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MOSL: UPL (Neutral)-North America to remain under pressure

UPL: North America to remain under pressure

(UPLL IN, Mkt Cap USD7.2b, CMP INR646, TP INR691, 7% Upside, Neutral)

 

• Global major crop protection companies like BASF and ADAMA have investors alarmed after they cut their CY19 growth estimates due to difficult weather conditions in North America (NA) and the ongoing US-China trade war. The NA market contributes 18% to UPLL’s revenues, and its farm profitability too should come under pressure owing to the bad weather conditions.
• Additionally, the US-China trade war led to US Customs increasing the import duty (to 25% from 10%) on Active Ingredients (AI), which in turn, would push up prices of formulations. Currently, in Tranche-3, import duty has been imposed on 3 AIs, which are being used by UPLL in its formulations.
• Further, the US is considering imposition of duty on Tranche 4-materials, including four of the largest volume generic herbicides — glyphosate, glufosinate, dicamba, and 2, 4-D.
• Thus, the unfavorable weather and higher custom duty will exert pressure on farm profitability, thereby impacting agrochemical consumption.
• Apart from deficient south west monsoons, delay in the overall onset of rains across India has deferred sowing by few days, thereby impacting the agrochemical placement in 1QFY20 adversely. Thus, there could be a spillover of revenue in 2QFY20 for UPLL owing to a shift in the agrochemical placement.
• We cut our earnings estimates by 4%/3% for FY20/FY21. We value UPLL at 14x FY21E EPS and arrive at TP of INR691. Maintain Neutral.