UPL investors leave past behind to overtake PI Industries’ valuations

UPL Ltd shares have risen around 38% since end-October, on the back of improving prospects for sale of agrochemicals. While the domestic agricultural sector is expected to do well, with healthy sowing and good reservoir levels, UPL’s prospects in key markets outside the country are also looking up.

Not too long ago, UPL’s market capitalization had slipped below that of PI Industries Ltd due to corporate governance concerns. All that is now behind from the looks of it, with UPL’s market value now way higher than PI.

A recent partnership announcement by the company to commercialize a key molecule has boosted its earnings prospects further. The company recently announced a long-term strategic collaboration with FMC Corp., a leading global agricultural sciences firm. The agreement provides UPL access to key markets prior to patent expiry, to commercialize Rynaxypyr active, FMC’s leading insecticide.

UPL will manufacture and supply Rynaxypyr to FMC in India, and FMC will supply the active ingredient to UPL in some markets. Early access to the formulation in key markets gives UPL an advantage to expand its crop solution portfolio, said analysts.

“The deal adds a key portfolio of products to UPL’s business and supports FMC in maximizing the penetration of this important active ingredient," said the company.

In 2019, the global Rynaxypyr market was valued at $1.6 billion, which is significant. The global crop protection market was valued at $59.8 billion, said analysts. The molecule finds major usage in rice, soybean, fruits and vegetables.

The Rynaxypyr market is expected to expand at an annual rate of 4.4% over 2018-2025 to reach $2.1 billion by 2025-end, said analysts at Motilal Oswal Financial Services Ltd. The India B2C opportunity is pegged at ₹2000 crore. “As per an industry source, toll manufacturing and supply of Rynaxypyr to FMC in India will provide UPL with a ₹700-800 crore long-term growth opportunity," Motilal Oswal analysts added.

As the molecule strengthens UPL’s portfolio, the company continues to gain in key geographies. The Street will be looking at sales performance in Latin America, which was subdued in Q3. Due to weather conditions, some sales got deferred to Q4, and analysts expect Latam growth rebounding this quarter.

Besides, the company is benefitting from improving synergies from its Arysta acquisition. This is helping drive margins. Cost synergy in Q3FY21 was ₹260 crore and revenue synergy was ₹410 crore during Q3 as per analysts at Elara Securities (India) Pvt. Ltd. The Street, however, will be watchful on debt reduction initiatives. The company planned to reduce debt by $700 million in the second half of FY21. Of this, $410 million worth of debt has been repaid by end-December. Debt reduction remains crucial for the stock’s prospects, according to analysts.