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.

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