UPL's Q3FY18 results (Outperformer) - Stable performance in tough times

Q3FY18 result highlights   

• UPL revenue and EBITDA came below estimates due to subdued commodity prices and unfavourable exchange rate which impacted growth in Latin American markets. PAT was ahead of expectations owing to lower tax rate.
• Q3FY18 consol revenues grew 7% yoy to Rs41.9bn (est. Rs44.1bn). Strong volume growth (12%) more than made up for the 3% adverse impact from exchange rate and 2% fall in realisations.
• Geographical growth split - North America (+8%), Latam (+4%), RoW (+9%), Europe (+14%), and India (+10%). 
• GMs improved 50bps to 54.5%. Stable fixed overheads and employee expenses enabled +70bps EBITDA expansion to 19.8%. Consol EBITDA grew 10.5% yoy to Rs8.3bn (est: Rs9.4bn).
• PAT increased by 21%yoy to Rs5.6bn (est: Rs4.7bn) due to lower tax rate (-2.5% vs 9.1% in Q3FY17). Lower tax was aided by prior period tax write-back.

Key positives: Sales volume growth

Key negatives: Weak growth in Latam

Impact on financials: EPS cut by 4.7%/2.7% in FY18 and 19E, we introduce FY20e EPS of Rs54.6/sh.

Valuations & view

UPL has continued to deliver stable operating performance in Q3FY18 despite supressed global demand through a combination of steady volume growth and tight cost control. We expect UPL’s volume growth trajectory to remain strong (~12%), led by success from new product launches in its key markets Growing strains in China dependent agrochem supply chains are adding to UPL’s competitive advantage. This combined with expected improvement in commodity prices in coming quarters should accelerate revenue and earnings growth momentum. Overall, we expect UPL’s earnings to witness CAGR of 15.1% in FY17-19E. Also, with management’s stated intent to participate in global M&A, development on the inorganic initiative will also be key to watch out for. Maintain Outperformer, with the upward revised target price of Rs982.