Latin America packs a punch for UPL in Q2, but there is no earnings upgrades yet

Oct. 30, 2018

UPL Ltd’s September quarter (Q2) results come as a respite for investors in agriculture input companies, concerned about cost pressures and moderate demand conditions. The stock gained about 3% on Friday after the company released its results. In an analyst call after the market closed, the management maintained a positive growth outlook. The upbeat mood among farmers in Latin America and new products are expected to keep up the growth momentum. Revenues during the quarter increased 13%, largely driven by Latin America. (See chart).


Importantly, profitability remained intact. The company raised prices. As global channel inventory normalizes and demand conditions improve, UPL is hopeful of passing on costs further, helping it maintain margins. “There are early indications of price hikes in the agrochemicals market. Consolidation among the top innovators is helping the industry pass on the cost increases caused by capacity cuts in China. This, in turn, will supplement volume growth and aid topline,” analysts at SBICAP Securities Ltd said in a note on UPL.

Thanks to its greater in-house production, UPL is better placed to deal with raw material cost pressures. Its relatively smaller listed peer Rallis India Ltd has seen its margins moderate due to cost pressures, leading to cuts in earnings estimates. In comparison, UPL has largely maintained its revenue and operating profit estimates.

The performance and the outlook should hold UPL in good stead. But growth-hungry investors eyeing earnings upgrades will have to wait.

One, the recovery is not broad-based yet. It has to be seen how Europe and North America respond to new products. Traction in these markets will add heft to UPL’s growth and can trigger earnings upgrades.

The second factor is expenses related to the Arysta acquisition. Last quarter, acquisition-related expenses stood at ₹37 crore, reducing the profit growth from 30% to 14%. The acquisition is expected to be completed by early next year. In the meantime, UPL is expected to continue to book related expenses.

The synergies from the acquisition are well-documented. However, uncertainty about the quantum of expenses can weigh on near-term earnings outlook. “Management re-iterated its FY19E revenue growth guidance of 10-12% and expects EBITDA margin improvement of 50-60bps. However, we are trimming our FY19/FY20E EPS by 11%/2%, factoring Arysta-related acquisition expenses,” said Emkay Global Financial Services Ltd. Ebitda is short for earnings before interest tax, depreciation and amortization.

EPS is earnings per share. One hundred basis points (bps) equal one percentage point.

To conclude, global demand should bode well for UPL. The pace of recovery and acquisition-related expenses will determine earnings upgrades.

More from AgroNews

• Sumitomo Chemical to Strengthen Business Operations of its Health & Crop Sciences Sector in the Latin American Region

  Sumitomo Chemical Company is strengthening its business operations relating to crop protection products and the feed additive methionine in the Latin American r...

• What is 14-hydroxylated Brassinosteroid (Natural Brassinolide)

  Brassinolide and its analogs, as the endogenous plant hormone, are different from the other five plant hormones and have unique physiological activities to the ...

• KingAgroot’s Jiangsu Huai’an new factory begins operating, six new compounds to be launched over next five years

  KingAgroot launched its Jiangsu Huai’an factory in August, 2019, which is located in the Huai’an Salt Chemical New Material Industrial Park, Jiangsu Province,...

• Over 2.5 million hectares of soybean crops treated with bionematicides last season in Brazil

  Over 2.5 million hectares of soybean crops in Brazil were treated with bionematicides during the 2018-2019 crop season, revealing an upward trend in the use of ...

• Attending company list released! 100+ producers and distributors will come to BioEx 2019

  The 2nd Biopesticides and Novel Fertilizers International Summit (BioEx 2019) will be hosted by AgroPages on August 22-23 in Hangzhou China. 40+ companies from ...

• Focus on Application Reduction, Efficiency Improvement, Cooperation and Innovation - 2019 Ag Formulation & Application Technology Congress

  In China, influenced by the policy of requiring negative growth in pesticide and fertilizer use, environment-friendly formulation products, advanced application...

• King Quenson: Focusing on a “Niche” Strategy and Delivering Brand Value through Partnership

  Established in 2003, it has grown from a company engaging in simple trading into one of the largest Chinese exporters of pesticide formulations in small package...

• Market trends discussed, supply, procurements exchanged: 2019 CPEW successfully held!

  This is the third consecutive year that AGROPAGES helds China Pesticide Exporting Workshop, open to worldwide industry practitioners. The workshop has become a ...

• Keyun Biocontrol’s Fall Army-Lure receives emergency registration in Bangladesh

  Keyun Biocontrol, the well-known Chinese biopesticide company’s, Fall Army-Lure received a special emergency registration in Bangladesh in June to help Banglad...

• Reduction of the Chinese supply of agricultural pesticides puts at risk Brazilian agriculture, warns CCAB Agro

  At an event in China, the Brazilian company made up of farmers emphasized the country's competitive differentials in food production, and the cooperative model ...