin America: While the company reported strong revenue growth in India (27%), Latin America (8%) and North America (19%), it registered steep decline in Europe (11%) and rest of world (14%) in Q1FY22 YoY. Unfavorable weather conditions and supply constraints affected company’s operations in Mexico, Europe, and rest of world. Brazil business grew 40% YoY.

* Multiple plays to protect (and improve) margins: The fixed costs of the company grew 11% YoY in Q1FY22. Thus, UPL is working on two broad strategies to improve the overall profitability: (1) currency hedge to reduce impact of adverse forex fluctuation mainly in Brazil, and (2) replacing the existing acquisition loan (for Arysta) with a 30bps cheaper sustainable loan. The acquisition loan is $1.5bn of which half is already replaced with sustainable loan.

* Higher working capital investments: The net working capital days increased from 84 to 91 YoY, due to higher inventory levels. This has resulted in adverse effects on cash flow from operations. However, we expect the company will reduce its working capital investments and remain confident of healthy cash flow generation

* Guidance maintained for FY22: UPL has maintained its guidance of 7-10% revenue growth and 12-15% EBITDA growth in FY22. It also expects to maintain net working capital days within range of 80-90 during the year.

* 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 target price of Rs860 (implied P/E 16x of FY23E EPS).

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