UPL Ltd. – Results misses street estimates

Sector Outlook – Neutral

UPL experienced a notable decline in revenue and profits due to reduced demand and price pressure in various global markets. Revenue dropped significantly across all regions, with the largest decreases in North America and Europe. 

The company faced challenges with high inventory costs and increased discounts, leading to a dramatic drop in EBITDA and a significant loss for the quarter. Despite these challenges, UPL anticipates a return to normal business performance in future quarters, especially with UPL Advanta showing positive EBITDA growth due to better margins and cost control.

Concall Highlights

UPL Global Crop Protection (excluding India):

• The global crop protection industry continues to navigate a challenging phase as head-winds in prolonged destocking and elevated pricing pressure persist. 
• The company con-tinued to support channel partners by extending higher rebates and accepting sales returns, which impacted revenues for the quarter. 
• The management expects normalised busi-ness performance from Q2FY25 as destocking subsides across key markets.

UPL Sustainable Agri Solutions (India):

• The key factors for the revenue decline was poor rabi season in Telangana and Karna-taka and low cotton acreage in North India, which led to high sales returns. The low glufosinate demand due to elevated channel stock and increased competition also impacted the results. 
• Management expects glufosinate demand to recover in the coming kharif season. Furthermore, UPL is also introducing new products to diversify crop mix. 
• The company continues to see challenging conditions in Q4FY24.

Advanta Enterprises:

• The company delivered healthy growth for 9MFY24 driven by higher prices and volumes in sunflower, corn, canola, sorghum and vegetable portfolios. 
• The company’s operating profit grew faster at 16%, driven by improved contribution and controlled overheads. 
• The company expects to close FY24 with low double-digit growth in EBITDA.

Cost Optimization Initiatives:

• The company is undertaking USD 100 mn cost reduction initiatives over the next two years, with 50% realised in FY24. UPL cost reduction initiatives yielded results, as the company reduced SG&A expenses by 19% YoY in Q3FY24. UPL is on track to reduce SG&A expenses by Rs. 100 million in FY25.

Volume Growth:

• The company registered revenue de-growth on two key parameters: Volume -5%, and Price -24% YoY.

Debt Update:

• The company aims for a rights issue to reduce its debt up to US$ 500 million.

Valuation and Outlook
The global agrochemical sector is facing tough times, with destocking dampening the market. UPL’s revenue and profits took a hit this quarter due to fierce competition and price drops. However, there’s a silver lining with growth in Latin America and worldwide, alongside cost-cutting measures aimed at improving profit margins. Looking ahead, UPL is optimistic about a recovery, especially with the upcoming major cropping seasons boosting demand in key regions. They’re working on bouncing back by the second quarter of next fiscal year as the situation starts to stabilise.