Improving balance sheet can help expand UPL valuations1 min read . Updated: 28 Apr 2014, 09:32 PM IST
Improved focus on cash flow generation and reward to shareholders are likely to trigger re-rating in the stock
Despite the challenges in Latin America and Europe, the agricultural inputs maker UPL Ltd delivered strong performance in the March quarter. Sales in Argentina and Colombia were hit by dry weather conditions and a farmers’ strike. Europe has seen prolonged winters, which impacted herbicide sales in the region. These two regions contribute more than two-fifths of UPL’s sales.
The subdued performance had limited impact on UPL. India and North America did well in the last quarter. A spike in insecticide use for the cotton crop helped the company in India. In North America the company’s herbicides for the soya crop have seen good response. Hence, overall sales increased by a strong 19%. Even though favourable currency rates propped up revenues, volume growth remained healthy at 6%.
Gross margins softened slightly. But thanks to price hikes and low overheads like reduced employee costs, UPL was able to improve operating margins. Operating profits jumped 25%. Add to this the low finance costs and an exceptional item that contributed favourably to earnings, and net profits increased by a strong 29%.
The management expects revenue to grow by about 12% in the current fiscal year. It wants to focus on new regions like Mexico, Indonesia, Vietnam and Thailand. The company aims to increase margins further by expanding product portfolio and leveraging the existing infrastructure. Revenue and margin guidance are encouraging, considering the headwinds the company is facing such as bad weather and soft farm goods prices.
While investors are enthused by the company’s performance—the stock has jumped 29% since Wednesday’s close—the management’s focus on increasing shareholders’ returns through higher dividends, balance sheet and return ratios improvement is driving positive ratings on the stock.
It lowered debt by one-fourth in the last fiscal year. Though working capital remained unchanged, focus on organic growth, cash conservation is infusing confidence in analysts. “Growing debt and capital misallocation has adversely affected company’s valuations in previous 2-3 years. However… improved focus on cash flow generation and reward to shareholders are likely to trigger re-rating in the stock," Emkay Global Financial Services Ltd said in a note.
The brokerage also points out that an improved balance sheet and improvement in RoCE (return on capital employed) to 19% (from 16% in 2012-13) will also bridge the valuations gap with its peers.