UPL - Q4FY21RU - Transition from post-patent to differentiated solutions

As guided by the UPL management, company’s Q4 performance improved substantially QoQ with both revenue growth as well as debt reduction leading to lower interest outgo which benefitted growth in bottom-line. 

Except for YoY degrowth in ROW region and flat US sales, all the other regions witnessed healthy YoY growth in revenues. ~15% YoY top-line growth for Q4 was primarily driven by volume growth of 18%, increase in prices of 1%, while negative 4% impact from forex. EBITDA margin improved 360bps YoY at 20.7% (17.1%), however was lower sequentially impacted by supply chain issues coupled with RM cost inflation. UPL reported stellar FY21 operational performance with ~23% EBITDA growth despite 8% top-line growth, while bottom-line jumped ~62% YoY. It had a marginal miss on its Net debt/ EBITDA guidance from 2.0x to 2.2x for FY21. 

Nonetheless, for FY22E the overall guidance is positive with expected revenue growth of 7-10%, EBITDA growth of 12-15%, while net debt/ EBITDA of less than 2.0x, and effective tax rate of 15-18%. UPL’s business transformation is underway with more emphasis on differentiated and sustainable solutions from post patented generics. This R&D driven transition is expected to not only gain market share through innovative solutions but also aid margin expansion. 

Additionally, UPL’s OpenAg collaboration initiative with FMC, Meiji among others is expected to create opportunities and aid future growth. Based on positive management guidance, we have upped our estimates sizably. UPL has already breached our earlier target price of ₹ 624. Based on our revised estimates, we continue to maintain ‘Outperform’ with a revised price target of ₹ 873 (valued at 15.0x FY23E EPS of ₹ 58.2).

Strong growth in Indian market driven by favourable agronomic conditions: During FY21, India reported robust 22% YoY growth in revenues at ₹ 46.7bn (₹ 38.3bn) accounting for ~12% of total revenues. India growth was driven by favourable weather with normal monsoon benefitting higher acreages in both seasons

LATAM benefits from double-digit growth across most countries: Most LATAM countries delivered close to double digit YoY growth while Brazil’s growth better than market, despite currency headwinds. Overall, during FY21, LATAM reported 8% YoY growth in revenues accounting for ~38% of total revenues

Growth driven by new products in Europe: Despite product bans, in FY21, Europe reported 12% YoY growth in revenues at ₹ 64.2bn (₹ 56.6bn) accounting for ~17% of total revenues.  Europe was benefitted from Improved mix and profitability, driven by accelerated sales of differentiated & sustainable solutions

Supply constraints impact North America market growth: During FY21, North American market witnessed marginal 1% YoY revenue growth accounting for ~15% of total revenues. North America growth remained subdued due to supply constraints, however strong growth in sustainable solutions drove margin improvement

ROW markets supported by strong growth in Asia despite flattish Africa: During FY21, ROW reported 3% YoY growth at ₹ 70.4bn (₹ 68.7bn) accounting for 18% of total revenues. SEA achieved double digit growth driven by continued expansion of Glufosinate solutions while China double digit growth was driven by volume gains in UPL’s branded sales and Yoloo acquisition

Focused strategy with debt reduction bodes well for financial performance: During UPL’s annual Capital Market concall, management remained upbeat on R&D driven product development, collaborations for growth, and debt reduction. UPL’s strong FY22E guidance led to substantial upgrade in our estimates with FY22E and FY23E EPS up by ~31% and ~40% respectively. At CMP, the stock is trading at 14.3x and 11.9x FY22E and FY23E EPS of ₹ 48.4 and ₹ 58.2 respectively. We continue to remain optimistic on UPL and maintain ‘Outperform’ with a revised price target of ₹ 873 (earlier ₹ 624, valued at 15.0x FY23E EPS of ₹ 58.2).

Risks: Currency headwinds in Brazil, second/ third wave of Covid affecting supply chain/ demand

Q4FY20 concall highlights – Expect to maintain growth with market share gains, launches of new products/ solutions, product price increases, low channel inventories, FY22E net debt/ EBITDA target of less than 2x

Market and Business Update – Better commodity prices to aid product price increases due to rise in input costs/ logics costs, low channel inventories

• Growth driven by cross selling of products from Arysta and complete solutions rather than selling a single product 

• Doubled share of differentiated solutions from 14% in FY16 to 29% in FY21

• Soybean resistance management platform for Brazil – Conceptualised in 2011, launched first solution Unizeb Gold, further launching additional solutions, expected to launch patented formulation in 2023/ 24, Unizeb Glory and Fluarys IP protection till 2034 and 2033 resp.

• Signs of supply chain constraints in industry – UPL is well protected, backward integrated for key RMs

• Cost increases – Should be able to pass on to customers through product price increases as commodity prices are better

• Soybean, corn – inventories quite low, prices high, limited scope for increase in area, expect high demand for products particularly bio stimulants

• Inventory – In totality dry, one of the best inventory situations till end-September for US, in India already placed products and in good situation, good inventory situation in Asia too

OpenAg innovation – Strong emphasis on addressing farmer pain points and offering solutions

• 103 new technology evaluations

• 78 collaborations with external partners

• 750+ R&D professionals, 20+ R&D facilities

• More than 2.5% annual revenue invested in R&D

• Innovation rate – 20.8% (FY22E – 21.8%)

• Molecules in development pipeline – 15

OpenAg collaborations – Collaborations to create opportunities together and drive growth

• FMC

- For Chlorantraniliprole in march 2021

- Total addressable market – US$ 5.0bn 

- 2021 launches in Brazil, Mexico, Kenya, South Africa, India 

• Meiji

- For Flupyrimin, IP protected in 2018, 2020, and May 2021

- Total addressable market – US$ 2.5bn

• Telesense – January 2021, artificial intelligence platform • Soil Health – May 2021, soil health collaboration

• FMC and Meiji collaboration – To offer differentiated and sustainable solutions for Rice in Asia, seed treatment, and soil treatment 

FY21 Financial Performance – Off-target in achieving net debt/EBITDA guidance, WC improves, better than expected achievement in cost and revenue synergies

• FY21 Overall revenue growth of 8% YoY – Supported from Volume growth – 11%, price increases – nil, currency headwinds – (3)% (mainly from Brazilian Rial)

• 46bps YoY Gross margin expansion – Supported by favourable mix driven by growth in higher margin differentiated & sustainable solutions

• 15% YoY growth in EBITDA – Higher sales with improved gross margins aided EBITDA growth partially offset by 4% increase in overheads

• FY21 Revenue break-up by products – 71% post patent, 29% differentiated and sustainable solutions 

• FY21 Gross debt reduction – ₹ 5,039cr, net debt reduction – ₹ 3,140cr

• End-FY21 Gross debt – ₹ 23,774cr (₹ 28,813cr), net debt – ₹ 18,922cr (₹ 22,062cr), short of guidance of 2.0x, actual 2.2x

• Cost synergy – FY21 US$ 126mn (₹ 882cr), cumulative – US$ 235mn (target US$ 200+)

• Revenue synergies – FY21 US$ 203mn (₹1,421cr),cumulative – US$ 443mn (target US$ 350+)

• Net WC – 71 days (80 days), lower by 9 days

• FY21 capex – US$ 275mn

• Q4 – 18% volume growth

• Q4 Exceptional cost – ₹ 81cr shutting down of Rotterdam plant, and Jhagadia accident

• FY21 Exceptional cost – ₹ 238cr, shutting down of Rotterdam plant, planned employee redundancies post Arysta integration

• CF from operations – ₹ 4,506cr

• Sustainability loan – Taken to replace existing acquisition loan, availed US$ 500mn till March21, US$ 250mn in April21, interest rate based on sustainability KPIs such as water reduction, carbon reduction etc.

• Jhagadia – Plant restarted on 11 April, all plant started from 14 April, all plants are running as of now

• Receivables factoring – ₹ 7,600cr

• Started communication with rating agencies

FY22E Guidance – Expect healthy growth with emphasis on debt reduction

• Revenue growth – 7-10%

• EBITDA growth – 12-15%

• Net debt to EBITDA – less than 2x

• Capex – US$ 300-320mn

• Effective tax rate – 15-18%

• R&D investment – to keep at ~2.5% of revenues, focus on bio stimulants, BioSolutions

Medium-Long term guidance – R&D pipeline to fuel growth along with margin expansion

• FY26E Revenue break-up by products – 50% post patent, 50% differentiated and sustainable solutions

• EBITDA margin – ~25% over the next three years

• Long-term revenue growth – 7-10%

• Peak R&D pipeline – US$ 4.5bn

India – Excellent performance in a strong market

• Q4 YoY revenue growth – 23%, 7% of total revenues

• FY21 revenue growth – 22%, 12% of total revenues

• Favourable weather with normal monsoon drove higher acreages in both seasons

• Continued volume expansion of Ferio, Sweep Power, and accelerated growth of sustainable solutions

• New product launches creating a complete portfolio for farmers

• Outlook – Favourable with low channel inventories

Latin America – Growth despite FX devaluation in Brazil 

• Q4 YoY revenue growth – 41%, 37% of total revenues

• FY21 revenue growth – 8%, 38% of total revenues

• Most LATAM countries delivered close to double digit YoY growth

• Brazil growth better than market despite currency headwinds

• Sucking pest and Soybean resistance management platforms grew significantly in Brazil and other South American countries

• Outlook

- Brazil – Lower rains, may result in lower winter yield, however high prices in Soybean since past 8-9 years

- Brazil – Launching new products, opportunities to grow innovative solutions in Brazil

- Expect soybean, corn, cotton, wheat area in Brazil due to high commodity prices – will be able to increase product prices

Europe – New product sales continue to outpace impact of banned products

• Q4 YoY revenue growth – 17%, 20% of total revenues

• FY21 revenue growth – 12%, 17% of total revenues

• Improved mix and profitability, driven by accelerated sales of differentiated & sustainable solutions

• Strong growth in Benelux, German, Poland, Italy, and Iberia

• Excellent performance of Argos in its first year of launch in addition to Fazor in potatoes

• France sales impacted by declining market

• Outlook – Gaining market share and expect to gain further market share, Focus on new product launches

North America – Supply constraints impacting sales in A4

• Q4 YoY revenue growth – flat, 20% of total revenues

• FY21 revenue growth – 1%, 15% of total revenues

• Supply constraints in some herbicides in Q4

• North America growth subdued due to supply constraints

• Strong growth in sustainable solutions drove margin improvement

• Increased demand for Interline (Glufosinate) due to robust ramp up of resistance-traits acres

• Outlook – Dry weather in the US, still early in the season to assess any impact

ROW – Strong growth in Asia and flat business in Africa

• Q4 YoY revenue degrowth – (11)%, 16% of total revenues

• FY21 revenue growth – 3%, 15% of total revenues

• SEA – achieved double digit growth driven by continued expansion of Glufosinate solutions

• Accelerated growth in China (double digit) – driven by volume gains in UPL’s branded sales and Yoloo acquisition

• Flat growth in Africa impacted by Covid related challenges

• Outlook – Favourable inventory situation in Asia, gaining market share in Africa