UPL Ltd. – Q2FY24 Result Update

Sector Outlook – Neutral

UPL experienced an 18.7% YoY decrease in Revenue in Q2FY24, reaching Rs 10,170 crores, which was below market expectations of Rs 10,836 crores. Various challenges affecting the industry impacted the quarter’s performance. For the full fiscal year (FY24), the company anticipates that revenue growth will remain flat, a deviation from its previous guidance of 1% to 5% revenue growth. UPL reported declines in annual revenue across different international regions, including Latin America (-17%), Europe (-7%), India (-23%), North America (-57%), and the Rest of the World (-4%). EBITDA decreased by 45.8% YoY but increased by 4.1% QoQ to Rs. 1,325 crores. The EBITDA margin stood at 13.0% in Q2FY24, down 651 basis points YoY, primarily due to a 412 basis points YoY contraction in gross margins, which reached 48.6%. In Q2FY24, the company incurred a loss of Rs 293 crores, contrary to market expectations of a profit. However, UPL expects its elevated inventory levels to decrease gradually as strong demand from farms in North America, Latin America, and Europe picks up during the cropping season in H2FY24.

Key Concall Highlights

UPL Global Crop Protection (excluding India):

• The revenue growth for the quarter was lower mainly on account of channel destocking and pricing pressure in the herbicides segment, especially in glufosinate, glyphosate, clethodim, and smetolachlor, particularly in North America and Brazil.
• The herbicides segment accounted for around 75% of the annual decline in Q2FY24 revenue of UPL Corporation.
• Margins are expected to improve due to pre-emptive actions being taken on cost reduction. These measures are expected to have a positive impact of around US$100 mn in the next 24 months. The initiative is on track, and the company anticipates a cost saving of US$50 mn in FY2024.
• The management expects H2FY24 to be better than H1FY24 due to the beginning of the crop season in the next quarter in Europe, North America and Latin America.

UPL Sustainable Agri Solutions (India):

• The revenue growth for the quarter was impacted by lower possessions for key crops such as cotton, exceptionally high channel inventory, erratic rainfall in August and September and higher than usual sales return.
• Management indicated that the price correction in India for UPL is far lower than in global markets, given that UPL enjoys market leadership in its key products and opted to defend prices.
• The company expects significantly improved performance in H2FY24, led by new product launches and higher grower demand.

Advanta Enterprises:

• The company has continued to deliver strong growth with improved operating profitability driven by higher prices and volumes in the Sunflower, Corn, Canola, Sorghum, and vegetables portfolios, partially offset by volume reductions in Brazil Soya, Australia Sorghum & Ecuador Corn portfolios.
• The company’s margins increased due to an improved product mix containing high-margin products and a good recovery in the Indian vegetable business.
• The company expects healthy demand for the remaining H2FY24.

Cost optimization initiatives: The company is undertaking US$ 100 mn cost reduction initiatives over the next two years, with 50% realised in FY24. UPL had already achieved a US$ 9 mn cost reduction by the end of Q2FY24, and another 50% is expected in H2FY24, with the balance in H1FY25.

Volume growth: The company registered revenue de-growth on three key parameters such as Volume -7%, Price -15% and currency exchange +3% YoY. International business registered volume growth driven by high-margin sustainable products.

Debt update: The company aims to reduce its gross debt by US$ 500 mn annually for FY24, led by a reduction in capex guidance and better cash generation in H2FY24.

Valuation and Outlook

The global agrochemical industry has faced difficulties in the last two quarters due to distributors reducing their stock and making strategic purchases. This was influenced by high levels of inventory in the supply chain and fierce price competition, which had a significant impact on the industry’s revenue and profitability in Q2FY24. However, we are observing an increase in sales volumes (up by 1% YoY) in the crop protection business (excluding India). This growth is primarily driven by the strong performance of sustainable and specialised products. Additionally, the company has implemented cost-cutting measures over the next two years to enhance its profit margins. The company is hopeful that its performance will gradually improve in H2FY24, especially as key regions like North America, Latin America, and Europe enter their main cropping seasons. In summary, UPL is managing well in this challenging market and anticipates that its operational performance will return to a positive trajectory by H2FY24 as the industry conditions stabilise.

Key Takeaway

• UPL has revised their revenue growth guidance to flat from 1-5% for FY2024 and EBITDA growth guidance to 0 to(-5%) from 3-7%%.
• The company aims to reduce its gross debt by USD 500 mn annually for FY24.
• The management expects H2FY24 to be better than H1FY24 due to the beginning of the crop season in the next quarter in Europe, North America and Latin America.