Shares of agrochemical company UPL fell 4 percent intraday on November 8 after steep fall in Q2FY20 profit, but global brokerage houses remained bullish on the stock and see 24-33 percent potential upside from current levels.
It was in addition to 4.3 percent decline in previous session. It was quoting at Rs 567.00, down Rs 12.90, or 2.22 percent, on the BSE at 11:00 hours IST.
While having overweight call on the stock with a target price of Rs 759 (implying 31 percent potential upside from current levels), Morgan Stanley said 15 percent volume growth and four days’ reduction in working capital were positive.
As reported in first half of FY20, 40 percent of FY20 estimated EBITDA was largely in line with seasonality, but negative was 280 bps gross margin compression due to strong growth in Latin America, the brokerage added.
The Latin America business registered a 24 percent growth YoY, Europe 1 percent and India 6 percent. But, the North America revenue declined 1 percent YoY in quarter ended in September.
CLSA also maintained buy call on the stock with a target at Rs 720 (implying 24 percent potential upside from current levels) though it cut FY20 EPS estimates by 16 percent. Core EPS numbers are cut 2-5 percent considering likely pricing pressure, it said.
UPL’s second quarter (July-September) profit fell 67 percent year-on-year (YoY) to Rs 89 crore due to a one-time cost of Rs 305 crore related to US court case expenses and severance payments with respect to Arysta acquisition.
The revenue during the quarter grew by 83.6 percent to Rs 7,817 crore YoY while earnings before interest, tax, depreciation and amortisation (EBITDA) increased 83.4 percent to Rs 1,539 crore and margin remained flat 19.7 percent YoY.
UPL has gained the market share in Brazil (driven by Soybean) and Europe (led by specialty crops). The company is on track to achieve synergy targets and has realized Rs 190 crore worth of synergy benefits in Q2. Despite the subdued performance in Q2, UPL has maintained its FY20 guidance as it expects to gain significant ground in second half of FY20 in Brazil and North America.
The net debt has increased from Rs 27,050 crore in Q1’20 to Rs 28,810 crore in Q2 due to stocking of inventory before the start of peak season.
“Debt is expected to peak in Q3 and see a sharp decline in Q4FY20. Performance in second half of FY20 is expected to determine UPL’s future course. Despite hiccups in first half of FY20, UPL is expected to sail though in second half due to its continuous focus on resistance management, cost leadership along with proprietary/generic products, diversified presence across all crops & geographies,” said Prabhudas Lilladher which maintained buy call with a target of Rs 740 (Previous Rs 752) based on 8.0x Sep’21E EV/EBITDA, implying 28 percent potential upside from current levels.
“Size has changed the game for UPL and its negotiating power is expected to increase with both vendors and clients. Its increased clout in the market enables it to maximize revenue and profits along with gaining market share,” it added.
The brokerage house maintained its earnings estimates and expects revenue, EBITDA and adjusted PAT to grow at CAGR of 34 percent, 53 percent and 35 percent between FY19-21.
Citi also has a buy call on UPL, but it slashed target price to Rs 770 from Rs 800, implying 33 percent potential upside from current levels as margin weakness seen in Q2FY20 is transient.
“Margin weakness should reverse to a large extent in the second half of FY20. We lower FY20/21 EBITDA & EPS estimates by 1.5 percent/2.6 percent and 8 percent/7 percent. We expect Arysta deal to add significant value,” it said.
In the first half of FY20, the profit after tax (PAT) fell 1 percent YoY to Rs 769 crore, but the revenue surged 87 percent to Rs 15,723 crore.
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