UPL Rating – add: Firm has multiple levers to maintain its margins

While the street seems concerned about rising input prices and its likely impact on UPL’s Ebitda margin, we note the company has maintained the margin in a narrow band of 17.5-20.4% over the relatively long period from FY09 to FY21e. UPL has multiple levers to sustain the margin at the said level, with the levers being: (i) selective price hikes and tweaking of trade margins; (ii) improvement in revenue mix; and (iii) cost-saving initiatives. Besides, while its global market share stands at ~10%, it is the leader in its key markets such as India, Chile, Mexico and Columbia, which we believe indicates strong pricing power. Company will continue to benefit from synergy benefits as well as operating leverage in FY22e-FY23e too. We maintain our Add rating on the stock with a revised DCF-based target price of Rs 665, implying 13x FY23e EPS (earlier target price: Rs 600).

Ebitda margin in a narrow range over FY09-FY21e: Despite volatility in prices of crude oil and crude oil derivatives, UPL has maintained its Ebitda margin in a narrow range of 17.5-20.4% over FY09-FY21e. While input prices and other costs (e.g. port handling expenses) are rising, we model the company to maintain its Ebitda margin at ~19.7% over FY22e-FY23e.

Synergy benefits on track as per plan: Cost synergy benefits worth $109 mn were achieved in FY20 and an additional $79 mn in 9MFY21. Revenue synergy benefits worth $240 mn were reaped in FY20 followed by another $114 mn in 9MFY21. UPL is on track to achieve its targeted synergy benefits in FY21e-FY22e.

Guidance maintained: UPL has maintained its guidance of 6-8% revenue growth and 10-12% Ebitda growth in FY21. Cost-saving measures initiated post-lockdown and synergy benefits are leading to expansion in Ebitda margin. Company also expects net working capital days and net debt to decline by FY21-end.

Maintain ADD: We model UPL to report revenue and PAT CAGRs of 8.4% and 16% respectively, over FY20-FY23e. We remain confident of value creation with RoE at 14.4% in FY23e (higher than the cost of equity).