UPL: subdued results, but hope springs eternal
Agrochemicals maker UPL Ltd’s revenue growth remained soft in the March quarter (Q4) as challenges persisted in its key markets. Revenues increased 6.5%, in line with the single digit growth rate the company delivered in the earlier part of the fiscal year. For the full year too, revenue rose 6.5%, the first single digit growth in at least five years (see chart).
On the face of it, the performance doesn’t look as if it will improve investor sentiment, which in any case has been tepid. The stock has lost 9% in the last six months compared to a 5% rise in the Sensex. What could change this underperformance?
There could be two reasons for a change. One of them is the relative performance and the limited choice investors have in the agriculture inputs sector. Note that, despite softening growth, UPL remains an outperformer in the industry. “In FY16, the company registered growth of 10%, whereas the industry de-grew by 9.6%. In FY17, too, UPL posted 16% revenue growth v/s industry average of -2.5%. Similarly, in FY18, the company grew 7%, whereas the industry witnessed growth of mere 0.2%,” Motilal Oswal Securities Ltd said in a note.
Also helping is backward integration. The rise in raw material costs and industry-wide pressure on profitability notwithstanding, the UPL management has improved profitability, thanks to efficiency gains. “While gross margins dipped by 96bps YoY due to supply shocks from China, UPL recorded a 30bps YoY expansion in EBITDA margins, propelled by manufacturing efficiency,” says SBICAP Securities Ltd in a research note. Ebitda stands for earnings before interest, taxes, depreciation amortization. 100 basis points (bps) equal one percentage point.
The second set of reasons emanate from the business environment. It’s likely that the global agrochemical industry will see a cyclical recovery this year. A strong product pipeline, lower inventories and a better crop price outlook in key overseas markets are expected to help UPL. According to two domestic broking firms, the management is said to have guided for 10-12% revenue growth and stable profitability for 2018-19. “(The) management is confident of being ahead of the industry growth going forward as well. (They) expect 2018 to witness a turnaround in the industry,” Sharekhan Ltd said in a note.
The commentary and relative outperformance should please investors. Nevertheless, the proof of the pudding is in the eating and investors would do well to track the growth trajectory, which has been the main driver of the stock in the past. For the stock to regain momentum, the upgrade cycle has to kick in again. Except for the commentary, the March quarter earnings provide limited impetus to this.