UPL - Robust Volumes Spur Performance; Result Update Q2FY15 :: Edelweiss, PDF link

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UPL’s Q2FY15 sales and EBITDA surpassed our estimates. However, PAT belied it primarily on account of higher interest cost. Key quarter positives were: (i) commendable performance in all geographies, except North America; (ii) 15% and 2% YoY surge in volume and realisation, respectively; (iii) INR1.1bn dip in gross debt. However, net debt rose by INR3.29bn QoQ; and (iv) net working capital improved by 7 days YoY. Key negative was the 30bps YoY decline in EBIDTA margin. Management guided for 12-15% YoY revenue growth with margin improvement of 60-100bps in FY15. Our positive stance on the company stems from its diversified agricultural business model and sharpened management focus on organic growth along with improvement in balance sheet. We believe the stock’s re-rating is imminent given improvement in EBITDA margin, strengthening balance sheet and return ratios. Further, it is available at huge discount to Rallis, Bayer and PI Industries (FY16E P/E of 16-20x). We expect the valuation gap to narrow in the near term led by better financials. In view of attractive valuations.

Strong volume-led growth; forex loss dents PAT

In Q2FY15, UPL’s net sales grew 14.2% YoY to INR26.6bn predominantly due to volume and price (rate) growth of 15% and 2% YoY, respectively; however, forex impact was negative 2% YoY. India, Europe, Latin America and RoW grew 7.5%, 26.9%, 20.2% and 29.5% YoY, respectively. However, North America revenue declined 11.6% owing to softening commodity prices. EBITDA margin fell 30bps YoY to 18.0% (estimate: 18.5%), primarily due to higher advertisement on brands and travelling expenses. Interest cost rose 15.6% YoY to INR1.4bn (estimate: INR1.1bn) owing to forex loss of INR0.5bn. PAT grew 4.8% YoY to INR1.8bn.

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