UPL Shares Fall As Analysts Flag Earnings Risks After Q4 Profit Declines

Shares of UPL Ltd. fell over 2% on Tuesday after the company reported a fourth-quarter decline in its net profit.

Analysts expressed concerns over the company's earnings after the agriculture solutions provider suffered an inventory loss worth Rs 1,240 crore during the quarter ended March 31.

Its consolidated net profit declined 42.56% to Rs 792 crore in Q4 FY23.

UPL's gross margin contracted 900 basis points to 40.7% during the period. Its top-line grew by 4% to Rs 16,569 crore. Ebitda declined by 16% to Rs 3,033 crore.

For FY24, the management of the company has guided revenue growth of 6-10% and Ebitda growth of 8-12%.

"Though top-line growth will be primarily driven by volume growth as realisation may continue to soften, we see the pressure on margins with liquidation of high-cost inventory and weak pricing environment from China," said Nuvama Institutional Equities in a May 9 note.

"The muted revenue growth was primarily led by decline in post-patented product prices with ramp-up of supply from China, as well as lower sales in North America," Motilal Oswal Financial Services Ltd. said.

However, Nirmal Bang Securities Pvt. remained positive "based on the company's strategy to ‘move up the value chain', by increasing the share of sustainable and differentiated products, its backward integration initiatives and farmer connect".

A key positive highlight amidst the weak performance was reduction in debt. The net debt reduced to Rs 16,900 crore in FY23, compared to Rs 18,900 crore in FY22.

Shares of UPL Ltd. declined by 2.29% to Rs 699 apiece, compared to the decline in the benchmark NSE Nifty 50 by 0.39% as of 10:47 a.m.

The total traded volume so far in the day stood at 6.8 times its 30-day average.

Out of the 26 analysts tracking the company, 23 maintain a 'buy' rating, two recommend a 'hold' and one suggests a 'sell' on the stock, according to Bloomberg data. The return potential, as calculated by the consensus of analyst estimates, stands at an upside of 35% over the next 12 months.

Here is what analysts project for the company

Nuvama Institutional Equities

• Retains 'Buy' rating on the stock, with a revised target price of Rs 966.

• Anticipates a sustained improvement in balance sheet, while inexpensive valuations protect downside risk.

• Future cash flows may fuel further inorganic growth opportunities, which will improve with working capital reduction.

• With earnings risk for FY24, the brokerage cut its estimates for FY24/25 earnings per share by 22/8%.

• Though top-line growth will be primarily driven by volume growth as realisation may continue to soften, the pressure on margins with liquidation of high-cost inventory and weak pricing environment from China is likely to remain.

• Growth will be driven by volume, as pricing is anticipated to decline in FY24.

• Less seasonality risk, given its geographic reach and non-dependence on any one geography for sales.

• UPL, like most companies with a large export interface, faces risks from an appreciating rupee.

Motilal Oswal Financial Services

• Reiterates a 'neutral' rating, with a target price of Rs 750.

• Factoring in UPL's weak Q4 FY23 performance, the brokerage cut its earnings estimate for FY24 and FY25 by 13% and 9% respectively.

• Post re-opening of China, global agrochemical inventory level in channel surged, thereby driving the prices lower for UPL's key post-patented molecule.

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

Jefferies

• Reiterates 'Buy' on inexpensive valuation, with revised target price of Rs 925.

• UPL's Q4 FY23 operational performance was a miss, impacted by steep margin compression, both year-on-year and quarter-on-quarter.

• However, company achieved healthy sales growth of more than 16% YoY in FY23, led by firm pricing in fist half of FY23.

• Healthy improvement in cash flow generation fueled deleveraging.

• Key risks include extended supply glut in global agro-chem market, weather disruptions in key regions and subdued pace of deleveraging.

• The company is diversified across products and regions, which alleviates risks.

Kotak Institutional Equities

• Lowered their rating to 'Reduce', with a revised fair value of Rs 690.

• If industry over-capacity is not corrected, acute margin pressures will remain longer.

• Continued overcapacity in China, leading to prolonged price competition, is a risk.

• The current environment of falling prices and elevated channel inventories could put pressure on both volume growth and realisations.

• Continues to estimate 5% revenue growth for FY24, but has cut its margin assumptions to reflect the competitive onslaught from China.

• Slower revenue growth should logically help increase cash flow in FY24, thereby permitting further reduction in debt – this would definitely be a positive.

Nirmal Bang Securities

• Maintains 'buy' on UPL, based on expectations of revival in volume growth, combined with improved margins from new and differentiated products, especially from second half of FY24.

• Cut FY24E/FY25E estimates by 10%/10.5% and target price by 10.5% to Rs 1,037.

• The setback in Q4 FY23 was a one-off and the same is not likely to cause further pain, barring some pressure on pricing in Q1 FY24 /Q2 FY24.

• The reduction in net debt and UPL's stated intent to increase the share of sustainable/differentiated products, including Bio Solutions, is likely to aid margin expansion in the next 2-3 years.

• The progress UPL is making on ESG-related goals is an added long-term catalyst.

• Concerns include volatile commodity prices, competition from China, vagaries in weather and potential for increase in working capital, if chemical price inflation-led topline growth were to revive.