Neutral UPL Ltd For Target Rs.550 By Motilal Oswal Financial Services Ltd
Pricing pressure continues to hurt operating performance Operating performance below expectations
* UPL Ltd (UPLL) reported a muted quarter as EBITDA remained flat on a YoY basis, largely due to a price decline (down 7% YoY) led by overcapacity in China. Volume grew 16% (indicating a healthy demand environment), resulting in revenue growth of 9% YoY.
* UPLL is expecting improvement in the global business, with inventory destocking nearing completion. Further, margins are expected to witness a significant uptick in 2H, led by the benefit of lower-cost inventory, increase in high-margin product sales, favorable regional mix, and margin expansion in the Indian business.
* We largely retain our FY25E/ FY26E EPS on the back of positive commentary on the outlook (expected margin recovery and mid-single digit volume growth in 2HFY25) and unchanged guidance. Reiterate Neutral with a TP of INR550. Strong volume growth drives revenue
* UPL reported revenue of INR110.9b (est. INR106.5b) in 2QFY25, up 9% YoY (volume growth: 16%, price decline: 7%). EBITDA stood at INR15.8b (est. INR16.8b), flat YoY. EBITDA margin was 14.2% vs. 15.5% in 2QFY24, due to a 110bp contraction in gross margin. The contribution margin was hit due to pricing pressure and a change in the regional mix.
* Net loss came in at INR630m (est. Adj. PAT INR635m) vs. net profit of INR1.1b in 2QFY24. The company witnessed a higher loss on account of the impact of income tax charge due to non-recognition and the reversal of DTA in some countries.
* India revenue increased 13% YoY to INR15.7b, led by higher volume on account of better demand closer to application seasons. North America revenue grew 10% YoY to INR5.5b on account of the continued strong inseason demand. LATAM revenue was flat at INR50.4b, as the strong volume growth was offset by price softening. Europe revenue rose 8% YoY to INR13.6b, aided by strong volume growth in Fungicides, while RoW revenue grew 29% YoY to INR25.5b, owing to volume-led growth in Africa.
* Advanta revenue increased 4% YoY to INR11.1b, driven by grain sorghum in Argentina and Australia and corn in India, Thailand, and ASEAN, while UPL specialty Chemical revenue remained flat at INR26b as growth in the noncaptive business was offset by a decline in the captive business.
* Gross debt (excluding perpetual bonds) declined to INR318.4b in Sep’24 vs. INR339.3b as of Sep’23, Net debt declined to INR275.3b in Sep’24 vs INR307b in Sep’23.
* In 1HFY25, revenue increased 5% to INR201.6b. However, EBITDA declined 14% YoY to INR27.2b. Net loss stood at INR2.7b vs Adj Pat of INR5.1m in 1HFY24. For 2HFY25, implied Revenue/EBITDA growth is 9%/2.2x, led by margin expansion.
Highlights from the management commentary
* Guidance: The company expects mid-single-digit volume growth in 2H. Management has maintained its guidance of ~4-8% revenue growth in FY25, with an absolute EBITDA growth of ~50%. It expects FCF generation of USD300- 400m.
* Outlook: UPLL is expecting improvement in the global business with inventory destocking nearing completion. However, the pricing pressure continues due to overcapacity in China. Management expects it to abate going forward.
* Capex: UPLL will incur a capex of ~INR18b in FY25, with ~INR7b already incurred in 1HFY25.
Valuation and view
* We expect 2HFY25 to witness a recovery in margins, aided by the benefit of lower-cost inventory and a favorable regional mix. Demand is expected to be normalized with a major part of global inventory destocking being completed.
* However, any short-term challenges due to price volatility, cash flow generation, and debt repayments remain the key monitorables.
* We reiterate Neutral with a TP of INR550 (based on 10x Sep’26E EPS)
For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
