Q4FY23 Review: UPL: Pricing pressure to persist in near term

9 May 2023 , 10:29 AM

UPL saw significant pricing tailwinds during the course of FY23, which not only boosted margins, but also bloated working capital and finance costs. With the onset of post-patent products’ glut in global markets (largely from Chinese suppliers) and subsequent decline in realisations, analysts of IIFL Capital Services

 had turned cautious on UPL; immediate recovery is still hard to factor in. However, the silver lining would be slightly better working-capital position and reduction in finance costs.

Margins compress sharply, as expected: 

UPL reported subdued operational performance in Q4FY23. While revenue growth was at 4% YoY, Ebitda declined 16% QoQ. This was mainly on account of sharp decline in gross margins by ~890bps YoY to 40.7%. Management highlighted that decline in post-patent product prices, owing to oversupply from China, idle capacity costs and rise in share of low-margin LatAm revenues — significantly impacted gross margin.

Net debt arrives at guided levels: 

Gross debt at Mar-end stood at ~Rs230bn; net debt at ~Rs169bn. The company managed to repay net debt of US$440mn by end of FY23. UPL achieved net debt-to-Ebitda of 1.5x by end of FY23. Going forward, UPL will not look to further deleverage debt; management is comfortable with net debt-to-Ebitda not going below 1.1x. Cash generated during FY24 will be used towards funding of working capital and capex initiative for future growth. The company has guided to a capex of $350mn in FY24.

Near-term challenges make for a cautious view: 

UPL has set guidance for FY24: revenue growth of 6-10% and Ebitda growth of 8-12%. However, management comments suggest that a large portion of these forecasts would be driven by performance during H2FY24. Outlook for H1FY24 stands muted, owing to declining price trend across post-patent portfolio, especially as Chinese manufacturers oversupply global markets. With near-term challenges and growth assumptions skewed towards H2FY24, we see limited triggers on stock at this point.

Analysts of IIFL Capital Services trim FY24-25 EPS estimates further by 6-10%, to factor weak Q4 results and challenges in the coming quarters. Their TP at 10x Jun-25 EPS (rolled over from Mar’24 to Jun’24), reduces from Rs855 to Rs835.