Recommendation from Pesticides & Agrochemicals Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

UPL LTD.: MOVING AHEAD WITH CONFIDENCE

HERE IS WHY
✓Expectation of increase in product demand
✓Focus on operational efficiency
✓Improvement in cash flows

I ndia is the fourth-largest producer of agrochemicals in the world. The total value of the crop protection industry in India stood at approximately USD 685 billion in FY24. From the total USD 685 billion, India’s domestic market is estimated at USD 296 billion while its export market is at USD 388 billion. The Indian agrochemical industry is set to grow at a CAGR of 6.0-6.5 per cent by FY27-28, driven both by exports and domestic consumption. With increasing population, the demand for food grains is increasing at a faster pace as compared to its production.

Agrochemicals are used to improve crop performance, yield or control pests. Keeping in mind the growth of agro activity products we recommended UPL Ltd. as our choice scrip for this issue. UPL is a global leader in agricultural solutions, operating in multiple countries. The company engages in the production and sale of agrochemicals, field crops, vegetable seeds, as well as industrial chemicals. With a focus on the complete agricultural value chain, UPL offers a wide range of patented and post-patent agricultural solutions for various crops.

In Q1FY25, on a consolidated basis, the net revenue of the company marginally increased by 1.16 per cent YoY to ₹9,067 crore as compared to ₹8,963 crore from the previous year’s same quarter. For Q1FY25, the PBIDT excluding other income decreased by 13.51 per cent and stands at ₹1,101 crore. The company posted loss of ₹495 crore in the quarter as compared to profit of ₹159 crore in the previous year’s same quarter.

In FY23-24, the domestic pesticide industry is expected to have declined by 4-5 per cent due to high global inventory, China’s surplus supply, and reduced export demand. An El Niño event led to lower rainfall, impacting pesticide demand and spray schedules. Formulation prices dropped 7-9 per cent, but are expected to stabilise in FY25. While high inventories may affect the Indian agrochemical market in the first half of FY24, the shift to La Niña and a potential good monsoon season, along with inventory normalisation, could drive market growth in the latter half of the year and beyond.

In terms of the company’s segment-wise breakup, 82.4 per cent of the revenue comes from crop protection products, 11.1 per cent is derived from the seed business and the balance 6.5 per cent comes from non-agro activity. The company’s revenue mix is diversified across the world with 53.4 per cent coming from Latin America, 11.4 per cent from North America, 7.3 per cent from Europe and remaining 27.9 per cent from the rest of the world. As a company, UPL SAS (Sustainable Agriculture Solutions) is restructuring the business with strict credit policies that have led to postponed sales, thus impacting Q1 revenues.

However, this has led to an improvement in cash flows and working capital. The management has expressed confidence in achieving guidance despite the current challenges, citing improvements in cash flow and a focus on operational efficiency. The expectation is of a stronger second half, driven by improved market conditions and effective cost management strategies. In the last three years the company has delivered average ROE of 8.55 per cent and ROCE of 10.6 per cent. Considering the company’s business and the demand emanating from the agro chemicals industry, we recommend BUY.