Why UPL Share Price is Falling

Editor's note: One would have imagined that by now, UPL share price would chart a growth trajectory. After all, one of the strongest agrochemical players has been struggling on the bourses for a long time.

Recovery was due.

But that's not the case. UPL on 30 October 2023 posted yet another set of weak earnings.

On top of that, the global agrochemical manufacturer expects no revenue growth in the current financial year as part of its revised guidance post its results.

In July 2023, we wrote a detailed article explaining the challenges and opportunities for UPL.

A lot has happened since then and it's time to revisit the risk-reward setup in UPL.

Continue reading...

Why UPL Share Price is Falling

In the first half of 2023, high raw material costs and inventory build-up dented margins of almost all agrochemical companies in India.

While raw material prices have eased a bit, the prospects for agrochemical companies don't look so bright for the rest of 2023.

Demand continues to remain weak, and inventory is piled-up.

Amid all these challenges, one of the best agrochemical companies in India - UPL - is caught in a broad-based correction.

The company's shares have been on a downtrend and today, they touched a new 52-week low.

Let's find out why UPL share price is falling.

Weak outlook

UPL share price has continued to underperform for a long time. But the current downtrend in the stock comes after experts turned cautious ahead of its Q1 results.

The street is anticipating weak performance from UPL in its first quarter results of FY24 amid headwinds in the agrochemical business, both domestic and international markets.

In the fourth quarter, UPL had posted a sharp contraction in margins owing to a decline in post-patent product prices with ramp-up of supply from China while unfavorable regional mix also impacted the business.

Global demand remains weak as markets like Europe, Latin America, where UPL has a big exposure, maintain their sluggish stance.

Apart from a weak outlook, another looming concern for UPL is its high debt.

UPL had acquired Arysta in 2019 and this acquisition was funded through debt of around US$ 3 bn.

While the company has consistently rewarded shareholders by announcing big dividends and its management has committed to reducing debt, the net debt-to-equity level is still above the levels where it needs to be.

UPL did reduce debt in FY23, but it has a long way to go if it wants to become a debt free company.

Update: UPL on 30 October 2023 posted a net loss of Rs 1.9 bn for the July-September quarter. The company had reported a net profit of Rs 10 bn in the year-ago period.

The company's revenue came in at Rs 101.7 bn, down 18.7% on a YoY basis.

The weak performance in the quarter under review was due to subdued global demand as inventory destocking continued in this quarter as well.

UPL has now cut its revenue growth guidance for FY24 to flat as against the previously guided 1-5%.

EBITDA guidance for FY24 was also revised lower to 0 to -5% as against the earlier guidance of 3-7%.

What next?

The prospects for UPL don't look bright at least for the first quarter. There's already huge inventory build-up in the market.

ADAMA, one of the leading crop protection companies in the world, recently reported a decline in sales and volumes for the first quarter. Some impact of this development is already factored in UPL's stock price.

Over the long term however, UPL is well placed to grow all thanks to its product portfolio and established geographical presence.

The company gives some assurance when it comes to price volatility, as many agrochemical companies don't have their in-house R&D. Whereas most of UPL's raw material and power requirement is met in-house.

The company last month also announced hiving off its specialty chemical business to a 100% owned entity, UPL Specialty Chemicals Limited (USCL) for Rs 35.7 bn. This segment needs to be tracked closely for the next couple of months until the shareholder approval comes through.

Promoters of the company seem to be making most of the opportunity and buying beaten down shares of UPL from the open market.

Look at the detailed shareholding pattern of UPL to find out more.

Update: The company is now pushing hard on its cost-reduction drive to cut back some debt. UPL plans to reduce its expenses by US$100 million over next two years.

The company aims to reduce debt by US$500 million by the end of FY24.

The management is optimistic that the second half of the year will be better than the first half.

UPL has also announced that its board of directors has approved to hive off the specialty chemical business, including active ingredients manufacturing, to a 100% owned entity, UPL Specialty Chemicals Limited (USCL) for a consideration of Rs 35.7 bn.

This re-arrangement, which will be subject to approval of shareholders and expected to be completed in 3-4 months.

Currently, the stock is trading at a PE ratio of 12.1x. This is well below the industry PE, its 5-year average PE of 17.2x and its 10-year average PE of 17.3x. The median 5-year P/B ratio is 3 times while currently the stock is available at 1.6x.

How UPL shares have performed lately

UPL share price has declined by more than 8% in the last five days and more than 25% on a year-to-date basis.

Today, the stock was down 1% before recovering and it's up half a percent right now at Rs 539.

The company touched its 52-week high of Rs 807 on 5 December 2022 and its 52-week low of Rs 528 today.

Have a look at the table below to compare UPL with its peers -

Comparative Analysis

Company	PI Industries	Rallis	Sharda Crop	Sumitomo	UPL
ROE (%)	17.0	10.0	16.5	23.3	15.9
ROCE (%)	20.5	21.6	21.6	30.7	16.9
Latest EPS (Rs)	81.0	8.5	37.9	10.1	47.6
TTM PE (x)	45.4	24.8	14.4	42.8	13.9
TTM Price to book (x)	7.8	2.4	2.2	9.1	1.9
Dividend yield (%)	0.3	1.2	1.1	0.3	1.5
Industry PE	21.8
Industry PB	3.8

Data Source: Equitymaster, Ace Equity

About UPL

UPL is a global generic crop protection chemicals and seeds company. The company is engaged in the business of agrochemicals, industrial chemicals, and chemical intermediates.

The agrochemicals segment consists of agrochemicals technical and formulations. The industrial chemicals segment consists of industrial chemicals and specialty chemicals. The others chemical segment consists of traded products.

For more details about the company, see the, UPL company fact sheet and quarterly results on our websites.

You can also compare UPL with its peers.

UPL vs PI Industries

UPL vs Dhanuka Agritech

UPL vs Bayer Cropsciences

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...