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MOSL : UPL: Higher working capital increases net debt

.  UPL: Higher working capital increases net debt

(UPLL IN, Mkt Cap USD7.3b, CMP INR770, TP INR800, 4% Upside, Neutral)

Earnings better than expected  

• UPLL reported strong revenue growth of 27% YoY driven by improved price realization (+18% YoY). Higher double-digit sales growth was witnessed in key markets such as LATAM, North America and ROW except India (8% YoY).
• Gross debt increased to INR301b in 1QFY23 from INR259b in 4QFY22 with net debt rising by INR76b QoQ to INR265b due to an increase in working capital requirement.
• Factoring in its positive 1QFY23 performance, we raise our FY23E/FY24E earnings by 8%/9%, respectively. We reiterate our Neutral rating on the stock with a TP of INR800 (premised on 10x FY24E P/E).

Improvement in realization drives sales growth

• UPLL reported a revenue of INR108.2b (est. INR96.9b) in 1QFY23, up 27% YoY (volume growth: +6%, price: +18%, exchange: +3%). EBITDA stood at INR23.4b (est. INR21.5b), up 26% YoY, aided by improved realization of herbicide portfolio and efficient supply chain. EBITDA margin was at 21.7% v/s 21.9% in 1QFY22. Adjusted PAT stood at INR10.5b, up 3% YoY (est. INR7.5b). Effective tax rate came in at 5.7% in 1QFY23.
• Sales in Europe grew 13% YoY driven by strong growth in France on the back of NPP BioSolutions business.
• Revenue in North America jumped 47% YoY because of strong herbicide growth backed by improved product mix and prices.
• Revenue was up 38% YoY in LATAM aided by strong growth in Brazil owing to the improved pricing for herbicides and strong double-digit growth in NPP BioSolutions led by Mexico and the Andean region.
• India revenue growth moderated to 8% YoY on delay in planting of key crops.
• Revenue from the ROW grew 31% YoY due to growth in SE Asia and AUS/NZ led by insecticides and fungicides, despite supply constraints.
• Net working capital increased to 108 days in 1QFY23 from 91 days in 1QFY22, led by short-term inventory build-up in anticipation of a strong demand and uncertainties in supply chain along with reduction in factoring quantum to optimize interest cost in certain geographies. This rise in net working capital led to an increase in net debt by INR76b QoQ to INR265b

Highlights from the management commentary

• Guidance: Upward revision of growth for Revenue/EBITDA to 12-15%/15-18% from 10%+/12%-15% guided earlier for FY23, respectively.
• Working capital days to be ~80 (from 108 days in 1QFY23) for FY23E with net debt reduction target of USD400m. Management guided for a capex of ~USD300-325m for FY23E.
• Product Mix: The company aims to drive 50% contribution level (v/s 30% in FY22) from the specialized/differentiated product sales that are shielded against raw material volatility.
• Management will commercialize Chloratraniliprole (CTPR) in major markets and this would become a major part of its business from FY24 onwards. CTPR was commissioned in 1QFY23 and product supplies in batches have already begun.

 

Valuation and view

• In 1QFY23, UPLL's gross/net debt rose INR50b YoY each to INR301b/INR265b due to higher working capital requirement. The net debt-to-EBITDA ratio (including perpetual bonds) is expected to reduce to 1.7x in FY23 from 2.2x in FY22. However, we believe cash flow generation and debt repayment remain the key monitorables amid a high inflationary environment in FY23E.
• We expect a revenue/EBITDA/Adj. PAT CAGR of 12%/15%/12% over FY22-24, respectively, backed by higher volumes and improved product mix.
• The stock has traded at an average P/E of 10.7x over the last three years on a one-year forward basis. We have ascribed an 10x FY24E P/E to the stock.
• Factoring in its positive 1QFY23 performance, we raise our FY23E/FY24E earnings by 8%/9%, respectively. We reiterate our Neutral rating on the stock with a TP of INR800.