UPL Ltd - global agrochemical company

[manishgathani]

from 20-20 TIA investment summit last weekend.

"UPL

• I was looking for a disruptive industry. Agriculture was one such. In that cleantech was an agenda. Another question was are we a natural owner of that industry? Are processes innovative?

UPL is not a company but an entire ecosystem. It’s like a horse bought a horse and together they are looking to buy a cart.

UPL - One of the world’s biggest buyers of soft commodities. Multiple plants, deep processes, various products. This was the old UPL. Then came the Arysta acquisition. Now what is coming up is the world’s biggest non patent manufacturing and distribution company. As well as manufacturing and distribution for patent-ed chemicals.

UPL is now locking in the farmer, getting unique soil health data, seed productivity etc etc. With the customisations they have, they are building the biggest farmer platform in the world.

They are in touch with 120 startups who have molecules but no distribution. And they all have to come to UPL.

UPL is the 5th biggest, but the top 4 are patent players and once things go off patent, it will come to UPL.

India is the 2nd largest agricultural nation and largest agrarian nation. India has 50% extra rainfall. If we get our fertilizer process correct, then UPL can play a big part in Indian agro chemical story.

UPL has done 53 acquisitions in 25 years. Most value is created when diverse parts of biz integrate. Market doesn’t see this.
Debt has just seen end of cliff and any revenue growth will hit ebitda growth. Market doesn’t see FCF but company is seeing FCF with which it has paid off Arysta acquisition debt and is now paying working capital debt. It’s a Lego brick company which will continue to re-invest to become world’s largest agei chemicals company."

[ranvir]

UPL Ltd Q3 concall highlights -

Revenues at 13679cr, up 21 pc. Price, Forex, Volume contribution at 13pc,7pc,1pc each

EBITDA at 3035 cr, up 14 pc

NP - 1087 cr, up 16 pc

Region wise revenue, growth -

LATAM- 5974 cr, 28 pc
North America - 2745 cr, 30 pc
Europe - 1444cr, 3 pc

India - 1075 cr, 19 pc RoW - 2441 cr, 12 pc

Gross Debt at 32803 cr Cash and equivalents at 5275 cr

Cash flow from Ops in Q3 at 5070 cr

Advanta’s ( seeds business ) contribution ( included in consolidated numbers above )-

Sales at 912 cr, up 31 pc

GM at 61 pc, up 300 bps

EBITDA at 275 cr @ 30.1 pc, up 460 bps

UPL to receive Rs 1600 cr for 9.1 pc stake sale in UPL’s SAS ( sustainable agri solutions ) business

UPL received Rs 2400 cr ( aprox ) for 13.3 pc stake sale in Advanta to KKR

Stake sales are aimed to reducing UPL’s gross debt

Speciality chemicals business scaling up rapidly. Now clocking 1500 cr annual revenues vs 600 cr four yrs back. Aim to grow this vertical at 25 pc CAGR for next 3-4 yrs

UPL confident of good growth in Q4 as well on back of strong demand from India, North America

Aim to reduce net debt by 4000 cr by end of FY 23. Avg cost of debt in dollar terms is 7.1 pc

Industry witnessing tightening of working capital cycles due higher rates. Good for bigger players like UPL

Expect strong volume growth in Q4

Also expect to reduce inventory days

Agri commodity prices remaining strong. That’s keeping demand for agri inputs at good levels

As EBITDA contribution from Speciality chemicals business grows, will start reporting it separately

Finance cost in Q3 should be the peak number due debt reduction going fwd

Company better positioned vs peers as most others piled inventory onto the distributors due Covid and War related disruptions, while UPL didn’t

Disc: holding, biased

[Lajja_Shah]

-	Decline in post patent product prices with ramp up of supply from China, idle capacity costs to achieve competitive inventory position, and unfavourable regional mix (increase in share of LATAM) significantly impacted contribution margins in Q4.
-	Leaner inventory to support UPL to capture growth opportunities in FY24.
-	UPL SAS’ delivered 16% YoY revenue growth and 31% EBITDA growth. ‘Advanta’ reported 12% YoY revenue growth, but a 5% YoY decline in EBITDA primarily due to higher fixed overheads and R&D expenses.
-	Lower Receivables and Inventory Days led to reduced 5 WC days.
-	Outlook: FY24 Revenue growth guidance: 4-8%. EBITDA Growth: 6-10%. Prices of post patented products likely to normalize after H2FY24. Margins are expected to remain under pressure but are taking various measures to control costs. Revenue/EBITDA guidance for various business segments are UPL Corporation (4%-8%/6%-10%) UPL SAS (12%-16%/14%-18%) Advanta Enterprises (11%-15%/14%-18%) and specialty chemical manufacturing (10%-14%/12%-16%) RoCE is expected to increase by 125-175 bps in FY 24. LATAM and Africa business is expected to grow rapidly than mature markets. Momentum in Launch is expected in FY24. The management guided capex for FY 24 to be total USD 350 mn of which USD 160 mn will be spent on manufacturing, USD 20 mn on Advanta business, and the rest will be utilised on intangible assets for the company’s global crop protection business. The net Debt to EBITDA ratio for FY 23 was 1 5 x and management is comfortable with this However, the management aims to reduce it to 1 x in the future It indicated that the free cash flows generated in the future will be used to repay the debt
-	Headwinds: Pricing challenges, Challenges in volume growth due to excess supply from China, Product bans in South Europe.
-	Tailwinds: Strong Farm Gate demand, increased demand for bio-solutions, continued ramp up of new, innovative products.
-	EBITDA has been adversely impacted due to various factors, such as one time idle capacity costs of INR2000–2500mn, inventory losses of INR3000 3500mn, an unfavourable regional mix and lower post patent product prices. However, the company expects improvement in the EBITDA margin, driven by a revival in agrochemical prices in H2FY24 and an increase in share from differentiated products.
-	Brokerages are expecting FY24/FY25 revenues to be 57700 crs & 65200 crs. Expected EPS for the respective years is Rs. 55.9/Rs. 73.

[omsingla]

Overall, co. is guiding for 6-10% EBITDA growth along with margin pressure next year which is not very attractive. But the average EV/EBITDA multiple across time frame have been above 8.5 times, while currently it is trading at 6.3 times. Even if we consider the EV/EBITDA multiple to revert to average, there are good gains to be made here. But the whole sector’s valuations including Bharat rasayan, etc. are currently cheaper than average so there must be some headwinds in the near future. Are the valuations bottomed out or is correction still possible in agrochemicals? Am I missing something?

disc.- not invested

[ranvir]

I would like to believe that UPL should be close to its bottom. Had it not been for its heavy debt burden ( which otherwise is solvable because the company throws up a lot of cash per year ), it wouldn’t be trading at such steep discount … IMHO

Disc: holding

[ranvir]

UPL Q1 concall highlights ( also explains the stress in agrochemical sector ) -

UPL’s Q1 numbers were bad due to price and volume contraction

Price correction due oversupply in generic products from China. In non-generic products / seeds, pricing is holding up

Volume contraction continues. Started last Qtr. Should end by end of Q2

Correction-due over stocking that happened during COVID and Russia- Ukraine disruptions

Gross Debt lower by aprox 1250 cr YoY but is up QoQ as Q1,Q2 usually have inventory build up at company level. Same gets liquidated in Q4

Guiding for strong double digit growth in H2 FY24

Jump in Finance cost due consolidated rate of borrowing going up from 3.5 to 6 pc YoY

Debt/EBITDA to remain below 1.5-2 for FY 24

Company still performing better than most other formulations based agrochemical players

To cut costs by 800 cr in next 2 yrs, 400 cr this yr

Expect some recovery in Q2. Full recovery by Q3,Q4

Farmer level consumption is not affected at all

EBITDA in Q1 is down by 32 pc. Still guiding for 3-7 pc EBITDA growth for FY 24. Management believes that they have factored in all types of scenarios to arrive at this guidance

H2:H1 - revenue breakup is generally 60:40. If company grows in H2, it can achieve a lot of catch up

Volumes to catch up from Q3 onwards. Pricing to normalise only in Q4

Disc: holding

[Kumarsids]

Thanks. How does you see the impact of foray into Phosgene chemistry (Paushak is leader) as well as separating the specialty chemicals business for UPL future ?

[manjunathca]

im seeing Approx 50% reduction in Sales when compared to Mar 2023 and Jun 2023… and PAT 1080 cr vs 102 cr… based on above comments i can observe impact from china on agro products… but does it impact 50% reduction in sales ?
Any redflag here ? not gone thru AR. but i was going thru in Screener…

Disclosure : Not Invested. Study Purpose Only.

[Rafi_Syed]

Agchem companies needs to be compared same quarter of previous year not sequential basis, so 17% sales reduction compared to same qtr of prev. year

[manjunathca]

thats what generally ppl will do… but 90% reduction from previous quarter will raise concern… and it has impacted share price…

[Pulak]

Agriculture is a very seasonal activity and that has an impact on companies in this sector.
Specifically for UPL Pls see last few years trend between March and June quarters. There has been a 33% variance in sales, this year has been exceptional due to excess inventory from China and hence it’s been a 50% variance.

Main thing to monitor is how they are in the middle of reorganizing their business into the 4 pillars and their debt reduction effort. Promoter interest is another variable.
It’s a reasonably global company and looks attractive from an entry price standpoint. Offers decent dividends Would make sense to take a broader longer duration view and not one quarter result
Disclosure: not invested. My comment is not a recommendation to buy or sell. It’s on my radar

[Garuna]

Can you help me with this?

UPL:

BSE/NSE
PE = 57

Screener
PE = 16

TTM EPS figures are different…38 on Screener and 10 on BSE/NSE

Thanks

[swsriram]

1. UPL Ltd financial results and price chart - Screener
   PE is 57.6

2. UPL Ltd financial results and price chart - Screener
   PE is 16.2

the difference is:

1. is standalone entity whereas,
2. is consolidated entity.

[rranjan]

UPL was in my radar since 18-19 when i had traded it for an year long investment . It has changed since then - has become great distribution channel , available at lowest valuation since 2014 (baring 2020) and could become potential 2-3 bagger in next 2-3 years . Headwinds are temporary and thats why we are getting it below 1x sales valuation.

[Rohit_Sakaria]

One more subsidiary Asi Seeds, Kenya added.

[Rohit_Sakaria]

Antique maintains buy on UPL; says margin concerns behind.

[Atul_Desai]

brokers’ targets for UPL are always 800 to 1000 for years, but the stock reacts and falls well below various resistance points below 800… so we have to take these with a heap of salt. their debt levels are always the issue. they should focus on debt reduction and stop buybacks and dividends till they reduce to below USD 1 Bn at least

[newrb]

In Agrochem space, PIIND is a better bet. Quality of earnings is better, hence gets much better valuation. If you see longer term returns (say 5 years), the difference is stark.

[Rohit_Sakaria]

Someone pointed out that UPL has 192 subsidiaries hence he it is underperforming since it’s difficult to ascertain which direction the company is heading.

I feel that if company is increasing subsidiaries and conversely debts are reducing, it’s a positive picture.

Would like to know others thought on this.

[nipunmohta]

Their explanation for the same is that they require an entity in every nation that they are present in. Recent restructuring exercise has simplified the structure though and one can see that the main subsidiaries (not the step down subsidiaries) are into a particular line of business.