PL Stock Report: UPL (UPLL IN) - Q1FY24 Result Update - Lackluster operating performance; outlook bleak - Downgrade to 'HOLD'

Rating: HOLD | CMP: Rs625 | TP: Rs650

Q1FY24 Result Update - Lackluster operating performance; outlook bleak

Quick Pointers:

§ Volume/price/exchange growth of -9%/-10%/+2% YoY respectively.

§ Net debt stood at Rs291.8bn (including perpetual bond of Rs29.8bn), up Rs92.9bn QoQ and down Rs2.8bn YoY.

We trim our FY24E/25E estimates by 10%/7% and cut target multiple from 12x earlier to 10x currently and downgrade the rating to ‘Hold’ from Buy, to factor in subdued growth and margin outlook in the near term primarily led by a) high inventory levels in key regions; b) adverse weather conditions impacting demand; and c) falling RM cost scenario exerting pressure on realizations & margins. UPL reported weak set of numbers below our and consensus estimates with Revenue/EBITDA/PAT of Rs89.6bn/Rs15.9bn/ Rs2.0bn (-17%/-32%/-79%YoY). Citing bleak demand environment globally coupled with pressure on realizations & margins, UPL has revised downward its revenue growth guidance to +1-5% (earlier +6-10%) and +3-7% for EBITDA growth (earlier +8-12%) in FY24E. Management has not provided debt repayment guidance for FY24, stating net debt/EBITDA to be in the range of 1.5-2.0x in FY24E. We expect Revenue/PAT CAGR of 4%/15% over FY23-25E. Downgrade to ‘Hold’ from Buy with revised TP of INR650 (earlier Rs850) based on 10X FY25E EPS.

§ All geographies barring India & Row posted negative growth: Consolidated revenues at Rs89.6bn (-17% YoY) were below our and consensus estimates of Rs112.1bn and Rs103.3bn. Price/Volume/Fx for 1Q’24 stood at -10%/-9%/+2% YoY. All regions excluding India (flat YoY) and Row (+3% YoY) posted negative growth with LATAM/ Europe/NAFTA declining by 14%/27%/52% YoY. Subdued performance was largely on the back of a) significant decline in non-selective herbicides volume (particularly in LATAM and NAFTA); b) product specific bans in Europe (bifenazate- contributing to ~USD24mn last year) and c) higher channel de-stocking coupled with aggressive price competition from China.

§ Margins continue to be under pressure: UPL reported 70bps YoY contraction in gross margins to 56.2%, primarily led by provisions of high cost inventory. Gross margin compression was despite higher contribution of differentiated products at 37% vs 27% last year to the overall CP revenues and superior margins from Advanta seeds. Absolute EBITDA declined by 32% YoY to Rs15.9bn (PLe Rs19.4bn) with margins down 390bps YoY to 17.8% (Ple 17.4%) led by a) lower gross margins and b) lower absorption of fixed cost (opex up 5% YoY). Adjusted PAT came in at Rs2.0bn down 79% YoY (PLe Rs4.7bn). Going forward, UPL is undertaking a cost reduction initiative of USD 100 mn over next two years, with 50% being realized in FY24.

§ Net debt up Rs92.9bn QoQ: As on 30th June 23 net debt stood at Rs291.8bn (incl. perpetual bond of Rs29.9bn, considered as equity), down Rs2.9bn YoY and up Rs92.9bn sequentially. In 1Q’24, UPL sold receivable of Rs73bn as against Rs90bn in the same period last year (guided at USD1.4-1.6bn of receivable factoring in FY24E). Management alluded that company's average cost of debt stood at 6% in 1QFY24 as against 3.5% in the same period last year. Further Net debt/EBITDA is guided to be in the range of 1.5-2.0x for FY24E (no absolute debt reduction guidance provided for this year).

(Click on the Link for Detailed Report)