UPL Ltd’s margin performance for the quarter ended March (Q4FY23) was a drag on the overall earnings. Consolidated Ebitda margin year-on-year (YoY) fell nearly 490 basis points to 16.4%, well below expectations. Certain factors are responsible for the margin pressure.
First, product prices were weak. As COVID-related restrictions were lifted in China, there was a significant increase in the supply of agrochemicals from the country, putting pressure on post-patent product prices. In addition, delayed sowing in some regions such as the US meant weak prices for the product. Second, an unfavorable regional mix of the company (low-margin region, with higher contribution from Latin America) impacted the company’s margins.
Overall, this meant that UPL’s revenue growth was down 4% year-on-year in Q4 with 1% volume growth, while pricing fell 3%. However, the margin crisis meant that Ebitda fell at a sharp rate of 19%.
Analysts have cut their earnings estimates for this year and next due to weak fourth quarter results and a subdued outlook for the first half of this fiscal (FY24). JM Financial Institutional Securities says UPL’s margin challenges may ease over the next 1-2 quarters as Chinese supplies get exhausted. A report from the brokerage on May 9 said, “Due to expected margin recovery towards the end of H1 FY2024 and strong volume growth expected in H2 FY2024, we expect UPL to report Rs. Will report 8% sales and 11% EBITDA growth.”
Meanwhile, since UPL announced its results on Monday, its shares have declined nearly 3%. To be sure, analysts say the company’s continued efforts towards deleveraging are positive. net debt fell 16,902 cr in FY23 18,906 crore in FY22. According to the company, the net debt EBITDA ratio is 1.53 times. Amid adverse industry conditions in the near term, investors are likely to monitor debt repayments in future.
Rohan Gupta said, “While UPL’s volume growth and margins are likely to recover in H2, FY24 may still be volatile with respect to China’s behavior in terms of inventory supply and market price volatility.” There’s a lot of uncertainty.” , Director, Nuwama Institutional Equities. Besides, whether the company continues to reduce its debt is another worth watching. He believes that if there is visibility on these fronts then the stock can be re-rated. In the past one year, UPL stock has declined nearly 11%. ,
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