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Higher rebates and high-cost inventory liquidation hit margin

Operating performance beats expectations

* UPLL reported a weak quarter as revenue declined 15% YoY, primarily due to lower agrochemical prices (down 15% YoY) and volume decline of 2% YoY. EBITDA margins contracted 450bp YoY largely due to higher rebates (~5% price impact) and liquidation of high-cost inventory, partly offset by an improved product mix and a lower cost of goods sold.

* Gross debt (excluding perpetual bonds) increased to INR284.4b as of Mar’24 from INR230b as of Mar’23. Net debt (excluding perpetual bonds) increased to INR222b as of Mar’24 from INR169b as of Mar’24.

* Factoring in a better-than-expected performance in 4Q and an improving operating scenario in FY25, we raise our FY25E EPS by 21% while maintaining our FY26E EPS. Reiterate Neutral with a TP of INR560.

Revenue declined YoY across regions except EU and ROW

* UPLL reported revenue of INR140.8b (est. INR114.7b) in 4QFY24, down 15% YoY (volume down 2%, price down 15%, exchange gain: 2%).

* EBITDA stood at INR19.3b (est. INR13.2b), down 36% YoY. EBITDA margin declined 450bp YoY to 13.7% (est. 11.5%), led by a decline in gross margins (down 470bp YoY). Contribution margin was impacted by high-cost inventory liquidation and higher rebates to support channel partners. Adjusted PAT stood at INR3.6b (est. loss of INR4b), down 65% YoY.

* India revenue declined 24% YoY to INR12b, led by the company’s strategy to place products closer to the season (low product placement in 4Q) to optimize working capital and prioritize cash collections.

* North America revenue declined 49% YoY to INR15.3b, led by channel destocking, higher rebates, and challenges related to post-patent AI prices. LATAM revenue declined 23% YoY to INR49.7b, due to price decline, adverse weather, excess returns in Brazil. Europe revenue grew by 10% YoY to INR30.8b, due to improvement in volumes, while RoW revenue grew 21% YoY to INR33b, owing to higher volumes in Australia and Japan.

* For FY24, revenue/EBITDA declined 20%/51% YoY to INR431b/INR55b. Adjusted PAT stood at ~INR2.8b vs. ~INR44.7b in FY23. NWC days in FY24 increased to 86 vs. 64 days in FY23 due to reduced factoring (down ~USD400m YoY) on account of lower sales in NAM, EU, and Brazil.

Highlights from the management commentary

* Guidance: UPLL expects normalization of crop protection business in 2HFY25 and strong performance of seeds business in FY25. The management has guided for ~4-8% revenue growth in FY25, with absolute EBITDA growth of over 50% and CFO generation of USD300-400m.

* Deleveraging: UPLL targets to utilize entire FY25 CFO for debt reduction. It plans to further reduce debt through rights issue of maximum USD500m (by 2QFY25 end or early 3Q) and capital raise at platforms in FY25. It expects net debt-to-EBITDA ratio of less than 2x.

* Outlook: ~80% of the company's high-cost inventory was liquidated in FY24 and the balance will be liquidated in 1HFY25. The management indicated a weak 1HFY25 YoY due to a high base. Chinese agrochemical prices have stabilized and are expected to remain at the current level for a couple of quarters. However, the stabilized prices are still at lower levels.

Valuation and view

* We expect 1HFY25 to remain challenging for the global agrochemical industry due to: a) pending high-cost inventory across companies, which will be liquidated in 1HFY25 resulting in lower margins, and b) stabilization of agrochemical prices, albeit at lower levels. However, 2HFY25 is expected to witness recovery in overall demand and a pricing scenario globally.

* Considering short-term challenges, cash flow generation and debt repayments remain key monitorables.

* Factoring in a better-than-expected performance in 4Q and an improving operating scenario in FY25, we raise our FY25E EPS by 21% while maintaining our FY26E EPS. Reiterate Neutral with a TP of INR560 (premised on 12x FY26E EPS; ~25% discount to its five-year average, and a one-year forward P/E of 16x).

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