UPL - Guidance maintained; synergy benefits on track - ICICI Securities

Highlights from UPL's Q2FY21 result: (1) all regions reported strong volume-led growth due to favourable weather conditions and market share gains; (2) change in revenue mix, cost-saving measures post-Covid and synergy benefits helped EBITDA margin expand by 50bps YoY; and (3) synergy benefits are as per the company's stated plan and the net working capital days reduced to 106 in H1FY21 vs 120 in H1FY20. We model steady improvement in return ratios due to (i) synergy benefits and higher margins, and (ii) reduction in net working capital days. We model an earnings CAGR of 18% over FY20-FY22E with RoIC > Cost of Equity. Maintain BUY with a DCF-based target price of Rs540 implying 12x FY22E (earlier target price: Rs555).

- Q2FY21 performance: Strong volume-led growth: Company reported revenue, EBITDA and adjusted PAT growth of 14.4%, 17.5% and 108.4% respectively, YoY. Volume growth was 19%, but realisations declined 1%, and there was 4% impact of forex fluctuations. Gross margin shrunk 100bps, but EBITDA margin expanded 50bps due to synergy benefits.

- All regions performed well: All the five regions where UPL operates performed well with strong volume-driven growth. Region-wise growth rates: Latin America 12%, North America 9%, Europe 6%, RoW 27%, India 18%. Market share gains in some geographies and favourable weather conditions helped report the strong growth.

- Guidance maintained for FY21: UPL has maintained its guidance of 6-8% revenue growth and 10-12% EBITDA growth in FY21. Cost-saving measures initiated post-Covid and synergy benefits are leading to EBITDA margin expansion. Company also expects to reduce net working capital days as well as net debt by FY21-end.

- Synergy benefits on track as per plan: Cost synergy benefits worth US$109mn were achieved in FY20 and an additional US$44mn in H1FY21. Revenue synergy benefits worth US$240mn were reaped in FY20 and an additional US$59mn in H1FY21. We note the company is on track to achieve its targeted synergy benefits in FY21-FY22E.

- Expect improvement in return ratios: UPL is working on three broad strategies to improve return ratios: (1) improve revenues via market share gains, (2) improve margins via synergy benefits and lower input prices, and (3) reduce the working capital days, which corrected to 106 at end of H1FY21 from 120 in H1FY20. We expect RoE to increase to 14.4% in FY22E from 8.7% in FY20.

- Maintain BUY: We model UPL to report revenue and PAT CAGRs of 9% and 18% respectively, over FY20-FY22E. We remain confident of value creation with RoIC > Cost of Equity, hence we maintain BUY with a DCF-based revised target price of Rs540, or 12x FY22E (earlier target price: Rs555).

Shares of UPL Limited was last trading in BSE at Rs.453.15 as compared to the previous close of Rs. 450.55. The total number of shares traded during the day was 189821 in over 6440 trades.

The stock hit an intraday high of Rs. 457.3 and intraday low of 446.6. The net turnover during the day was Rs. 85914498.

Source : Equity Bulls

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