UPL On the righttrack:: Prabhudas Lilladher,

We met up with the Senior management of UPL to get an update on the business
environment and the outlook, going ahead. Postthe detailed interaction with UPL,
our conviction remains intact, as UPL is treading on the right track, improving
product mix, undertaking cost‐saving initiatives, consolidating supply chain,
reduction in working capital, FCF generation and gradual reduction of debt. For
FY14E, management maintained its organic top‐line growth of 12‐15% YoY, with
margin improvement of 100bps YoY. Net working capital islikely to remain range‐
bound within 90‐100 days. UPL continues to trade at attractive valuations of
7.7x/6.7x FY14E/15E earnings estimates, respectively, which is at a discount of 30‐
40% to its peers. With sustained earnings growth, lower working capital and
gradual reduction in debt, we believe, UPL is likely to get re‐rated. We roll‐over
valuationsto FY15E,resulting into target price of Rs210 (previous Rs185).
 Focus on FCF generation and reduction in debt gradually: UPL repaid Rs4bn of
debt in H1FY14, while in H2, it plans to repay almost Rs2bn. However, due to a
steep Rupee depreciation witnessed in H1, net debt stood at Rs28bn in Sep’13
(compared to Rs25bn in Mar’13). Gross debt stood at Rs38bn (Rs42bn in
Mar’13).
UPL targets to reduce its net D/E to 0.3x (currently 0.6x) over the next two
years. Management acknowledged that their focus clearly is on generating FCFF
and utilizing it to reduce debt gradually. UPL’s optimum cash balance is Rs8-
10bn and any surplus cash will be likely used for reduction in debt.

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 Improving working capital: UPL has been able to reduce its net working capital
days significantly over the last few quarters. Net Working Capital improved by
12 days YoY to 101 days at the end of Q2FY14 compared to 113 days last year.
Though much of the improvement in working capital has come through
renegotiation of higher creditors’ days, management highlighted that this is
sustainable and working capital is likely to remain in 90-100 days range.
Despite increasing contribution of Brazil, UPL has been able to maintain debtors’
days at 110 through various initiatives (increasing share of crops which have
lower cycle, barter system for crops, bills discounting etc.).
 Focus on integration rather than acquisition: UPL completed 24 acquisitions
during the last decade and has consequently emerged as a global player, with its
operations across continents. With sizeable presence across geographies, UPL’s
focus is now on integrating and creating synergies rather than undertaking any
further acquisitions.
 India business – strong momentum to continue: H1FY14 is witnessing India
business growing by 26% YoY. Widespread monsoons, coupled with timely
arrival, resulted in robust kharif and also created a favourable environment for
ensuing rabi. UPL continues to focus on increasing the share of branded
products in India (currently 75% of sales compared to 66% of sales two years
back). New in-licensed molecule, Ulala, launched in FY13, has received an
encouraging response and has ramped-up to Rs500m of sales. UPL expects Ulala
to enter the Rs1bn esteemed category over the next two years.

North America ‐ Season getting off to a good start: Previously, there had been
concerns of inventory pile-up in the North American region as last year
witnessed a delayed start to the season, resulting in inventory built-up at
dealers’ level. However, management clarified that channel inventory levels are
not threatening and UPL expects a strong season in North America this year.
While industry has been growing at 5-6% p.a., UPL last year clocked top-line
growth of 15% YoY in North America. Management also highlighted their
internal target of growth by at least 200bps higher than industry growth rate
across all regions.

Brazil  ‐ gaining ground: Brazilian agrochemicals market is worth US$10bn and
has been growing @14-15% p.a. Post the acquisition of DVA Agro, UPL has
undertaken various steps to garner incremental market share (launching new
molecules, extension labels, grow UPL’s share of products in DVA’s portfolio),
drive cost synergies (consolidating Latin American supply chain with DVA,
reducing overheads), reduce working capital (launch new molecules in crops
which have smaller cycle, bills discounting) and reduce interest costs.

DVA contributed Rs11bn to revenues, while it reported losses of Rs44m in FY13.
Management highlighted that DVA remains on the right track and margins have
improved by 150-200bps gradually. We estimate DVA’s EBITDA margins at 8-
10% at the time of acquisition, while margins have currently improved to 11-
12%.
 Guidance: For FY14E, UPL maintained its guidance of 12-15% organic growth,
with margin improvement of 100bps YoY. Management sounded fairly confident
of achieving this guidance. Over the medium term, UPL targets similar organic
top-line growth, with slight margin improvement every year.
 Maintain earnings estimates; roll‐over valuations to FY15E: We maintain our
estimates of Rs22.1/25.3 for FY14E/15E, respectively. We roll-over valuations to
FY15E, resulting in target price of Rs210 (previous Rs185).