Q3FY24 Review: UPL: Weak performance elevates leverage concerns

5 Feb 2024 , 11:32 AM

UPL’s performance worsened in Q3 with revenue declining 28% owing to destocking and profitability coming under severe pressure due to liquidation of high-cost inventory and the provision of higher rebates to support channel partners and high sales return. Such weak performance puts the company in a difficult position to meet the rating agencies 2.25x criteria of net debt/EBITDA. The debt has ballooned to US$4.3Billion while EBITDA plunged 56% over the year-ago quarter to ₹3.5 Billion during the nine months of FY24. 

UPL’s gross debt rose to ~₹362 Billion with net debt at ₹313 Billion. The management remained confident of reducing to reduce net debt from the current US$3.7 Billion to US$2.5-2.0 Billion. Additionally, the company has board approval to raise up to $500 Million through rights issue and is exploring g capital raise opportunities in platforms.

With the pricing headwinds likely to sustain, analysts at IIFL Securities have cut their FY25-26 earnings estimates by 28-17%. They expect the stock to underperform as weak performance will curtail cash flows and elevate balance sheet leverage concerns. They have downgraded the stock to Reduce. Their Target Price, rolled over to March 2025, comes down to ₹480 (down from ₹605).