UPL Ltd. has received an upgrade from Kotak Securities, which sees the company's specialty chemicals business Superform emerging as a key growth driver, supported by backward integration and expanding opportunities across differentiated chemistries.
The brokerage has upgraded its rating to 'Add' from 'Reduce' and set a revised fair value of Rs 570, following a sharp correction in the stock.
In a research note by analysts Abhijit Akella and Chaitanya Sawhney, Kotak said its visit to UPL's manufacturing facilities in Jhagadia and Dahej strengthened its conviction in Superform's growth prospects and the company's cost competitiveness. Management expects Superform to sustain strong revenue growth while improving profitability, although the proposed corporate reorganisation remains a key overhang for UPL's valuation.
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Why Kotak Securities Upgrades UPL Shares
Kotak Securities has shifted its valuation methodology from a discounted cash flow (DCF) approach to a sum-of-the-parts (SoTP) framework to better capture the differing growth profiles of UPL, Superform and Advanta.
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The brokerage has assigned Superform a valuation multiple of 12 times September 2028 estimated EBITDA, while Advanta has been valued at 10 times, factoring in its recent acquisitions, including Decco, and the potential upstreaming of cash to UPL. UPL Global has been assigned a multiple of six times.
Kotak has applied a 20% holding company discount to account for uncertainty surrounding the proposed reorganisation. Despite this discount, the brokerage believes the recent correction in UPL shares has improved the risk-reward profile enough to warrant an upgrade to 'Add'.
The brokerage also noted that changes to the reorganisation plan by management could provide further upside to its fair value estimate.
Superform Growth: UPL's Specialty Chemicals Business Targets 20-25% Revenue CAGR
A central pillar of Kotak's revised investment thesis is Superform, UPL's specialty chemicals business, which was established in 2022 and also includes the company's agrochemical manufacturing operations.
Superform focuses on five differentiated chemistries, including products that are difficult to manufacture because of the hazardous processes involved, as well as chemicals that offer alternatives to Chinese suppliers. These include phosphorus, acrolein and sulfur-based chemistries, alongside products involving processes such as phosgene and cyanation.
The business's third-party specialty chemicals operations generated revenue of Rs 2,900 crore in FY26, with an EBITDA margin of 16.5%, according to the brokerage report. Management expects Superform to sustain a revenue compound annual growth rate (CAGR) of 20-25% while improving EBITDA margins to 20% by FY30.
Key growth opportunities include phosphorus-based flame retardants, lubricant additives and battery chemicals. Backward integration into yellow phosphorus is expected to support the battery chemicals opportunity, while plans to triple cyanide capacity could help the business cater to applications including penicillin-G and caffeine.
For Kotak, the combination of differentiated products, growth opportunities and improving margins makes Superform an important contributor to UPL's longer-term earnings potential.
UPL's Backward Integration Provides Cost Advantage Over China
Kotak also highlighted UPL's backward integration across several important active ingredients (AIs), which supports its manufacturing cost competitiveness against Chinese producers.
The company has integrated production back to elemental or basic inputs for key products. Examples include sulfur for mancozeb, phosphorus for acephate and aniline for s-metolachlor.
According to management, UPL's manufacturing costs for its top 10 active ingredients produced in India are between 65% and 105% of those of global competitors. The range indicates that cost competitiveness varies by product, rather than implying a uniform cost advantage across the portfolio.
UPL has twice the capacity of its next-largest competitor in mancozeb and is the world's largest producer of acephate and aluminium phosphide, as well as the second-largest producer of s-metolachlor.
Kotak believes backward integration and continued efficiency improvements help the company withstand intense competition from China. However, UPL still sources around 45% of its active ingredients externally, with the company focusing on molecules where it believes it has a competitive advantage.
UPL Reorganisation Remains A Key Risk
Despite upgrading UPL, Kotak Securities cautioned that the proposed corporate reorganisation could weigh on the stock through a holding company discount.
The brokerage believes that separating the valuation of UPL's businesses under a sum-of-the-parts framework provides a better representation of their individual growth prospects. However, uncertainty surrounding the structure and execution of the reorganisation could lead to substantial and difficult-to-predict discounts in the market valuation.
The 20% holding company discount incorporated into Kotak's valuation reflects this risk. Any changes to the proposed restructuring could alter investor perceptions of the individual businesses and their combined value.
For investors, the key question is whether Superform's growth, improving margins and UPL's manufacturing advantages can translate into stronger consolidated earnings and help offset the uncertainty surrounding the reorganisation.
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