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At the doorstep of distress

Realization down 28%

UPL (UPLL IN) reported very weak Q3, marred by price erosion, rebates and sales returns. Topline declined 28% to INR 99bn versus our estimate of INR 96bn. Revenue decline was led by a 28% drop in pricing and 5% dip in volume. Gross margin plummeted 1677bps to 36% due to high sales return as also rebates extended to the distributors. UPLL did post break even on the EBITDA level with Q3 at INR 930mn but margin was meagre at 1.1%. Finance cost continued to rise along with debt. Forex loss of INR 2.9bn further accentuated the PAT loss to INR 12bn.

Equity issuance inevitable to avoid rating credit rating downgrade

Outlook for the next six months is challenging, with prices likely to remain lower YoY and continued destocking in key global markets. UPLL may still be burdened with high-cost raw material inventories, which may take some quarters to liquidate. Debt on the balance sheet has turned worrisome with net debt: EBITDA of 4.7x for FY24E, creating risk of a credit rating downgrade. Timely capital raising via rights issue is the only ray of hope to avoid any rating downgrade.  

All key geographies report a decline in sales

Sales in LatAM declined 30%, on pricing challenges in key herbicides/insecticides. Geographies, sans Brazil, saw a volume growth but with material pricing challenge. Significant pricing challenges in North America, especially in herbicides, channel de-stocking and higher rebates to channel led to a 67% dip in regional revenue. Europe saw a drop of 46% in revenue on impact across all key portfolios.

Valuation: Downgrade to Sell with a lower TP of INR 491

With global agrochemical markets in doldrums and elevated global interest rate, UPLL seems listless. It may continue to struggle till the market improves, the likelihood of which is 3-6 months away. We pare EBITDA estimates 63%/49% for FY24E/25E to factor in deep stress in the business due to global headwinds. We introduce FY26E estimates and downgrade UPLL to Sell from Buy, with a lower TP of INR 491 (INR 653 earlier), on 6x FY26E EV/EBITDA

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SEBI Registration number is INH000000933