UPL Rating: Buy – Prospects are sound for company’s growth

By: |
August 31, 2021 2:15 AM

AR highlights focus on margin-accretive segment, reduction in debt, new platforms; ‘Buy’ retained

UPL’s cumulative sustainability loan is at $750 mn as of Jun21.

UPL’s FY21 Annual Report delves deeper into its key strategies for driving the next growth phase. UPL envisages to grow margin-accretive Differentiated Solutions from 29% of sales now to 50% by FY26. Innovation rate could rise to 30% over 3-5 yrs (21% now), thus enhancing product line. ESG focus continues, with robust sustainability goals by 2025. Synergies on track. UPL expects Net D/Ebitda at <2x by Mar’22 (JEFe at 1.7x). Buy. PT `965 (target PE at 14x).

Focused approach: UPL intends to focus on three key strategies: (i) Increase share of margin-accretive Differentiated Solutions from 29% of sales to 50% by FY26. (ii) Increase Innovation rate to 30% over 3-5 yrs from 21% in FY21, thereby enhancing product line. (iii) With 15 molecules in development pipeline, UPL envisages to achieve risk-adjusted revenue of $2.5 bn in next 5 yrs by leveraging collaboration to access new technology (e.g., Open-Ag, R&D). For FY21-24e, we estimate sales/PAT CAGR at +9%/ +23%, with op margin at 23.5% by FY24e (+140 bps), aided by improving mix and Arysta synergies.

ESG: UPL is strengthening focus on ESG, with 29% of sales now from differentiated & sustainable solutions. Also, company has achieved reduction in water consumption, carbon emission, and waste disposal across manufacturing operations over past 5 years; 50,000m3 of rainwater is harvested & reused annually. UPL’s cumulative sustainability loan is at $750 mn as of Jun21.

India’s growth outpaces: UPL’s FY21 sales split: (i) Lat-Am Rs 149 bn (+8% y-o-y). Growth despite forex devaluation in Brazil. (ii) N-America Rs 57 bn (+1%); supply constraints impacted Q4 sales. (iii) Europe Rs 64 bn (+12%); growth led by new product sales. (iv) RoW Rs 70 bn (+3%); strong growth in Asia, whereas flattish in Africa. (v) India Rs 47 bn (+22%). Favourable weather and new launches aided growth. Even in Q1FY22, India sales grew by +27%, led by favourable commodity prices (+14% for food grains, 36-48% for cash crops, pulses, etc.).

Debt reduction; synergies on track: Net debt reduced to Rs 189 bn in FY21 (Rs 201 bn in FY20), with Net Debt/ Ebitda at 2.2x. UPL replaced $500 mn acquisition loan with sustainability loan in FY21, with 30bps lower interest and extended maturity by 2 yrs.

Management expects Net D/Ebitda at <2x by Mar’22. Post Arysta acquisition in Feb’20, UPL has achieved revenue synergies worth $203 mn in FY21 — cumulative at $443 mn. Cost synergies at $126 mn in FY21, total at $235 mn.
Outlook, Buy: UPL’s growth prospects appear sturdy, with deleveraging, differentiated solutions (margin-accretive), strong crop prices, and launch of new platforms (NPP & nurture.farm). Retain Buy with PT of Rs 965. Target PE at 14x, broadly in line with historical 5-year average. Key risks: Global disruption, pricing pressures, and missing deleveraging target.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1PI Industries: Maintain ‘hold’ with a TP of Rs 3,506
2Gujarat Gas: Retain ‘buy’ with unchanged Rs 920 PT
3Love Bitcoin? Do you know it is generating 2,25,90,000 kilogram of electronic waste every year? Here’s how