ULP is a long term play and its underperformance is a good opportunity to accumulate.
UPL reported a decent performance in Q3FY18 on the back of a 12 percent volume growth, although it is a slight miss on streets expectations. On a sequential basis, there was an 11 percent growth in revenues along with a 9.8 percent EBITDA expansion. Revenues grew 5.2 percent YoY, but due to pricing pressure there was a 7 percent contraction in operating margins which lead to a 2.6 percent fall in EBITDA. The substantial 40 percent decrease in interest cost helped in improving the net profitability.
Domestic operations need growth in farm incomes
Domestic operations recorded a decent 10 percent growth in revenues during the quarter on the back of the wheat herbicide sales and a delay in sowing in South. Cotton production was up 10 percent YoY which proved beneficial for the company. Slight improvement in MSP (minimum support price) helped in sales pick up during the quarter and the management believes that improving farm incomes would be the key to higher penetration of products, going forward.
High channel inventory impacted LatAm revenues
Margins in LatAm were impacted by very high accumulation of channel inventories during the start of the quarter which capped the price increase. Despite a slight delay in product launches during the quarter due to delay in registrations, new products received a good response and boosted revenues. Untimely rains in Brazil and Argentina delayed the overall planting season by around 15 days which would now tail in Q4.
Strong growth in Europe
Europe reported a strong 4 percent revenue growth on the back of a good sugar beet season and early sales of herbicides. Southern part of EU witnessed a very dry season which damaged crops like grapes and other vegetable that impacted sales. The company has introduced a line of new products in this segment and expects them to pick up in coming quarters.
North America impacted by decline in acreages
North America saw revenues growth of 8 percent YoY despite an impact due to decline in acreages for rice crop, which is a focus crop and accounts for a substantial portion of sales. Soybean and corn drove the revenue growth during the quarter.
Close down of factories in China owing to environmental concerns have put pressure on sourcing material which has impacted the margins industry wide. UPL too saw the impact, however, limited as the company is now venturing into manufacturing, though raw material sourcing still remains a concern in some cases. Going forward the company plans to expand the manufacturing facilities and benefit from the supply glut.
Move from Innovator to generic
Owing to the current stress on farm economics there has been a trend to move from Innovator products to generics. However the innovator products have also seen price cuts which has left little delta with generics. Moreover in many cases 100 percent replacement is not possible. With increasing product registrations there is immense competition and value from products remains the key.
OutlookThe stock has run up 5 percent in the last 12 months and corrected 2 percent since October ‘17, post which it is now trading at a 2019E PE of 15.7x and EV/EBITDA of 9.6x. With plans to expand in manufacturing which currently seems a strong market owing to closure of Chinese factories, good performance of the herbicide portfolio, a decent expectations from Rabi, good response for the new product launches along with the decent order book lined up, we believe the stock as a long term play and the underperformance is a good opportunity to accumulate.