Q1FY24 Review: UPL: Weak performance, lowered guidance

1 Aug 2023 , 12:41 PM

UPL reported weak results as revenue and Ebitda was impacted by the industry-wide destocking and pricing headwinds. Pressure was immense on the off-patent/generic portfolio, while differentiated and sustainable portfolio was up 7% YoY. Seeds business too delivered strong results with revenue/Ebitda reporting growth of 26%/54% YoY. Further, UPL is undertaking a cost reduction initiative of $100mn over next 2 years and expects 50% of this to be realised in FY24. The company has downgraded its guidance on revenue growth to 1-5% (from 6-10%) and Ebitda to 3-7% (from 8-12%). However, analysts of IIFL Capital Services believe the guidance is still optimistic given the pricing headwinds, and estimate revenue/Ebitda decline of ~4%/11% for FY24 resulting into FY24-26 EPS estimates cut of 10-22%. Analysts of IIFL Capital Services TP, rolled over to Sep-2024, now stands at Rs655 (down from Rs740). 

Performance below expectations: 

UPL’s performance was below expectations due to industry-wide destocking, pricing headwinds and erratic monsoon in India. Gross margins were largely stable, led by higher share of differentiated products, favourable product mix and improved margins in the Seeds business. LatAm business declined due to lower non-selective herbicides in Brasil, while high channel inventory in NAM resulted in significant destocking amid falling prices. 

Seeds business fared well: 

Advanta/Seeds reported a strong global growth of 26%, of which volume growth was 14% and price-led growth was 9%; Ebitda was up 52% YoY. Field corn, tropical field corn, across key markets like Peru, Ecuador, Thailand, and India performed well. In Crisp corn in Indonesia, UPL is moving from B2B to B2C. Management has guided for healthy demand to sustain for the rest of FY24. 

Cautious view, given near-term challenges: 

UPL has cut its FY24 guidance for revenue growth to 1-5% (from 6-10%) and Ebitda growth to 3-7% (from 8-12%). Management comments suggest that a large portion of these forecasts would be driven by performance during H2FY24. Analysts of IIFL Capital Services see the renewed guidance as optimistic, given that the ask rate is now upwards of 20% growth for H2FY24, which seems difficult in the current environment. So at this point, they see limited triggers on the stock.