UPL’s India business surprises positively in December quarter

While revenue at UPL in the rest of the countries grew 2%, Latin America led the growth with a 37% rise in revenue


A combination of dry spells, delayed crop seasons and demonetization-induced disruption to business has reduced growth expectations of  agrochemical companies.
A combination of dry spells, delayed crop seasons and demonetization-induced disruption to business has reduced growth expectations of agrochemical companies.

Shares of UPL Ltd, formerly United Phosphorus Ltd, gained 83% in the past one year as the company maintained the growth tempo despite the turbulence in its consumer markets. The December quarter (Q3) has been no different.

Revenue and volume are up 18% from a year ago. As has been the case in recent quarters, Latin America led the growth with a 37% rise in revenue. What came as a surprise though is a strong 20% growth in the India business.

A combination of dry spells, delayed crop seasons and demonetization-induced disruption to business has reduced growth expectations of agrochemical companies. Validating that view, Rallis India Ltd recently reported a subdued 8% growth for the December quarter despite a favourable base.

UPL’s India business also has the benefit of a favourable base—revenue in Q3 last fiscal was down 17%. Even then, as one analyst with a domestic broking firm points out, the growth is stronger than expectations. “A crop shift in favour of pulses, soyabean, oilseeds and corn resulted in improved demand for herbicides, which helped drive the top line,” Sharekhan said in a note.

In Latin America, the company benefited from better crop area and yield improvements in Brazil, a large market for UPL in terms of revenue. Its insecticide brands did well due to the high infestation of sucking insect in soybean. In North America, the business was flat as low incomes made farmers wary of investing in agriculture inputs. Business in Europe grew 8%. Its herbicides products did well, the company said in its results presentation.

While revenue in the rest of the countries grew 2%, Latin America and India stood as major growth drivers for UPL. In a conference call with analysts, the management maintained a 12-15% revenue growth forecast and 60-100 basis points expansion in operating margin.

Achieving the growth guidance may not look challenging, especially with revenue already rising 14% so far this fiscal.

But the growth outlook in the current quarter is less sanguine. The major consumption phase is over in three key geographies-the US, Europe and India. “Management has also cautioned for a tougher operating environment during Q4 FY17 in North America, Europe and India,” Emkay Global Financial Services Ltd adds.

This puts the growth burden on Latin America. Thankfully, the prospects in the region, especially Brazil, remain encouraging.

Though the valuation at 16 times one-year-forward earnings estimates does not look expensive yet, two factors will play a crucial role in the continuing outperformance of the UPL stock.

One is the maintenance of revenue growth momentum. The second is a recovery in the US and European farm sectors. These will ensure broad based growth and increase investors’ confidence in UPL’s 2017-18 prospects.

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