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Strong volume growth drives sales

UPL Ltd is a global agriculture Solutions Company engaged in the agrochemicals and industrial chemicals business with manufacturing sites across the world. Through recent expansion, the company has become a leader in global food systems as well.

* Q2FY22 revenue increase of 18.2% YoY as volume drives 15% YoY growth and the remaining by favorable price realization.

* EBITDA registered 13.1% YoY growth but EBITDA margin shrunk 90bps due to strategic investments made this quarter.

* Company was able to maintain margins with significant cost pressures in an inflationary environment. The volume growth momentum along with desirable pricing is expected to drive profits for the coming quarters. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 875 based on 15x FY23E adj. EPS.

Robust volume growth with better price realization boosts sales

The consolidated revenue registered healthy growth of 18.2% YoY to Rs. 10,567cr this quarter led by strong volume growth (~15% YoY) and improved price realization (~3% YoY). The main driver for the volume growth were Brazil with 27% YoY increase as the overall LatAM recorded 20.2% YoY growth in revenue at Rs. 5,088cr. Healthy increase in price realization had offset the cost increase and favorable volume-price growth has boosted the sales in North America (+23.9% YoY to Rs. 958cr) and Europe (+30.7% YoY to Rs. 1,336cr) this quarter. ROW registered a moderate growth level (+13.2% YoY to Rs. 1,702cr) as the quarter saw strong volume growth driven by better price realization in ANZ, whereas AME has de-grown due to unfavorable rains and supply chain challenges in parts of Africa. Japan remained flat compared to last year’s Q2 sales despite the Japanese Yen currency depreciation. Indian share saw muted growth of 5.3% YoY due to deficit rainfall affecting crop production and Covid related challenges, offset by better contribution margin in seeds and specialty business.

Margins shrunk due to strategic investments

Strong contributions from all the regions ensured EBITDA growth of 13.1% YoY to reach Rs. 2,045cr despite supply chain constraints and inflationary prices. However EBITDA margin dipped 80bps to 19.4% which was offset by strategic long-term investments into digital platform (~Rs. 81cr) this quarter. Adjusting for this the EBITDA margin remained comparable at 20.1% (vs. 20.2% in Q2FY21). Exceptional items amounted to Rs. 41cr (down 80.6% YoY) in the quarter which mainly includes cost related to restructuring in Europe, litigation, insurance and severance related expenses. As a result, PAT rose 36.9% YoY to Rs. 634cr.

Key con call highlights

* Management maintained their outlook for revenue and EBITDA around 7-10% and 12-15% respectively. Net debt to EBITDA at <2x for FY22.

* Company has signed long-term collaboration with Christian Hansen, for the manufacture microbial solutions for sustainable agriculture.

Valuation

Although the margins remained flat this quarter, it was mainly due to the regional mix, led by Brazil’s higher share which contributed to low margin business. But the increasing volume growth driven by favorable price realization indicates that the demand is normalizing compared to last year, which is expected to continue momentum in the coming quarters. Hence, we maintain our BUY rating on the stock with a revised target price of Rs. 875 based on 15x FY23E adj. EPS.

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