UPL stock slumps 11% on weak Q3 performance, triggers downgrades

Weak near-term outlook could worsen cash flows for the company

The stock of the country’s largest agrochemical company by revenues, UPL, fell 11 per cent in trade on Monday after posting a weaker-than-expected December quarter performance.

While expectations on the performance in the third quarter were low, the results undershot even these estimates. The Street is worried that a weak operational performance going ahead could lead to higher working capital and weigh on cash flows. Some brokerages have cut their estimates and downgraded the stock.

Revenues of the company fell 28 per cent year on year (Y-o-Y) on the back of pricing pressures across markets. Fall in agrochemical prices led to inventory destocking by distributors which hit volumes. While prices fell 24 per cent, volumes slipped 4 per cent for UPL.

Sales of its largest market, Latin America, was down 28 per cent due to pricing challenges in key herbicides and insecticides in Brazil. Sales in the Indian market slumped 20 per cent due to higher sales return in key crops of cotton and pulses which saw lower acreages in North India.

Low demand for glufosinate (herbicide) compared to last year due to dry kharif and rabi seasons, higher channel stock and increased competition also impacted performance.

Among major markets, North America was the worst-hit, falling 64 per cent due to channel destocking, lower prices and higher rebates. Rest of the world markets, led by China (insecticides) and Turkiye (herbicides), were the only segments to report growth in revenues at 12 per cent.

Lack of operating leverage and a steep fall in gross margins by 1,670 basis points led to its operating profit declining by 86 per cent. Operating profit margin was down 18 percentage points to 4.2 per cent. Weak operational performance, higher interest costs and unfavourable forex led to a loss of Rs 1,217 crore. 

Gross debt increased by Rs 3,370 crore as compared to the year ago quarter to Rs 36,173 crore while net debt adjusted for forex impact rose by Rs 3,637 crore Y-o-Y to Rs 31,165 crore. 

The company expects its March quarter performance to be weaker as compared to the year-ago quarter. The performance is expected to gradually recover by the second quarter of FY25. 

Post the results, Rohan Gupta and Rohan Ohri of Nuvama Research have downgraded the stock to reduce.

Margin contraction, persistent weakness in its key markets of the US and Brazil, and inventory destocking continuing for two–three quarters shall put margin under pressure.

This along with an increase in working capital and delays in receivables would pressure cash flows. Though UPL has plans to raise money through a rights issue of up to $500 million to repay debt, the analysts believe there is risk of credit ratings downgrade in the near term, given increase in its net debt to operating profit to 5.3 times in FY24.

Motilal Oswal Research has cut its earnings estimates by 23 per cent for FY25. Analysts led by Sumant Kumar of the brokerage say that there are near-term challenges in the global agrochemical industry due to an 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.

Considering the short-term challenges, cash flow generation and debt repayments remain the key monitorables, they added.