Stock call: UPLL in winning seat as US acreage shifts to maize, cotton from soybean

The North America — a key market for UPLL – is the third largest agrochemical market after LatAm and Europe. North America contributed 18% to UPLL’s annual revenues, while it contributed 23% to revenues in Q4FY18. Further, 42% of UPLL’s total revenue from North America in FY18 was realized in Q4.

In this report, we analyse the North American agrochemical market and crop mix from UPLL’s perspective. We also met UPLL’s management to better understand the company’s position in North America (primarily the US), outlook for ongoing season and update on the Arysta consolidation.

The acreage in the US is likely to shift towards maize/cotton from soybean owing to high closing stock of soybean. This should augur well given that maize constitutes 24% of the total agrochemical market in North America v/s soybean’s share of 15% despite similar acreage in both crops.

Glufosinate is the highest revenue contributor for UPLL in North America. Since Glufosinate targets crops that constitute 66% of the total acreage in the US (maize and soybean), therefore growth is likely to be driven by Glufosinate-based products.

The integration of Arysta with UPLL is on track with a likely integration cost of $40-60m, spread out over FY20. So far, transaction cost (legal fees, etc.) of `1,520m has been incurred in M9FY19. The integration would aid in realising cost synergy of $100-110m in the first year (FY20) and thereon, an additional $100-150m per year. Further, revenue synergy to the tune of $350-400m is expected over a period of three years.

The closing stock of soybean in the US touched a record high of 26m tonne (+118% y-o-y) in 2018-19. This was largely a result of record production (125m tonne, +4.3% y-o-y), driven by both rise in acreage and yield, but offtake was restricted from China owing to the prevalent trade war between the two countries.

On the other hand, closing stock of maize was down to 45.2m tonne (-17% y-o-y) in 2018-19, thereby supporting firmer prices. Further, as per the National Cotton Council (NCC), US cotton producers intend to plant 14.5m acres this spring, up 2.9% y-o-y. Therefore, an acreage shift is expected from soybean to maize/cotton, which is likely to augur well as UPLL has an equally strong presence in soybean and maize.