PL Stock Report: UPL (UPLL IN) - Q2FY24 Result Update – Lackluster operating performance; outlook bleak - HOLD

UPL (UPLL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs541 | TP: Rs550

Q2FY24 Result Update – Lackluster operating performance; outlook bleak

Quick Pointers:

§ Volume/price growth of -15%/-7% YoY respectively.

§ Net debt stood at Rs336.8bn (including perpetual bond of Rs29.8bn), up Rs45.0bn QoQ and up Rs21.9bn YoY.

We trim our FY24E/25E/26E estimates by 29%26%/25% and maintain HOLD factoring 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 loss of Rs101.7bn/Rs15.8bn/ Rs-1.2bn (-19%/-43%/-114%YoY). Citing bleak demand environment globally coupled with pressure on realizations & margins, UPL has revised downward their revenue growth guidance to flat growth YoY (earlier +1-5%) and +0 to -5% for EBITDA growth (earlier +3-7%) in FY24E. Company has highlighted that the gross debt is expected to come down by USD500mn in FY24E. We expect Revenue/PAT CAGR of 8%/22% over FY24-26E. Maintain HOLD with revised TP of INR550 (earlier Rs650) based on 10X FY26E EPS.

§ All geographies posted negative growth: Consolidated revenues at Rs101.7bn (-19% YoY) and were below our and consensus. Price/Volume/Fx for 2Q’24 stood at -15%/-7%/+3% YoY. All regions posted negative growth with LATAM/ Europe/NAFTA/India/ROW declining by 17%/7%/57%/23%/4% YoY growth. 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 520bps YoY contraction in gross margins to 48.6% primarily led by provisions of high cost inventory and higher sales return. Gross margin compression was despite higher contribution of differentiated products at 36% vs 27% last year to the overall CP revenues. Absolute EBITDA declined by 43% YoY to Rs15.8bn with margins down 660bps YoY to 15.5%. Adjusted PAT loss came in at Rs-1.2bn as against PAT of Rs8.5bn. Going forward, UPL is undertaking a cost reduction initiative of USD 100 mn over the next two years, with 50% being realized in FY24.

§ Net debt up Rs45.0bn QoQ: As on 30th September-23 net debt stood at Rs336.8bn (incl. perpetual bond of Rs29.9bn, considered as equity), up Rs21.9bn YoY and up Rs45.0bn sequentially management alluded that company's average cost of debt stood at 7% for 2QFY24. Further, the company has highlighted that the gross debt is expected to come down by USD500mn in FY24E.

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