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Home >Markets >Mark To Market >Firm growth prospects for UPL, but debt reduction holds key

After a brief pause in November, the rally in UPL stock has resumed its momentum. It is up almost 40% since November lows and analysts see further gains. The strong Q3 performance posted by the company has added to investor confidence.

The demand for agrochemicals in the country continues to remain firm led by good reservoir levels after the strong monsoon season, robust winter crop sowing and increased farmer income. Growth in India market provided support to UPL’s performance during Q3, while Latin America, the key market for UPL, saw some weakness. European markets too reported a robust growth, compensating partly for weakness in LATAM.

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Europe region grew 30% YoY and was led by sales in Poland, Benelux, Ukraine, Italy, and Spain. The strong demand from the newly launched Argos, which is used to stop sprouting in stored potatoes, helped. Launching alternative products to fill the gaps created by banned product too have helped say, analysts.

With India sales growing strong 21% YoY, overall revenues grew 3% despite LATAM sales declining 8% year-on-year. Sowing had been hit by drought in Brazil and Argentina during October-November, leading to weak demand in Q3FY21. Though Argentina supported, the currency headwinds in the entire region pulled down the overall show in Latin America. Analysts see LATAM growth rebounding in Q4.

With domestic prospects already strong, and Europe, North America and other geographies too seeing satisfactory growth, forward prospects remain firm.

The company too has maintained its guidance on 6-8% revenue growth and 10-12% Ebitda growth for FY21.

The company’s margin expansion continues to be supported by improving synergies from Arysta acquisition. Cost synergy in Q3FY21 was 260 crore and revenue synergy was 410 crore, said analysts at Elara Securities (India) Pvt Ltd. The higher synergy benefits add to Street confidence too.

Price increases in local currencies and cost savings will support margin, said analysts at Motilal Oswal Financial Services Ltd (MOFL). However, they added that “high debt remains a key concern for the stock".

In its 2QFY21 conference call, the management guided at reducing debt by $700 million in 2HFY21. Of this, $410 million of debt has been repaid in December. Company is targeting net det/Ebitda of 2x by FY21 end say analysts and further debt reduction in Q4 remain to be watched for.

The stock has traded at an average P/E (price to earnings) the ratio of 13.5x over the last three years on a one-year forward basis. At current levels, it is trading at about 11.5 times FY22 estimated earnings.

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