UPL hosted its ‘Capital markets Day’ last Friday. The Management Team of UPL,
including the Regional Business Heads, explained the regional agri trends & UPL’s
strategy over the medium‐term. Post interaction with the management, we remain
fairly confident about UPL’s growth path ahead. Robust earnings growth during
Q4FY13, improvement in margins and working capital despite growing share of
Brazil, increased interaction with the investor community and improved disclosures
are likely to bring back investor confidence gradually. Management remained
fairly confident of achieving its revenues growth guidance of 12‐15% YoY during
FY14E, along with margin improvement of 100bps YoY. We believe consistent
earnings growth combined with improvement in Balance Sheet and return ratios is
likely to trigger re‐rating. Reiterate ‘BUY’ with target price of Rs185.
! Brilliant climax to FY13: Q4FY13 results turned out to be a pleasant surprise,
both on the profitability as well as Balance Sheet front. EBITDA margins
improved by 70bps YoY to 19.0%. Consistent pricing increase (nine consecutive
quarters of YoY positive price increases), shift in product mix, rationalization of
costs, turnaround in DVA are gradually gaining momentum and we believe,
margins are likely to improve by 50bps YoY in FY14E. Management is targeting
margin improvement of 300-400bps in DVA over the next two years. Working
capital days reduced to 90 at the end of FY13 driven primarily by increase in
creditor days (management has guided for working capital days in the range of
90-100 for FY14E). UPL generated FCF of Rs6.2bn in FY13.
! New product launches integral to growth: India, RoW & Brazil are likely to drive
growth over the medium term. In India, UPL plans to launch nine new products
over the next two years. UPL has identified five mega brands domestically which
have the potential to generate annual turnover in the vicinity of Rs1bn each.
UPL plans to launch over 15 new products in Brazil over the next 3-4 years and
aims to be counted amongst the top 5 companies in Brazil over the next 5 years.
While current revenues in Brazil are in the vicinity of US$200m, UPL aims to
achieve revenues of US$800-900m over the next five years. However,
management highlighted that though they are chasing growth in Brazil, they do
not want to compromise on margins.
! Reiterate BUY with target price of Rs185: With sustainable earnings growth,
improvement in working capital and free cash flow generation, we believe stock
is likely to get re-rated. Improved disclosures and increased interaction with
investors are likely to bring back investor confidence gradually. We value UPL at
9x FY14E earnings of Rs 21.2 and reiterate ‘BUY’ with target price of Rs185.
UPL’s Growth Drivers
! New product launches: New product launches are going to be an integral part of
UPL’s growth strategy, going forward. US$4bn worth of products are expected
to go off-patent over the next few years which provide generic players like UPL
sufficient growth opportunities. Management highlighted that target innovation
turnover index stands at 15%.
! Focus on branded sales: Branded sales currently constitute 66% of the total
generic sales for UPL and management plans to further increase sales from
branded products. Since growth is higher in the branded generics segment, UPL
has decided to focus more on this segment.
! Collaborations with global players: Collaboration with global players helps the
company to penetrate into newer markets, launch new products and build
strong product portfolio.
! Focus on emerging markets: Strong presence in emerging markets which are
growing at a higher rate of 10-12% compared to global agrochemicals market
growth rate of 3-4%, positions UPL well for riding the growth boom in these
countries.
! Diversification into newer crops: Diversification into newer crops, where it has
limited presence or competition is limited, provides UPL an excellent
opportunity to tap newer crop segments and sustain the growth momentum.
UPL has a strong R&D team which continuously develops newer product
combinations enabling the company to strengthen its product portfolio.
! Strengthening the mega brands portfolio: UPL claims to have 10 products
where it has leadership position globally. Management plans to further
strengthen the mega brands portfolio in order to sustain growth.
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