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Dark horse in Nifty pack buries ‘bad past’ quickly to bounce 33% in a month

NEW DELHI: It’s a fertiliser company with businesses across the world, and one of the biggest such firms in India. But it is never counted among the most popular stocks to own on Dalal Street.

This often overlooked Nifty stock has suddenly come into reckoning after bouncing nearly 33 per cent in the last one month – the most for any stock in the elite pack.

The stock earned a re-rating after the company surprised analysts with its March quarter earnings. Since earnings announcement, the scrip has risen 15 per cent in the last one week. On Wednesday as well, the stock climbed over 3 per cent.

What is working for the firm?
For the March quarter,

reported robust all-round performance. Revenue growth was led by Latin America, India and European markets. Ebitda margin expanded by 270 bps YoY to 22.2 per cent on the back of 200 bp gross margin expansion, resulting in 31 per cent Ebitda growth.

Analysts said in spite of forex fluctuations, one thing the company’s financials are highly sensitive to, UPL reported strong growth in Brazil. Normal monsoon helped the India business report strong numbers. North American business faced some supply constraints, but managed to keep revenues stable.

The company has managed lower its net debt by 14 per cent YoY and reduced net debt-to-Ebitda ratio to 2.2 times in FY2021 from 3 times in FY2020. This is another factor that impressed analysts. The company management has given a guidance for 7-10 per cent YoY revenue growth and 12-15 per cent Ebitda expansion in FY2022.

“The management sounded bullish on the global agrochemicals market, led by better farm economics on account of rising global agri-commodity prices – which would drive the consumption of agrochemicals. This, coupled with lower channel inventory, is also expected to bode well for strong demand in the agrochemicals sector in FY22,” said Sumant Kumar of Motilal Oswal.

Even though the company did not raise product prices last financial year, the management expects to take price hikes in FY22 owing to an increase in raw material costs. The company is confident that farmers would absorb it given the higher prices they are enjoying on their produce.

The company’s focus is now on transitioning from generics to proprietary and patented products. Taking advantage of its improved distribution reach after integrating Arysta, a North American firm that UPL had acquired in 2018, it is now forging partnerships with innovators and new-age startups to improve its legacy positioning as a low-cost agrochemicals provider. The market share gain has been consistent for the company thus far.

Corporate governance issue

The stock faced a lot of turmoil last December (2020) after a whistle-blower had alleged corporate governance lapses in the company and alleged that its promoters had siphoned off funds.

In a clarification to the reports, the company had said that this was an old matter, which was reported to the audit committee in 2017 and closed after an independent probe.

Does that still haunt?

Ritesh Gupta of Kotak Securities said the consistent negative news flow over governance and investor concerns around low free cash flow generation can still limit any material re-rating from seven times FY23 EV/Ebitda

“That said, UPL continues to exhibit a strong propensity to gain market share in the global agrochemicals industry, targeting gains in both innovation and cost-conscious markets,” he said.


How much can the stock rise?
Analysts say much of the earnings growth is already in the price after the non-stop rally seen in the last one month. Hence, they do not see further upside in the stock and suggest either reducing or selling the stock.

Motital Oswal has target prices at Rs 750,

Rs 735 and Prabhudas Lilladher pegs the stock at Rs 740. Sharekhan is among the most bullish ones with a 12-month target at Rs 800.

“A slowdown in the global agrochemical industry and delay in new product launches could impact revenue growth for UPL. Currency fluctuations might impact the company, as it has a significant presence in various geographies. A fresh US-China trade war post Covid-19 crisis might also impact commodity prices,” said Sharekhan, outlining the risks.

Gupta of Kotak Securities has a ‘sell’ rating on the stock with a price target of Rs 650.

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