Momentum continues UPL’s 3QFY15 :: HDFC Securities

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Momentum continues UPL’s 3QFY15 revenues were Rs 30.5bn (+15% YoY) mainly led by volume growth. EBITDA margin expanded to 18.9% (+129 bps) led by lower operating expenses. Consequently, EBITDA came in at Rs 5.7bn (+24%). However, lower other income (Rs 136mn, - 73%) and higher interest cost (Rs 1.4bn, +26%, higher forex losses) restricted APAT to Rs 2.6bn (+5%). We remain positive on the long term growth prospects of UPL. Assurance of no big acquisition and focus on product/geographical consolidation further improves outlook. Mgt maintained its guidance for (1) Revenue growth of 12-15% (2) EBITDA margins at 18-19% (3) Working capital to remain at ~105 days. Diversified portfolio and geographical spread protect UPL from weather/commodity shocks. Strong growth, no acquisition and debt reduction will reduce valuation discount to peers. Maintain BUY and raise TP to Rs 460 (14x FY17E EPS, rolling fwd to FY17E and raising multiple from 13x to 14x vs 20/18x for PI Industries/Rallis India). 3QFY15 highlights  Revenue growth : Volume +16%, price +2% and exchange impact -2%.  Geographic revenue growth: India (+25%), Latin America (+14%), Europe (+2%), North America (+3%) and ROW (+22% YoY).  Labour shortage and rising cost are driving up usage of herbicides particularly in India. Muted commodity prices and excess inventory in some of the areas remains a concern.  UPL continues to maintain its focus on new launches and corporate + product branding, which will drive volumes in the future.  Risks : (1) Regulatory risks (subsidiaries in 88 countries) (2) Cross currency volatility. Europe/Latin America/RoW contributes 18/27/15% of revenues.  Valuations and view : Maintaining high revenue growth rate and cash generation will be the key drivers. With no major capex, net D/E should reduce from 0.4x in FY14 to 0.1x by FY17E. UPL trades at 12.0/2.0x FY17E EPS/BV. Maintain BUY, TP Rs 460.

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