UPL - LATAM to support Q4, Debt to come down sizably by end-FY21

UPL reported stark improvementin sequential performance supported from growth across regions except LATAM which was impacted due to currency headwinds and delayed season in Brazil. Q3FY21 revenues increased marginally by 2.1% QoQ and 2.6% YoY at ₹ 91.3bn (Q3FY20 – ₹ 88.9bn). Revenue growth was primarily driven by 7% YoY jump in volumes, 1% price increases, while currency headwinds had a negative impact of 5%. QoQ gross margin expansion led to EBITDA margin expansion from 18.6% in Q2 to 24.1% in Q3 while operating profit jumped 32.1% QoQ and 4.8% YoY at ₹ 22.0bn (Q3FY20 – ₹ 21.0bn). 

UPL pared ₹ 39.8bn debt during the quarter supported by improvement in working capital cycle which improved by 19 days YoY. However, interest outgo jumped sizable for the quarter due to prepayment cost pertaining to bond prepayment and currency fluctuation. Lower effective tax rate supported 71.5% and 13.3% jump in QoQ and YoY bottom-line. Management reiterated its FY21 guidance of 10-12% EBITDA growth and 2.0x Net Debt/EBITDA. Delay in LATAM is expected to benefit Q4 performance which would be able to aid meet the debt guidance. Based on 9M numbers, we have marginally changed our estimates for FY21E and FY22E while introducing FY23E estimates. We roll over our valuations to FY23E and continue to maintain ‘Outperform’ with a revised price target of ₹ 624 (earlier ₹ 560, valued at 15.0x FY23E EPS of ₹ 41.6).

India reports good growth despite market slowdown: During Q3, India reported robust 21% YoY growth in revenues at ₹ 9.1bn (₹ 7.5bn) accounting for 10% of total revenues. India growth was thwarted due to excess rains in South which reduced market growth after a very strong H1

Delayed season coupled with currency headwinds led to degrowth in LATAM: Season delayed by drought in Brazil/ Argentina in October/ November coupled with currency impact from Brazilian Real. However, the company is confident of recouping sales in Q4 which have been pushed due to delayed season along with increase in grain commodity prices and recent rains in the region

Strong growth in Europe: Europe reported stellar 30% YoY growth in revenues at ₹ 11.2bn (₹ 8.6bn) accounting for 12% of revenues and driven by improved mix driven by strong sales of differentiated & sustainable solutions. Strong growth seen in Poland, Benelux, and Ukraine in addition to Italy and Spain

Weather and market share gain support North America market growth: North American market witnessed 5% YoY revenue growth supported by weather and market share gains. Strong growth in differentiated and sustainable solutions driving improved margins. Increased demand for Glufosinate witnessed due to ramp-up of resistant-traits acres

Demand normalizes in ROW markets: ROW reported 6% YoY growth at ₹ 19.0bn (₹ 17.9bn) accounting for 21% of revenues driven by normalised demand and higher demand for Glufosinate aided growth. UPL witnessed double digit growth in Africa and Middle-East while Australia and New Zealand benefitted from normalised season

Management reiterated debt reduction guidance: During 9MFY21, UPL reported 19% jump in EBITDA at ₹ 57.0bn while reiterating its guidance of 10-12% EBITDA growth for FY21E which is likely to surpass. LATAM growth is expected to be better in Q4 supporting performance. Management also indicated WC reduction by 4-5 days while maintaining its Net Debt/ EBITDA guidance at 2.0x. Synergy benefits are aiding UPL’s performance which is expected to benefit in future too. Thus, we remain positive on the stock. At CMP, the stock is trading at 14.5x and 12.8x FY22E and FY23E EPS of ₹ 36.9 and ₹ 41.6 respectively. Rolling over our valuations to FY23E, we continue to maintain ‘Outperform’ with a revised price target of ₹ 624 (earlier ₹ 560, valued at 15.0x FY23E EPS of ₹ 41.6).

Risks: Currency headwinds particularly in LATAM, debt overhang, second wave of Covid affecting European region 

Q3FY20 concall highlights – Q4 growth to continue, FY21E debt reduction and EBITDA growth target maintained, expect good performance for the next year

Market and Business Update – Growth across regions except LATAM

• Four of five regions reported growth, Latin America was impacted due to currency headwinds and delayed season in Brazil

• Ban on Mancozeb in the EU – plan to replace with other products, overall share of Mancozeb sales to the EU small compared to overall global sales

• Sustainability initiatives – year till date

o CO2 reduction – 12%

o Reduction in water consumption – 30%

Financial Performance – On target to achieve Cost and Synergy benefits, WC reduction along with debt reduction 

• Overall revenue growth of 3% – Supported from Volume growth – 7%, price increase – 1%, currency headwinds – 5% (mainly from Brazilian Rial)

• Revenue and EBITDA increase – supported by strong volume growth, favourable mix, and price increases, currency headwinds and significant delayed season in Brazil

• Net WC 117 days – lowered by 19 days on account of account payables

• Debt reduction – ₹ 3,980cr

• Gross debt end-December – ₹ 27,837cr, net debt – ₹ 24,244cr

• Capex 9M – ₹ 1,360cr, ₹ 1,015cr on tangibles and rest intangible, FY21E ₹ 1,750cr

• Q3 Fixed cost increase 11% YoY – intra quarter movement of costs, ₹ 39.5cr court order on excise duty pertaining to period April 2008 to December 2013 in Jammu

• Interest cost ₹ 745cr (₹ 515cr) – interest and financial charges ₹ 460cr (one-time prepayment cost of ₹ 75cr pertaining to bond prepayment of US$ 410mn, ₹ 32cr reduction in finance cost due to prepayment), balance ₹ 285cr on currency fluctuation, MTM 

• Exception items, income of ₹ 78cr – favourable verdict on Agrofresh, reversal of provision of US$ 18mn of total provision of US$ 31mn

• Q3 Cost synergies – ₹ 260cr, US$ 35mn, cumulative till Q3 US$ 188mn (target US$ 200mn+)

• Q3 Revenue synergies – ₹ 408cr, US$ 55mn, cumulative till Q3 US$ 354mn (target US$ 350mn+by FY22E)

• Factoring for sales receivable at LIBOR+200bps

• Factoring – ₹ 4,570cr, ~US$ 600mn

Guidance/ FY21E – Maintained EBITDA growth and debt reduction guidance

• Q4 to benefit from price variance

• Commodity price inflation – expected to affect Q4 and Q1FY22, however have the ability to increase prices to counter the effect

• Net debt end-FY21E – US$ 2.4-2.5bn based on 2.0x Net Debt/ EBITDA

• Innovation rate – expect 21.7% from ~20%+ last year

• FY21E EBITDA guidance– 10-12% growth, maintained, no change in guidance

• 4-5 days in reduction in WC days from 98 days by end-FY20

• EBITDA margin range for next couple of years – 24-25%

India – Good growth despite market slowdown

• Q2 YoY revenue growth – 21%, 10% of total revenues

• Excess rains in South reduced market growth after a very strong H1

• Good herbicide sales in resistant Phalaris infested wheat acres of North India

• Strong Feriso and Sweep Power volume growth Q3

Latin America – Delayed season impacted 

• Q3 YoY revenue degrowth – (8%), 42% of total revenues

• Season delayed by drought in Brazil/ Argentina in October/ November, pushing sales to Q4

• Volume growth in South Cone and Andean region

• Increase in grain commodity prices and recent rains supporting a positive trend for Q4

• Currency devaluation in LATAM countries partially offset by pricing actions

Europe – Bringing alternative products for Mancozeb ban

• Q3 YoY revenue growth – 30%, 12% of total revenues

• Improved mix driven by strong sales of differentiated & sustainable solutions benefitted growth

• Strong growth seen in Poland, Benelux, and Ukraine in addition to Italy and Spain

North America – Growth driven by weather and market share gains

• Q3 YoY revenue growth – 5%, 15% of total revenues

• Strong growth in differentiated and sustainable solutions driving improved margins

• Increased demand for Glufosinate due to ramp-up of resistant-traits acres

• Strong growth in Vigilant, Everest, Manzate, and Interline

ROW – Normalised demand and higher demand for Glufosinate aided growth 

• Q3 YoY revenue growth – 6%, 21% of total revenues

• Double digit growth in Africa and Middle-East

• Australia and New Zealand benefitting from normalised season

• Strong growth in South East Asia supported by expansion of Glufosinate

• Accelerated growth in China, driven by volume gains in branded sales and impact of Yoloo acquisition

• Expect market share gains and growth in 1H 2021