UPL sinks to 52-week low as brokerages paint bleak growth picture

Commenting on the weak demand scenario, UPL Corporation Ltd's CEO Mike Frank said, “The global agrochemical industry has been going through a challenging phase over the last two quarters as distributors prioritised destocking and focused on tactical purchases amid high channel inventories. "

The market was also witnessing pricing pressure fuelled by an unfavourable base and aggressive price competition from the Chinese post patent exporters.

Taking this weak demand environment into account, UPL has lowered its revenue growth guidance for the current fiscal to 1-5 percent from 4-8 percent, indicating a prolonged pressure on its revenue.

The company has also revised its FY24 margin growth guidance to 3-7 percent from the earlier projection of 6-10 percent.

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Brokerages’ take

Aligned with the cautious growth outlook, brokerages, too, are not too optimistic.

Brokerage firm Motilal Oswal Financial Services sees near-term challenges in the global agrochemical industry due to the accumulation of high inventory, as distributors opt for need-based tactical purchases and declining agrochemical prices, led by aggressive price competition from Chinese post-patent exporters.

Also Read: UPL Q1 Results: Net profit plunges 81% to Rs 166 crore, misses expectations

Considering these short-term challenges, the firm said cash-flow generation and debt repayments will remain key monitorables for UPL.

The agrochemical company reduced its net debt by around $160 million to $3,193 million as of June 30, 2023.

MOFSL also cut its FY24E/FY25E earnings estimates by 7 percent/8 percent but retained its “neutral” stance and a target price of Rs 670.

Though Nuvama Institutional Equities had also factored in the ongoing weakness in the global agrochemicals space, UPL's dismal Q1 results prompted the firm to further trim its estimates.

The brokerage cut its FY24E/25E EPS by 7 percent/8 percent amid expectations of a muted topline growth.

Nuvama also slashed its price target for the stock by over 8 percent to Rs 886 even as it retained the “buy” call.

Centrum Broking, too, revised down FY24E/ FY25E EBITDA estimates to 7 percent/9 percent. The firm has also slashed its price target for the stock by nearly 11 percent to Rs 949 while maintaining a “buy” call.

Antique Stock Broking, too, cut its FY24/25 EPS estimates by 10 percent each. The firm also lowered its price target for UPL by over 8 percent to Rs 650, saying recovery may take some time.

Jefferies also have a dim outlook for UPL's Q2 earnings on the back of expectations of a near 5 percent on-year decline in agrochemical industry in FY24.

The foreign brokerage cut its FY25-26E EPS by 9-10 percent while FY24E cuts are even sharper.

"We now estimate FY23-26E EBITDA CAGR (compounded annual growth rate) at 5-6 percent, but forecast PAT CAGR at around 23 percent, driven by deleveraging,” it said.

Despite the bleak outlook, the brokerage still has a “buy” call on the stock, with a price target of Rs 800, due to its inexpensive valuations.

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