UPL Share price: Sharekhan maintains a Buy rating with price target of Rs 632

UPL reported weaker than expected growth revenue growth of 2.6% yoy (vs expectation of 8.2% growth) to Rs 9126 cr due to a sharp fall of 8.4% yoy in revenues from Latin America due to a negative forex impact and a delayed agricultural season. Overall, volume growth of 7% yoy and pricing improved by 1% (first quarter of positive price movement since Q1 FY21) partially offset a 5% negative forex impact (currency devaluation in Latin American countries). Revenues from North America, Europe, India and rest of the world (RoW) markets were strong and increased by 5%, 30.1%, 21% and 6.1% yoy, respectively.

UPL management says Gross margins improved by 230bps yoy to 44% led by strong volume growth, a favourable mix (higher sales of differentiated products and sustainable solutions) and price hikes. Adjusted EBITDA margin improved by 135 bps yoy to 24.6% (259 bps above our estimate of 22%) led by better gross margin partially offset by higher cost. Sharekhan have adjusted EBITDA margin for one-time exceptional cost of Rs 39.5 cr on account of an unfavourable court order for the industry pertaining to excise duty liability for previous years. Consequently, adjusted EBITDA grew by 8.6% yoy to Rs 2248 cr, above estimate of Rs 2120 cr.

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Reported PAT of UPL grew by 13.3% yoy to Rs 794 cr led by margin improvement and lower tax outgo. Adjusting for forex loss and extraordinary items, PAT stood at Rs 1018 cr (up 16.4% yoy), which was above Sharekhan’s estimate of Rs 867 cr due to better margin performance, lower interest costs (down 8.5% yoy) and effective income tax rate at 10.3% (vs assumption of 20%).

The management of UPL has guided for strong Q4 FY21 given a robust outlook for high-margin Europe/North America regions and potential recovery in Latin America (to benefit from market share gain and positive price actions). With 16% yoy EBITDA growth in 9M FY21 and likely strong Q4FY2021, Sharekhan expects UPL to beat its full EBITDA growth guidance of 8-10% for FY21.

UPL management’s focus on achieving net debt/EBITDA of 2x by March 2021 is encouraging and likely debt reduction (given expectation strong cash flows in Q4 FY21) would be a key re-rating trigger. Sharekhan expects EBITDA/PAT CAGR of 12%/16% over FY2020-FY2023E, which would help generate cumulative FCF of Rs 12850 cr over FY2021E-FY2023E and drive balance sheet deleveraging.