IGI Logo

Higher fixed costs weigh on margins

Operating performance below our expectation

* UPLL reported a muted operating performance despite gross margin expansion, weighed by higher fixed costs (+10% YoY) and logistic costs. The gross margin expansion was attributable to a better product mix as well as realization, partially offset by higher raw material cost. In 1QFY22, the company’s net debt further increased INR26b and stood at INR215b as of Jun’21.

* Net profit was above our expectation, led by tax benefits, despite UPLL reporting a muted operating performance during the quarter. Factoring in the same, we maintain our estimates for FY22/FY23 as well as our Neutral rating, with TP of INR760.

Realization and product mix change lead to gross margin improvement

* UPLL reported revenue growth of 9% YoY to INR85.2b (est INR85b) in 1QFY22 (volume growth: +6%, price: +2%, and exchange: +1%). EBITDA was up 5% YoY to INR18.6b (est INR20b). The EBITDA margin contracted 80bp YoY to 21.9%. Reported PAT grew 23% YoY to INR6.8b. However, adjusted for exceptional items and the exchange impact, adj PAT stood at INR10.2b (up 50% YoY v/s est INR8.6b).

* In 1QFY22, strong revenue growth was seen across regions (India: 27%, LatAm: +24%, and NA: +19%), barring Europe (-11% YoY) and RoW (-14% YoY).

* India revenue grew 27% despite (i) delayed monsoons in parts, (ii) the second COVID wave, and (iii) delayed upward price revisions. Strong volume growth (~14%) in Glufosinate (Ferio, Sweep Power), coupled with higher price realization (by ~7%), aided performance.

* Revenue was up 24% YoY in LatAm on the back of strong growth across the region, with Brazil leading with 40% growth. Strong volume growth in Perito (by ~2x) and Sperto (by ~1.8x) in Brazil, coupled with higher price realization for Perito, led to overall growth in the region.

* North America revenue grew 19% YoY on the back of higher volumes, strong realizations, and an increase in acreage for major row crops.

* Europe sales de-grew 11% on supply constraints and unfavorable weather conditions. UK Mancozeb-based formulations (Manzate and Nautile) were phased out to 2Q.

*  RoW revenue declined 14% YoY due to unfavorable weather conditions, lower volumes, and supply constraints, which partially offset the growth seen in some RoW regions.

Highlights from management commentary

* Debt: Gross debt as of Jun’21 stood at INR251b (v/s INR238b as of Mar’21). Net debt stood at INR215b as of Jun’21 (v/s INR189b as of Mar’21). In 1QFY22, UPLL borrowed USD250m in sustainability loans, taking the total sustainability loans to USD750m. Loans were utilized entirely for acquisition loan repayments – acquisition loans currently stand at USD1.5b. Sustainability loans were taken at the rate of LIBOR +30bp.

* Maintained FY22 guidance: Revenue growth is guided at 7–10%, with EBITDA growth at 12–15% and net debt to EBITDA at <2x.

* Pre-orders: UPLL had ~USD500m+ worth of advance orders in Brazil in the first five months of CY21

Valuation and view

* The global Agrochemicals market is set to gain from better farm economics on account of firm/rising global agri commodity prices, which would in turn drive agrochemical consumption.

* UPLL reduced net debt by INR31.4b and achieved 2.2x net debt to EBITDA in FY21 v/s the 2x guidance. However, net debt to EBITDA (including perpetual bonds) stood at 2.5x in FY21 v/s 3.4x in FY20. Furthermore, the company’s net debt further increased by INR26b in 1QFY22 and stood at INR215b as of Jun’21.

* The stock has traded at average P/E of 12.6x over the last three years on a oneyear forward basis. However, we ascribe 11x P/E (~15% discount to its threeyear average).

* Net profit was above our expectation, led by tax benefits, despite UPLL reporting a muted operating performance during the quarter. Factoring in the same, we maintain our estimates for FY22/FY23 as well as our Neutral rating, with TP of INR760.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer