Demand and margin gains ahead for agrochemicals manufacturer UPL

UPL reported revenue of Rs 11,090 crore in 2QFY25, up 9 per cent Y-o-Y, with volume growth of 16 per cent offsetting price decline of 7 per cent

UPL reported a muted quarter as operating profit remained flat on a year-on-year (Y-o-Y) basis, due to a price decline (down 7 per cent Y-o-Y) and surplus capacity in China. Volumes grew 16 per cent, resulting in revenue growth of 9 per cent Y-o-Y.

 

UPL expects improvement in the global business, with inventory destocking near completion. The margins are also expected to see a significant uptick in the second half led by lower-cost inventory, increase in high-margin product sales, favourable regional mix, and margin expansion in India. Thus, the prospects going ahead seem positive due to the expected margin recovery and mid-single digit volume growth.

 

UPL reported revenue of Rs 11,090 crore in Q2FY25, up 9 per cent Y-o-Y, with volume growth of 16 per cent offsetting price decline of 7 per cent. Operating profit was flat over the year ago quarter at Rs 1,580 crore.

 

The operating profit margin was 14.2 per cent as compared to 15.5 per cent in Q2FY24, due to a 110 basis points contraction in gross margin. The contribution margin was hit due to pricing pressure and changes in the regional mix. There was a net loss of Rs 63 crore versus net profit of Rs 110 crore in Q2FY24. The company suffered loss on account of the impact of income tax charge due to non-recognition and reversal of double taxation agreements in some countries.

 

The India revenue increased 13 per cent Y-o-Y to Rs 1,570 crore, led by higher volume on account of better demand. North America revenue grew 10 per cent Y-o-Y to Rs 550 crore on account of the continued strong in-season demand. Latin America revenue was flat at Rs 5,040 crore as the strong volume growth was offset by price softening. Europe revenue rose 8 per cent Y-o-Y to Rs 1,360 crore aided by strong volume growth in fungicides, while rest of the world revenue grew 29 per cent Y-o-Y to Rs 2,550 crore owing to volume-led growth in Africa.

 

Advanta revenue increased 4 per cent Y-o-Y to Rs 1,110 crore, driven by grain sorghum in Argentina and Australia and corn in India, Thailand, and ASEAN, while UPL’s specialty chemical revenue remained flat at Rs 2,600 crore as growth in the non-captive business was offset by a decline in captive business.

 

Gross debt (excluding perpetual bonds) declined to Rs 31,840 crore in September ’24 (vs. gross debt of Rs 33,930 crore, September 23). Net debt declined to Rs 27,530 crore in Sep’24 (vs Rs 30,700 crore in Sep’23).

 

In H1FY25, revenue increased 5 per cent to Rs 20,160 crore. However, operating profit declined 14 per cent Y-o-Y to Rs 2,720 crore. Net loss stood at Rs 270 crore versus adjusted net profit of Rs 0.5 crore in H1FY24. For H2FY25, the guidance implies revenue growth of 9 per cent and doubling of operating profit or better due to margin expansion.

 

The company expects mid-single-digit volume growth in H2. Management has maintained its guidance of 4-8 per cent revenue growth in FY25, with an absolute operating profit growth of 50 per cent. It expects free cash flow generation of $300-400 million.

 

The company expects its global business to grow with inventory destocking nearing completion. However, pricing pressure continues due to the China surplus. UPL will incur a capex of Rs 1,800 crore in FY25, with Rs 700 crore already incurred. 

But price volatility is a concern as is cash flow generation since debt repayment is key. Global peers have an average range of enterprise value/operating profit of 6-10 times and price to earnings ratios of anywhere between 5-15 times. Target valuations for UPL will be in that range.