Agrochemical player UPL suffered a flurry of downgrades over Q1FY24 as analysts turned wary of the lack of clarity on the company's debt reduction targets, at a time when the demand for agrochemicals looks bleak. Three months ago, the company enjoyed 24 'buy' calls, two 'hold' calls, and two ‘sell’ calls, as per Moneycontrol's Analyst Call Tracker.
A year-ago, data shows, 'buy' calls were at 28 while 'sell' and 'hold' calls were just one each. That tally has now changed: 'buy' ratings have fallen to 21, while 'hold' calls have risen to 6 and 'sell' recommendations remained at 2.
It's not just the analysts on the Street who are distancing themselves from UPL, resulting in the downgrades. Investors too remain sceptical of the company's growth prospects, reflected in the over 18 percent slump in the stock within the past year.
The major snag for UPL has been its high level of net debt which stood at Rs 262 billion (Rs 26,200 crore) as of June. To tackle that, the management announced a slew of measures, including a cost reduction initiative of $100 million (Rs 8,304.2 crore) over the next 24 months, with at least 50 percent of that being realised in FY24. However, they have not rolled out a guidance on the debt reduction for FY24, which became a major turn down for investors and analysts.
What's worse is that the current demand in the global agrochemicals space is sluggish and this weakness is likely to continue for some time. Against that backdrop, there are also concerns about how UPL plans to repay its loans and bring its debt down from eye-popping levels.
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Brokerage firm Prabhudas Lilladher was also disappointed by the management's decision to hold back guidance for repayment of the debt, The firm, which downgraded the stock to a 'hold', also highlighted UPL's expectation to keep net debt-to-EBITDA in the range of 1.5-2.0 times for FY24.
The company's debt level remains a major monitorable for most brokerages and any progress on that front can trigger re-rating. Brokerage firm Kotak Institutional Equities said that it would monitor the company’s strategy on reducing its net debt over the next few quarters to consider a more positive outlook on the stock. “We believe UPL does offer value if balance sheet concerns are successfully addressed,” Kotak Institutional Equities said.
Meanwhile, the company also lowered its revenue growth guidance for the current fiscal to 1-5 percent from 4-8 percent, indicating a prolonged pressure on its revenue. On the other hand, FY24 margin growth guidance was also cut to 3-7 percent from the earlier projection of 6-10 percent.
It is the culmination of the above-mentioned factors that brokerages switched to downgrading the stock, foreseeing difficult times in the near future.
However, the situation might not be as bleak as it seems as several brokerages have also kept their hopes to see a demand recovery from the December-January quarter of FY24 intact.
According to Elara Capital, which has a 'buy' call on UPL, a continued slowdown in placements in the next 2-3 quarters may trim channel inventory, post which, normalisation of supply-demand is expected for agrochemicals. "The sentiment in the agrochemicals industry is at its nadir but we perceive a month-on-month improvement, albeit at a snail’s pace. Hence, buy UPL on any steep price correction," the firm stated in its note.
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