UPL: Steady outlook after transient hiccups

UPL’s performance for the June quarter may have been impacted by multiple factors, but a 10 per cent volume growth was still encouraging. On revenues, there was a disappointment as despite launch of three new products domestic growth came at just four per cent year-on-year, impacted by goods and services tax (GST)-led destocking.

Latin American business grew six per cent and was hit by poor commodity prices, high channel inventories and drought in Mexico. The European growth of four per cent too was impacted by hot weather in South Europe despite beet acreage improving. UPL's overall revenue growth of six per cent was supported by North American business growing seven per cent and Rest of the World geographies growing nine per cent.

Earnings before interest, tax, depreciation and amortisation (Ebitda) thus was up just 7.3 per cent. However, adjusted net profit surged 26.8 per cent supported by higher other income, lower interest expenses, lower depreciation, and lower tax rate.

The problems faced in the quarter, however, are temporary in nature and growth is expected to be much better in the coming quarters with GST-led destocking behind and good monsoon supporting demand. Further, in India, four new products are to be launched soon, while new launches in Latin America are also anticipated to drive growth.

Management also offered a positive outlook for both geographies, with soybean prices beginning to perk up in Latin America. Management has also maintained FY18 guidance for 12-15 per cent revenue growth, 50-75 bps Ebitda margin expansion, and a 20-22 per cent effective tax rate.

Analysts at Morgan Stanley, too, say that they would not extrapolate trends from June quarter. Business is very seasonal and second half dominates overall profitability.

Notably, the company is also seeing debt reduction, and the decline in interest costs should also drive earnings. Analysts at IIIFL Institutional Equities have raised their FY18/19/20 EPS estimates for UPL by 5/3/2 per cent, respectively to Rs 44.2/52.0/61.9, mainly to reflect lower interest expense going forward.

Not surprisingly, despite subdued quarterly performance, the UPL stock has continued scaling new highs and is up over two per cent post results.

Analysts such as Himanshu Nayyer at Systematix Shares say that at current valuations the stock looks fairly valued and returns will be in line with earnings growth. Nayyer remains watchful on growth of innovator companies that can impact generic sales by UPL.

The company is also said to be looking for an acquisition to boost growth. Analysts at Edelweiss say that UPL continues to hold huge cash of Rs 2,600 crore in anticipation of any potential acquisition opportunities.

Company has had a history of successfully turning around acquisitions. The only risk that analysts highlight is that the acquisition should not be too big to stretch the balance sheet. Analysts at Deutsche Bank say that while it is still early days, a likelihood of a mega acquisition may emerge as an overhang on the stock given potential equity dilution to fund it.