UPL gains 7% in four days on hopes of margin expansion

Brokerages CLSA and Emkay Global Financial Services have recommended 'buy' rating on UPL with target prices of Rs 1,100 and Rs 910, respectively.

Shares of UPL were up 3.6 per cent at Rs 817.50 in Monday’s intra-day trade, quoting higher for the fourth straight trading day, and having rallied 7 per cent during the period on hopes of margin expansion. The market price of the company, a global leader of crop protection products and sustainable agricultural solutions, had hit a 52-week high of Rs 864.75 on June 8, 2021.

Brokerage firms CLSA and Emkay Global Financial Services have recommended ‘buy’ rating on UPL with target prices of Rs 1,100 and Rs 910, respectively.

UPL is aiming for a 25 per cent earnings before interest, taxes, depreciation, and amortization (ebitda) margin by FY26 vs 20.6 per cent in the first half (April-September) of the financial year 2021-22 (H1FY22).

Success in differentiated and sustainable products (management expects a 50 per cent contribution to sales from such products by FY26 from 29 per cent currently) and unique farmeroriented solutions that create demand for such products should enable UPL to achieve this goal. A transition towards high-value products should drive a PE rerating, CLSA said.

“We reiterate a BUY rating, raise our target price from Rs 1,060 to Rs 1,100, and raise FY22-24 EPS estimates 2-3 per cent as we build in spot currency assumptions,” the foreign brokerage said.

“Our Buy thesis is underpinned by 8 per cent FY22E-25E revenue CAGR, driven by 19 per cent CAGR in Differentiated and Sustainable (D&S) solutions; EBITDA margin expansion from 22.5 per cent in FY22E to 24.1 per cent in FY25E, supported by innovative products; around 18 per cent profit after tax (PAT) CAGR over FY22E-25E, supported by EBITDA margin expansion and lower interest outgo; and substantial net debt reduction from Rs 16,600 crore in FY22E to Rs 3,200 crore in FY25E from healthy cash flow generation,” said Emkay Global Financial Services.

Further, upside risk stems from the monetization of UPL’s fast-growing specialty chemicals business (Rs 45/ share, potentially) and nurture.farm initiative. Downside risks are adverse agronomical conditions in key markets, and adverse forex fluctuations, the brokerage firm added.