UPL’s Q2 gets a boost from strong growth across regions

Erratic rainfall in India meant India growth was slightly subdued at 5% y-o-y in Q2. Nevertheless, the Latin American business remained a stronghold, contributing half to revenues with a strong 20% year-on-year growth. Favourable weather led to accelerated sales in Europe, while improved commodity prices, tight supply for key products, favourable channel stock and better price realisation in North America supported revenue growth. Europe and North America sales posted strong 24% and 31% year-on-year growth respectively.

Supply chain remained disruptive and higher logistic and raw material costs posed challenges. Nevertheless, the company still managed to post operating performance that met analysts’ estimates. Ebitda at ₹2,045 crore increased against ₹1,808 crore in the year-ago quarter. The company said this was driven by a strong contribution even in a disruptive supply-chain and inflationary environment, partially offset by strategic long-term investments in our digital platform of ₹81 crore. Without considering this investment, the Ebitda margin is at 20.1%, in line with the last Q2, the company added.

“Strong 2QFY22 volume growth of 15% indicates UPL’s supply-chain capabilities and ability to benefit from the ongoing disruption,” said analysts at Kotak Institutional Equities.

The management has maintained its FY22 guidance. It had guided for revenue growth of 7-10%, with EBITDA growth at 12-15% and a net debt-to-Ebitda ratio of less than 2x.

Though strong Q2 show lends confidence, rising costs are keeping analysts watchful on the profitability improvement, free cash flows etc, moving forward. Kotak analysts said higher working capital days, as well as raw material inflation, would drive higher working capital investments this year, limiting free cash flows.

The higher tax rate also is leading to some tweaking of current fiscal estimates. “Adjusted net profit was 17% lower than our estimate, due to an increase in the tax rate and higher MI than estimated,” said analysts at Motilal Oswal Financial Services. They have reduced their FY22 earnings estimate by 4%, but have maintained the estimates for FY23.

The stock slipped more than 3% in morning trades on Monday.