UPL's Q2FY19 results (Outperformer) - Operationally strong; PAT below due to exceptional charges
Q2FY19 result highlights
- Consolidated revenues grew by 12.9%yoy to Rs42.5bn (est. Rs41.4bn) led by 8% volume growth, 4% price increase and 2% forex impact
- Among key geographies, Latam witnessed strong growth of 26% yoy while India grew by 8%; Europe /North America / RoW grew by 1% / 2% / 6% respectively.
- GMs remained stable at 55.9% despite RM challenges. Controlled growth in overheads led to 16.7%yoy growth in EBITDA to Rs8.3bn ahead of estimates of est.Rs8bn. EBITDA margins rose by 60bps yoy to 19.7% - and beat estimates - 19.3%.
- Forex loss of Rs520m and exceptional charge of Rs570m (Rs370m related to Arysta acquisition charges) impacted profitability. This coupled with higher tax rate (25.4% vs 18.5% in Q2FY18) and lower other income (down 58% yoy) led to 5% yoy decline in PAT to Rs2.85bn (est :Rs3.67bn)
Key positives: Stable EBITDA margins, Strong growth in Latam
Key negatives: Lower other income; increase in net debt
Impact on financials: Maintain our Earnings Estimates (Arysta acquisition not included in estimates)
Valuations & view
UPL has continued to deliver stable operating performance in Q2FY19 through a combination of steady volume growth and tight cost control. In FY19E, we expect UPL’s volume growth trajectory to remain strong (~8-10%), led by success from new product launches in its key markets. Moreover reducing channel inventories in Latam and expected improvement in commodity prices in coming quarters should accelerate revenue and earnings growth momentum. In the long run, we believe the recently announced deal of Arysta life Science is a transformational one and can create significant strategic value for UPL along with potential meaningful upside (pls refer to our note highlighting the Arysta transaction details (). Overall, we expect UPL’s earnings to witness CAGR of 13.6% in FY18-20E (ex-Arysta). Maintain Outperformer with a revised target price of 959 (18x FY20E EPS).
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