UPL’s performance decent, but there’s a bit of scepticism as well
Shares of UPL Ltd gained 2% on Tuesday, taking the one-year returns to 46%. Tuesday’s gain comes on the heels of the company’s June quarter results. Revenues and operating profit increased 6-7% while volume rose 10%.
The performance is not particularly robust nor has it beaten all analysts’ expectations. But favourable commentary and relative outperformance are driving investors to UPL.
Notwithstanding the turbulence in the agriculture inputs markets, UPL has delivered double-digit growth in the last two fiscal years. In the last quarter, revenues in India are up 4%, compared to a slight dip at Rallis India Ltd.
UPL’s performance stands out even if one compares it with global majors. An analysis of the agriculture inputs divisions of Bayer AG, Dow Chemical, Dupont and Syngenta by Dolat Capital Market Pvt. Ltd shows that only one company (Dupont) reported notable revenue growth last quarter. Their performance was hit by tough market conditions in Brazil.
Relatively, UPL’s Latin America business held up rather well (up 6%). The company even retained its 12-15% revenue growth forecast for the current fiscal. In contrast, Bayer expects the agrochemical market to grow 1% in the current calendar year, according to Dolat.
What explains this? Aditya Jhawar, an analyst at Investec Capital Services (India) Pvt. Ltd, says UPL’s presence is relatively smaller than that of the innovator firms. So, it benefits from an expansion in market footprint and product portfolio, which the company has been doing.
Also, UPL tends to gain in current circumstances of low commodity rates as farmers look to buy UPL’s relatively cheaper generic products.
Still, there is a bit of scepticism as well. Despite delivering steady outperformance, UPL’s one-year forward stock valuations are more or less similar to Rallis India’s. PI Industries Ltd is valued much higher.
While that leaves scope for more gains, the valuation gap also reflects the Street’s scepticism.
According to two analysts, UPL does not provide revenue bifurcation of seeds and agrochemical businesses. This makes it difficult to understand UPL’s performance as it is not clear if it is driven by agrochemicals or the recently amalgamated seeds unit, one analyst said.
Second, cross-currency fluctuations are increasingly influencing UPL’s earnings. So, even if UPL is reporting good growth, it is tough to say how much of it will translate into earnings in the end, another analyst said. While one cannot do much about currency fluctuations, better disclosures may help clear investors’ doubts.