UPL: riding the Latin America wave
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Latin America continues to power UPL Ltd. Revenues, volumes and operating profit were up 17%, 23% and 19%, respectively, in the September quarter.
The growth is driven by India and Latin America. Together, both the regions generated more than half of its sales last fiscal year.
Of them, Latin America is the clear outlier. Revenues are up 34%. In the first two quarters they rose 26%, better than the 10% rise in India.
The strong show, however, failed to impress investors who drove the stock down 1% on Friday. A one-time expense related to the Advanta Ltd merger weighed on profit growth. Excluding this item, profit would have grown 44% and led to earnings upgrades.
Nevertheless, the UPL stock is still up 47% from a year ago, much better than the 10% rise in the BSE 500 index. Management commentary remains optimistic. It maintained revenue growth guidance of 12-15% and 60-100 basis points expansion in margins on strong prospects in India and Latin America. A hundred basis points equal one percentage point.
The growth is again expected to be driven by Latin America, which is seeing traction in agriculture activities. Last fiscal year, the region alone generated 32% of UPL’s sales.
Rallis India Ltd, which released its second quarter results last week and exports agrochemicals to Brazil, also said prospects are looking up in the region.
According to Sharekhan Ltd, UPL has been gaining market share in Brazil and expects to outperform the industry in the near term.
With prospects for the domestic market also looking up due to good soil moisture and improved groundwater levels, analysts expect the company to do better in the second half of the fiscal year and possibly even beat its own revenue growth guidance.
“We believe UPL is well poised to post higher growth in H2FY17 on the back of new product launches, favourable rabi season and start of sowing season in Latin America where demand environment remains encouraging,” Emkay Global Financial Services Ltd said in a note.
The expectations have driven up the UPL stock and valuations in the past several months. At 16 times one-year forward earnings estimates, the stock is no longer cheap.
For it to continue to outperform the broader markets, profitability should keep pace with revenue growth.
Despite low raw material costs and strong volumes, margins expanded less than 30 basis points in the September quarter.
While this indicates strong competition and pricing pressures, the slow progress is weighing on earnings estimates. Better profitability can drive earnings and maintain the stock’s outperformance.