UPL profitability miss no big deal as it maintains growth momentum

UPL Ltd’s shares lost 1.7% on Friday after the company missed operating profit and margin expectations for the March quarter. It otherwise did well, with revenue and volume growing in the range of 20-21%.

To be sure, the reported numbers show improvement on both margins and operating profit parameters from a year ago.

The only glitch is that they did not add up to Street expectations.

But then, one cannot attach too much importance to the expectations for now—they are based on previous accounting norms, while the latest results are through new rules (IND AS). For instance, Ebitda margin in the year-ago quarter were at around 22%. New rules peg them at around 15%.

In the absence of reliable benchmarks, one has to look at the performance trajectory. Here, there are reasons to be both cheerful and cautious.


The good news is that UPL maintained the growth momentum. It has cut debt. All business regions registered growth.

At less than 6%, growth is the slowest in India. But if one compares its performance with the almost flat growth at Rallis India Ltd, a large agrochemicals firm, UPL’s growth looks reasonable.

What’s more, the firm aims to maintain the growth tempo. It expects to benefit from the revival of cotton crop acreages in the coming season. Sugar crop acreages are estimated to rise in Europe. This can aid its sales in the region.

Subdued agriculture produce prices are a concern. But a tightening of environmental regulations in China and the resultant reduction in supplies can provide support to agrichemical product prices, the management said in the post-results presentation. “UPL management has guided for a 12-15% topline growth in FY18, with 50-75bps margin expansion,” Sharekhan Ltd said in a note.

That said, revenue growth in Latin America, the key growth driver of UPL, has slowed to 17%. In the same quarter of the previous two fiscal years, revenue in the region grew in the range of 29-57%. The region is facing growth challenges, with the market either flat or shrinking in most countries. Low farm produce prices are said to be weighing on farm investments. As farmers look for cheaper options, UPL expects to sell more low-priced generics products. Whether the situation evolves in line with expectations or not, only time will tell. In the meantime, the maintenance of the double-digit growth tempo should provide comfort to investors.