UPL has multiple levers for margin recovery after Q1 miss

Although Latin America remains the most important contributor for UPL, sales growth of 24% year-on-year was led by Brazil. However, the growth could have been more but Mexico was impacted by severe drought while Brazil recorded more than 40% year-on-year growth.

The market shrunk in key areas in Europe with major decline in South European countries due to the climatic conditions. European sales were down 11% year-on-year. Sales in other parts of the world, too, declined 14% year-on-year as unfavourable weather conditions and supply constraints reduced volumes.

27% year-on-year growth in India and 19% y-o-y growth in North America supported overall revenues growth. Nevertheless, operating performance suffered. Multiple headwinds due to climatic conditions, the rising freight rates bumped up fixed costs and overall, there was disappointment on margins.

UPL Ltd reported a muted operating performance despite gross margin expansion, weighed by higher fixed costs (up 10% y-o-y) as logistic costs too saw an increase. Net profit, however, met expectations due to tax benefits, said analysts at Motilal Oswal Financial Services Ltd. Factoring in the same, MOFSL maintains its estimates for FY22/FY23.

The geographies such as Mexico are also expected to catch up during the year. Overall climate volatilities are part of Agribusiness and analysts expect better performance moving forward taking care of earnings growth during FY22.

Analysts at HSBC Securities and Capital Markets (India) Private Limited said that margin expansion, moving forward, should be driven by rising share of differentiated products and price increase to offset weak currencies.

The global Agrochemicals market is set to gain from better farm economics on account of firm/rising global agri-commodity prices, which would in turn drive agrochemical consumption added at MOFSL.

UPL has maintained its guidance of 7-10% revenue growth and 12-15% EBITDA growth in FY22, which further instigates confidence. The company also expects to maintain net working capital days within the range of 80-90 during the year. Overall analysts at ICICI Securities Ltd model UPL to report both revenue and PAT CAGR of 8.6%, over FY21-FY23.