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Strong Q1FY23 but WC deteriorates, upped FY23E guidance

UPL’s Q1FY23 revenues surged 27%YoY on the back of robust growth across the Americas and ROW markets. Revenue growth was propelled by 18% YoY pricing growth, favourable currency 3% YoY, while volumes grew 6% YoY. Despite RM cost inflation, the company’s gross margins expanded 20bps YoY due to superior supply chain, own manufacturing, and efficient sourcing. EBITDA margins however contracted 100bps YoY at 19.8% due to increased employee costs and opex. Despite higher gross debt at Rs301bn, interest outgo was lower YoY due to currency gains. Better operating performance supported by lower interest costs led to 30% YoY jump in bottom-line at Rs87.7bn. Based on strong Q1, management upped FY23E revenue/ EBITDA guidance from 10%+/ 12-15% to 12-15%/ 15-18%. With collaborations coming to fruition, UPL is well poised to deliver above-industry growth. We continue to remain optimistic on the growth prospects of the company and maintain BUY with a TP of Rs1,082 (earlier Rs988)

Growth led by Americas, India lags in Q1

UPL’s strong Q1 growth was attributed to North America and LATAM with 47% and 38% YoY growth respectively. While North America growth was volume-led, LATAM growth was pricing-led (strong herbicide pricing in Brazil). ROW markets too supported growth with 31% YoY increase in revenues, propelled by SE Asia and Australia/ New Zealand markets. Due to delay in planting, India reported single digit growth at 8% YoY, however UPL expects recovery with a strong Q2. UPL plans to launch 80 new products globally with some blockbuster products in the US and Brazil which is likely to support growth.

Collaborations coming to fruition

UPL’s previous global collaborations have started yielding results while new collaborations signifies its formidable presence in the global agrochem space. Under the FMC collaboration, UPL has already launched the product and is currently expanding its geographical reach. Although may not be meaningful in FY23E, this collaboration is expected to start contributing meaningfully from FY24E onwards. In partnership with Christian Hansen, UPL has launched Zoatin, a bio nutritional solution and in collaboration with MMAG, a new ‘Flupyrimin’ based insecticides range in India. The latest collaboration being, UPL entered into a new supply agreement with Bayer for ‘Spirotetramat’, insecticide to develop novel differentiated pest management solutions.

Guidance upped, debt management remains the key, maintain BUY

Mounting debt remains a key concern for UPL amidst the rising interest scenario across geographies. During Q1, WC surged to 108 days (91 days YoY and 69 days QoQ), consequently increasing net debt by ~40% QoQ to Rs265bn (USD3.4bn). Nonetheless, management remained confident of net debt reduction of ~USD400mn by end-FY23E. We believe debt reduction to remain key metric to watch out for in near to medium term. Based on Q1FY23 numbers and change in management guidance, we have raised our FY24E earnings by 9%. Valuing UPL at 16x FY24E EPS of Rs67.6, we maintain BUY with a TP of Rs1,082 (earlier Rs988

Valuations

We value UPL at a PE multiple of 16x FY24E EPS. UPL is expected to report EBITDA/ PAT CAGR of 13%/20% during FY22-24E. We see current multiples of 11.3x FY24E EPS and 5.8x EV/ EBITDA at attractive levels. Historically, UPL has traded at a 10-year mean PE of 15.7x and EV/ EBITDA of 8.8x

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