Sector Outlook: Neutral
Weak operational performance; recovery expected from H2FY25
Revenue of UPL for Q1FY25 increased by 1.2% YoY, but declined 35.6% on a quarterly basis to Rs. 90,670 mn, which was below market expectations of Rs. 92,060 mn. The revenue growth for the first quarter was flat, as a 16% increase in volumes was offset by a 14% decline in price and a negative 1% forex impact. Revenues in international markets for UPL reported an annual revenue decline. Markets like Latin America (-10%) and India (-9%) de-grew during the quarter. However, some markets like Europe (+13%), North America (+42%) and the Rest of the World regions (+3%) witnessed strong performance, posting double-digit growth. EBITDA decreased 13.5% YoY / down 40.4% QoQ to Rs. 11,010 mn, while EBITDA margin stood at 12.1% (down 206 bps YoY) in Q1FY25, owing to inventory shortages and supply constraints. The company posted a loss of Rs. 5,270 million, higher than the expected Rs. 2,410 million loss. Despite good demand for insecticides and fungicides in Latin America, price erosion impacted Brazil. UPL reduced SG&A expenses in Q1FY25 and plans further cuts in FY25. A turnaround is expected in H2FY25, driven by mid-single-digit volume growth in key markets.
Key Concall Highlights
UPL Global Crop Protection (Excludes India):
- Volume Growth: Strong volume growth in most regions, though pricing pressure persisted.
- North America: High demand for herbicides and fungicides, driving natural plant protection revenue.
- Europe: Significant volume-led growth in fungicides.
- Future Outlook: Normalised business performance expected from H2FY25.
UPL Sustainable Agri Solutions (India):
- Revenue Impact: Sales postponed to July to optimise working capital, leading to lower quarterly sales compared to the previous year.
- Anti-dumping Duties: Applied for duties on glufosinate.
- Sales Transition: Tighter credit and inventory norms may delay sales.
- Monsoon Impact: Optimistic forecast for monsoon to boost demand recovery and performance in Q2FY25.
- Cash Flow: Transitioning to stricter norms to enhance cash flows.
Advanta Enterprises:
- Revenue Drop: Seed business faced weather challenges, leading to a 7% revenue drop and 30% EBITDA decline YoY.
- Margin Decline: Contribution margins decreased by 271 bps due to higher production costs and lower recoveries in India, Thailand, and Indonesia.
- Future Recovery: Wet season production expected to aid recovery in Field Corn, positively impacting margins in H2FY25.
UPL Specialty Chemicals:
- Revenue Decline: Decline in captive revenue due to product mix and inventory liquidation in Crop Protection platforms.
- Demand Outlook: Strong demand expected in lubricants and stabiliser sectors.
- Joint Venture: Entered JV with Aarti Industries for manufacturing and marketing specialty chemicals.
UPL Growth Outlook:
- Revenue Growth: Expected growth of 4-8% for FY25.
- EBITDA Growth: Guidance of 50% growth compared to FY24.
Debt Update:
- Net Debt Increase: Net debt rose by US$ 639 million to US$ 4.7 billion in Q4FY24.
Valuation and Outlook
The global agrochemical market has adjusted to lower levels after significant price drops last year, and recovery will be slow. UPL has seen inventory destocking progress, especially in North America. They’ve implemented cost-cutting measures, reducing SG&A expenses by 3% in Q1FY25, with plans to cut more by FY25. The outlook for UPL in FY25 looks positive, with each segment focusing on growth strategies. Management aims for over 50% EBITDA growth and 4-8% revenue growth YoY as rebates and high-cost inventories decrease. Cost optimization, lower raw material prices, and improved working capital are expected to boost margins and cash flow. While there may be near-term challenges in H1FY25, a strong recovery is anticipated in H2FY25. UPL’s debt reduction strategy is crucial. Overall, UPL is managing well in a tough market, with expectations of improved performance as conditions stabilise.
