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Global headwinds continue to dent revenue

Operating performance misses expectations

* UPLL reported another weak quarter, with a 28% YoY decline in revenue. It was primarily attributed to a continued downtrend in agrochemical prices (down 24% YoY), leading to continued destocking of inventory by distributors (volumes down 5% YoY). All regions (except RoW) witnessed a sales decline of at least 20% (India) to as high as 64% (North America). RoW sales grew 12% YoY.

* Gross debt (excluding perpetual bonds) increased to INR361.7b as of Dec'23 from INR328b as of Dec'22. Net debt (excluding perpetual bonds) increased to INR313.5b as of Dec'23 from INR275.3b as of Dec'22.

* Factoring in UPLL’s subdued performance in 3QFY24, we cut our FY25E/FY26E EPS by 23%/11%. Reiterate Neutral with a TP of INR530.

Lower gross margins and unfavorable operating leverage hurt margins

* UPLL reported revenue of INR98.9b (est. INR100.6b) in 3QFY24, down 28% YoY (volume decline: 5%, price decline: 24%, exchange gain: 1%).

* EBITDA stood at INR4.2b (est. INR10.3b), down 86% YoY. EBITDA margin declined 18pp YoY to 4.2% (est. 10.3%), led by a steep decline in gross margins (down 15.5pp YoY) and operating deleverage. Contribution margin was impacted by high-cost inventory liquidation and higher rebates to support channel partners. Adjusted net loss stood at INR5.9b (est. INR0.6b loss) vs. adj. PAT of ~INR13.4b in 3QFY23.

* North America revenue declined 64% YoY to INR9.9b, led by channel destocking, higher rebates, and challenges related to post-patent AI prices.

* LATAM revenue declined 28% YoY to INR42.9b, due to pricing-related challenges, especially in key herbicides and insecticides in Brazil.

* India revenue declined 20% YoY to INR8.6b, due to lower acreages for key crops such as cotton and pulses in North India, low glufosinate demand due to dry Kharif and Rabi season, and realignment of sales closer to season.

* Europe revenue declined 30% YoY to INR10.1b, due to lower volumes and channel inventory-related challenges. RoW revenue grew 12% YoY to INR27.4b, owing to higher insecticide/herbicide volumes in China/Turkey.

* For 9MFY24, revenue/EBITDA declined 22%/56% YoY to INR290b/INR36b. Net loss for 9MFY24 stood at ~INR1m vs. Adjusted PAT of ~INR34b in 9MFY23

* NWC days as of Dec’23 stood at 155 vs. 121 as of Dec’22, owing to higher receivable days (up by 16 days) and lower payable days (down by 16 days).

Highlights from the management commentary

* Guidance: UPLL expects 4QFY24 to be weaker YoY; however, it expects margin improvement QoQ. The management expects normalized business performance in 2QFY25.

* Outlook: The management expects the price challenge to continue in the near term. UPLL is witnessing a pick-up in volumes in Latin America and double-digit growth in revenue in the RoW region.

* Cost rationalization: UPLL reduced SG&A expenses by 19% YoY to INR22.7b and is on track to reduce SG&A by USD100m in FY25 (from the base of FY23). The major part of this reduction will be sustainable.

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