UPL - Synergy benefits on track - ICICI Securities

Highlights from UPL's Q1FY21: (1) India business reported strong 27% revenue growth due to early monsoon, 14% higher sowing and market share gains, (2) Change in revenue mix, lower input prices and synergy benefits helped EBITDA margin expand 510bps YoY, (3) The synergy benefits are as per the plan and the net working capital days reduced to 84 in Q1FY21 from 115 in Q1FY20. We expect steady improvement in return ratios due to (1) synergy benefits and higher margins and (2) reduction in net working capital days. We expect earnings CAGR of 19.8% over FY20-22 with RoIC > Cost of equity. Maintain BUY with a DCF-based target price of Rs555 (12x FY22E; Earlier TP-Rs466).

- India reported strong growth: The company reported revenue decline of 0.9% in Q1FY21. (0% volume growth, -0.9% price decline and no forex impact). Revenue growth in key regions - Latin America (16%), North America (14%), India 27%, Rest of World 10% and Europe 1%. The company has maintained its long term revenue growth ambition of 7-10% per annum.

- India business reported strong growth: Due to strong agri season, 14% increase in sowing and early monsoon India business reported 27% revenue growth. Considering market growth of 15%, the company has gained market share during the quarter. The branded products portfolio grew 36% YoY.

- EBITDA margin expansion led by lower RM cost and synergy benefits: Gross margin expanded 790bps led by (1) lower input prices and (2) improvement in revenue mix. Lower revenues of Latin America (low margin region) resulted in better margins at consolidated level. Synergy benefits helped EBITDA margin expand 510bps YoY. Due to higher effective taxes, net profit grew 4.8% YoY.

- Synergy benefits on track as per plan: The cost synergy benefits worth US$109mn were achieved in FY20 and additional US$11mn benefits were achieved in Q1FY21. Revenue synergy benefits worth US$240mn were achieved in FY20 and additional US$7mn benefits were achieved in Q1FY21. We note the company is on track to achieve the stated synergy benefits in FY21-22.

- Expect improvement in return ratios: UPL is working on three broad strategies to improve return ratios as (1) improve revenues via market share gains, (2) improve margins via synergy benefits and lower input prices and (3) reduce the working capital days. The working capital days have corrected to 84 at end of Q1FY21 from 115 in Q1FY20. We expect RoE to move to 14.7% in FY22 from 8.7% in FY20.

- Maintain BUY: We model UPL to report revenue and PAT CAGRs of 10.2% and 19.8% respectively, over FY20-FY22E. We remain confident of value creation with RoIC > Cost of Equity and hence, maintain BUY rating with DCF based target price of 555 (12x FY22E).

Shares of UPL Limited was last trading in BSE at Rs.452.2 as compared to the previous close of Rs. 478.25. The total number of shares traded during the day was 622788 in over 17409 trades.

The stock hit an intraday high of Rs. 484.25 and intraday low of 445.55. The net turnover during the day was Rs. 284173119.

Source : Equity Bulls

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