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Navigating uncertain times

UPL’s 1QFY24 EBITDA missed our and consensus estimates by 44% and 34%, respectively. This weak earnings print clearly indicates the headwinds faced by the generic agrochemicals players on account of excess supply scenario created by the Chinese players. Owing to these challenges, management has cut its FY24 EBITDA growth guidance to 3-7% (from 8-12%) within a span of two months. We had indicated in our recent report (click here) that price normalisation of generic agrochemicals will only happen gradually. Hence, in our view, things are likely to improve only gradually over the next few quarters for generic players. Amid testing times, management could also look to conserve cash by closely monitoring its capex spend of USD 300mn for FY24 and aims to maintain a net debt to EBITDA of 1.5x2.0x. Factoring in 1QFY24 results and commentary we have lowered our FY24/25/26 EBITDA estimates by 7%/8%/9% and PAT estimates by 19%/16%/17%, baking in higher finance cost. We maintain BUY with a revised Sep’24 TP of INR 880 (vs. Jun’24 TP of INR 965 earlier) on account of deleveraging and value unlocking of the specialty chemicals business.

* EBITDA miss driven by sharp decline in sales: UPL’s 1QFY24 consolidated EBITDA came in significantly below (44%/34% below JMFe/consensus) at INR 12.7 bn (vs. JMFe/consensus of INR 22.5bn /INR 19.4bn) on account of sharp contraction in revenue at INR 89.6bn (vs. JMFe of INR 114.7bn) due to a) channel destocking, with distributors opting for needbased tactical purchases and b) aggressive price competition from Chinese post patent exporters c) significant decline in herbicide volume and prices and d) product bans in Europe. These pressures impacted growth across geographies and thus led to a severe contraction in EBITDA margins to 14% (vs. JMFe of 20% and 20% in 1QFY23). During the quarter, interest expenses was higher at INR 7.0bn (vs. JMFe of INR 6.2bn) and other income was lower at INR 1.1bn (vs. JMFe of INR 2bn)

* Growth impacted across regions with severe weakness in Americas: UPL’s Latin America revenues showed severe de-growth led by Brazil and stood at INR 29.6bn (down 14%/54% YoY/QoQ, 21% lower than JMFe), mainly on account of non-selective herbicides de-growth (down 81%/53% YoY in H1CY23/Q1FY24). North America revenues were 53% below JMFe at INR 8.7bn (down 52%/71% YoY/QoQ) due to a) channel inventory destocking and b) weakness in non-selective herbicides due to aggressive price competition from Chinese exporters, leading to lower volumes of glufosinate, s-metolachlor and clethodim products. Europe revenues were 31% below JMFe and stood at INR 12.5bn (down 27%/55% YoY/QoQ) due to channel inventory led challenges and lower volumes amid products bans. India revenues were 7% below JMFe at INR 20.5bn (down 1% YoY) driven by delayed Kharif sowing activities and pricing pressure on post-patent products

* Estimates lowered – maintain BUY: We have lowered our FY24 EBITDA/PAT estimates by ~7%/19% and FY25 EBITDA/PAT estimates by ~8%/16%, we maintain BUY with a revised Sep’24 TP of INR 880 (from Jun’24 TP INR 965 earlier).

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