UPL: Performs in an adverse business environment ::Kotak Sec, report

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Performs in an adverse business environment. UPL’s results were better versus estimates at the operating level. The company reported healthy growth in sales of 15% yoy in an adverse environment for agri-chemicals globally on account of subdued crop prices. EBITDA margins also improved by 130 bps yoy. The company expects to sustain the momentum led by (1) new launches that will enable market share gains and (2) shift in preference of farmers for lower-cost products. We have increased our operating numbers led by higher sales/margins but our PAT estimates remain unchanged on adjustments to interest costs and minority interest. ADD with a revised TP of `450 at 13X December 2016 EPS.

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Delivers a good performance amid testing times for the global agri-chemical industry UPL reported consolidated 3QFY15 sales at `30.4 bn (+15% yoy). The growth in sales was particularly encouraging against the backdrop of an adverse environment for agri-chemicals globally on account of subdued crop prices. The growth was led by (1) 25% yoy sales growth in India; the management noted power brands of the company have done well driving sales in the branded formulations business, (2) 14% yoy growth in sales in LatAm and (3) 22% yoy growth in sales in the rest of the world (RoW). As per the management, the sales growth trend has been healthy as (1) the company is gaining market share led by new product registrations and (2) there has been a shift in farmer preference towards low-priced products, which is helping the company. UPL reported 3QFY15 consolidated EBITDA at `5.7 bn (+24% yoy) helped by higher (+130 bps) EBITDA margins, mainly led by savings on employee costs and other expenses (as per cent of sales). The company reported 3QFY15 consolidated PAT at `2.5 bn (+12% yoy). Cash-flow generation has been poor Net debt in 3QFY15 at `30.3 bn was higher by `2.2 bn and `4.9 bn versus 3QFY14 and 4QFY14 levels. As per the management, there has been significant increase in working capital to the tune of `9.5 bn in 9MFY15 as 3QFY15 has the highest working capital intensity on account of seasonality. Other than that, the company has done a capex of `5 bn and paid dividend of `1.7 bn in 9MFY15, which have led to negative net cash flow in the business. In our view, cash flows would improve in 4QFY15, as the company would gradually liquidate its current assets going forward. However, we expect net debt to remain flattish yoy in FY2015. Adjust earning estimates; retain ADD with a revised TP of `450 We have increased our estimates for operating profits led by higher sales/margin assumptions. However, increase in below-EBITDA costs (mainly interest) has led to almost static numbers for PAT. Our interest cost assumptions have gone up, as we are estimating lower FCF (in line with the trends witnessed so far) and higher forex losses. We retain ADD rating with a revised TP of `450 at 13X (12X earlier) December 2016 EPS.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily03022015ga.pdf