UPL shares hit a new low on subdued June qtr, weak outlook
UPL’s management is hopeful of an improved business climate in H2FY24, planning to focus on cash conservation, debt repayment, and if necessary, delaying capital expenditure.
Shares of UPL Ltd. have experienced a significant downturn, falling around 19% within the past year, with a marginal decline observed on Tuesday. This dip has been largely attributed to underwhelming performance in Q1FY24, which reflected the challenges across the agrochemical industry in recent quarters.
Industry players, including UPL, have been struggling with excess inventory following the relaxation of Covid-19 restrictions in China, resulting in substantial global market price erosion. This oversupply has adversely impacted UPL’s revenue, with a 17% year-on-year decline last quarter amounting to ₹8,963 crore. This drop was driven by a 10% decrease in prices coupled with a 9% dip in volumes, resulting in weak sales across all operational geographies.
But despite the drop in volumes and prices, Ebitda (earnings before interest, tax, depreciation, and amortization) margin held steady at 18% sequentially due to favourable product mix. Although, year-on-year, the margin contracted by 387 basis points.
If the pressure on price and volume persists, the margin could see an impact in the coming quarters. The management expects the September quarter to be weak. Considering the near-term headwinds, the management has lowered its FY24 guidance and now expects revenue growth in the range of 1-5% from 6-10% earlier. Ebitda growth, too, has been revised lower to 3-7% from 8-12%. Analysts from Kotak Institutional Equities indicate that the management guidance may still be at risk. “Q2FY24 revenues seem likely to decline somewhere around 10% year-on-year (largely driven by price erosion), requiring the company to record mid-teens revenue growth in H2FY24 to meet the midpoint of its guidance range," Kotak’s analysts said in a report.
While there’s optimism that commodity prices might improve in the coming quarters, the excess channel inventory levels could remain a potential obstacle to growth. Consequently, stimulating revenue growth through volume enhancement may prove challenging.
UPL’s management is hopeful of an improved business climate in H2FY24, planning to focus on cash conservation, debt repayment, and if necessary, delaying capital expenditure. The capex guidance for FY24 has been revised downwards from $350 million to $300 million, and any progress on this front could be a positive for UPL.
However, investors may need to brace for potential discomfort going ahead. Factors such as adverse weather conditions that can affect revenue and continued depreciation of agrochemical prices may pose a risk to achieving the revised guidance. After the June quarter results, numerous analysts have revised their earnings estimates downward. Nuvama Institutional Equities analysts said, “Although our earlier estimates had factored in ongoing weaknesses, we are trimming our FY24E/25E earnings per share by 7%/8%."
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