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Journey to 25% Ebitda margins

New launch successes are key to achieving this goal

UPL is aiming for 25% Ebitda margins by FY26 vs 20.6% in 1HFY22. Success in differentiated and sustainable products (management expects a 50% contribution to sales from such products by FY26 from 29% currently) and unique farmeroriented solutions that create demand for such products should enable UPL to achieve this goal. A transition towards high-value products should drive a PE rerating. We reiterate a BUY rating, raise our target price from Rs1,060 to Rs1,100, and raise FY22-24 EPS estimates 2-3% as we build in spot currency assumptions.

New launches in the next five years key to achieving 25% Ebitda margin

UPL has three product categories: 1) post-patent (plain-vanilla chemical products), 2) differentiated (value-added chemical products, eg, Mancozeb molecules’ evolution since a 2011 Brazil launch), and 3) sustainable (biological-based nextgeneration products, a US$4bn market). Management expects incremental US$2.5bn risk-adjusted revenue in five years from 15 molecules in development, mostly in the differentiated and sustainable category. UPL’s track record in such products is strong, with an innovation rate (the percent of total sales from new launches in the last five years) of 21%. In addition, collaboration with international peers for access to new molecules and a recent partnership with Chr. Hansen should enable UPL to achieve its goal of 50% revenue from such products by FY26 vs 29% in FY21 and 16% in FY16. These products require strong distribution capability, which UPL has adequately built up in the last decade. Such products have demonstrated higher yields for farmers and have superior margin profiles for manufacturers; this should make the 25% margin goal achievable by FY26.

Unique farmer-oriented solutions should raise demand for high-value products

UPL has invested in digital platforms such as nurture.farm that provide a gamut of services to farmers for the entire agriculture value chain, from pre-sowing to postharvesting. UPL onboarded more than 1.4m farmers and more than 60,000 retailers as of September 2021. These initiatives should raise awareness of UPL’s valueadded products and boost demand in the long term. Although nurture.farm is limited to India today, it can be launched internationally.

Reiterate BUY; target price raised to Rs1,100; EPS estimates raised 2-3%

We raise FY22-24 EPS estimates 2-3% as we build in spot currency assumptions. August/September 2020 price increases should be reflected in a seasonally strong 2HFY22. We value UPL at 15.5x Dec-23CL PE, a 25% premium to the 10-year average.

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