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Improved realization drives 4QFY22 growth

Net debt remains flat YoY; earnings better than expected

* UPLL reported strong revenue growth (+24% YoY) driven by improved price realization (+19% YoY). Higher double-digit sales growth was witnessed in key markets such as LATAM, North America, ROW and India.

* Gross debt increased to INR258.7b in FY22 from INR237.7b in FY21 while net debt remained flat YoY at INR189b.

* We largely maintain our FY23/FY24 earnings estimates. We reiterate our Neutral rating on the stock with a TP of INR880.

Higher gross margin drove operating performance

* UPLL reported a revenue of INR158.6b (est. INR148.2b) in 4QFY22, up 24% YoY (volume growth: +3%, price: +19%, exchange: +2%). EBITDA stood at INR36b (est. INR33b), up 27% YoY, aided by improved realization of herbicide portfolio and better product mix resulting in improved gross margin (up 370bp to 49.6% in 4QFY22). EBITDA margin expanded 50bp YoY to 22.6%. Adjusted PAT rose 59% YoY to INR19b (est. INR15b).

* Sales in Europe grew marginally by 2% YoY driven by fungicides, herbicides and NPP Biosolutions, despite significant losses due to product bans and Russia-Ukraine conflict since Feb’22.

* Revenue in North America rose 38% YoY on improved commodity prices, tight supply of key products, and favorable channel stock. The higher sales of glufosinate products (herbicides) along with strong growth in insecticides were the major growth drivers in North America.

* Revenue was up 21% YoY in LATAM aided by strong growth in Brazil for herbicides and insecticides.

* India revenue grew 63% YoY, outperforming other geographies, primarily propelled by growth in herbicides, new product launches and favorable commodity prices across cash crops, pulses and oilseeds.

* Revenue from the ROW rose 25% YoY aided by growth in fungicides, herbicides and insecticides, despite supply chain disruptions.

* Revenue/EBITDA/adjusted PAT grew 20%/18%/41% in FY22, respectively. UPLL generated CFO of INR65b in FY22 taking its cash balance to INR61.2b as of Mar’22.

Highlights from the management commentary

* Guidance: For FY23E, the management has guided for growth across revenue and EBITDA at 10% and 12-15% YoY, respectively, and an ROCE growth of 125-200bp supported by favorable market conditions. The management expects over 10% reduction in inventory days through digitization. UPLL has also targeted to pay back USD400m in debt in FY23.

* Long-term growth strategy: During FY23-FY27E, the management aims to achieve long-term growth at 7-10% p.a. with continuous focus on increasing the ROCE and improving leverage ratios. UPLL aims to achieve half of the revenue from high-margin differentiated and sustainable solutions by FY27E v/s 29% in FY22. Differentiated and sustainable products are 10% more margin accretive than post-patent products on a normal scale.

* Strengthening supply chain: UPLL manufactures 72% of Active Ingredients (AI) requirement in-house that reduces import dependence, thus ensuring reliable supply base. Further, the company has been able to reduce dependence on Chinese imports to 31% in FY22 from 37% in FY17. The management aims to maintain the current raw material sourcing mix of India/Others regions/China at 38%/31%/31%, respectively.

Valuation and view

* In FY22, UPLL’s gross debt rose INR21b to INR258.6b due to higher working capital and inventory costs, while, its net debt remained flat YoY at INR189b. The net debt-to-EBITDA ratio (including perpetual bonds) reduced to 2.2x in FY22 from 2.5x in FY21. However, we believe cash flow generation and debt repayment remain key monitorables amid a high inflationary scenario in FY23E.

* We expect revenue/EBITDA/Adj. PAT CAGR of 9%/11%/12% over FY22-24, respectively, backed by higher volumes and improved product mix.

* The stock has traded at an average P/E of 12.2x over the last three years on a one-year forward basis. We have ascribed an 11x FY24E P/E (~10% discount to its three-year average) to the stock.

* We largely maintain our FY23/FY24 earnings estimates. We reiterate our Neutral rating on the stock with a TP of INR880.

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