Recommendation From Chemicals Sector

Recommendation From Chemicals 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 LIMITED : IT’S THE CHEMISTRY THAT MATTERS !

HERE IS WHY
☛Good growth prospects
☛Attractive valuation
☛Strong market position. 

UPL limited manufactures, markets and distributes crop protection products, intermediates, speciality chemicals, and other industrial chemicals. It also undertakes research in these segments. Over time, UPL has made several acquisitions and entered into strategic alliances to diversify its product profile and increase geographical reach. The company is also present across the crop lifecycle – from seeds, seed-treatment products, pre and post-harvest products to storagetreatment products. For FY20, Latin America contributed the highest share to its revenue (38 per cent), followed by North America (16 per cent), Europe (15 per cent) and India (11 per cent).

In FY 2019, the company acquired Arysta LifeScience in an all-cash USD 4.2 billion deal. Today, the combined entity has emerged as the world’s fifth-largest crop protection solutions company with sales of USD 5 billion in FY 2020. It has also successfully completed integration across products, systems, businesses, markets, cultures, IT platforms, research and development pipeline and global teams. This acquisition will add to the top-line. Additionally, the management believes that synergistic cost savings of about USD 200 million are expected in fiscal 2021 on account of acquisition.

This will positively impact the profit and profit margins going forward. The domestic agrochemical industry is expected to start on a positive note in FY 2021, driven by a surge in herbicide sales, pre-buying led by robust demand expectations and price increase in generic molecules .The outlook remains stable for key Latin American regions such as Mexico, Central America and Colombia. 

The company has shown good growth in the last few years. Gross sales have increased from Rs 17,378 crore in FY18 to Rs 35,756 crore in FY20. EBITDA in the same period increased from Rs 3,517 crore in FY18 to Rs 7,452 crore in FY20. Going forward, the company has guided for net debt/EBITDA target of 2.0x by March 2021 from 2.9x as of March 2020. The latest quarterly results were also encouraging. Even with a minor reduction in sales for Q1FY21, the company was able to improve its profits and margins due to reduction in variable cost (raw material prices and COGS synergies). 

For the quarter ended June 2020, the company’s gross sales decreased 0.92 per cent to Rs 7,833 crore in Q1FY21 from Rs 7,906 crore in Q1FY20. Total expenditure for Q1FY21 stood at Rs 6,001 crore as against Rs 6,594 crore in Q1FY20, showing a decrease of 8.99 per cent. Operating profit showed an increase of 40.56 per cent to Rs 1,899 crore in Q1FY21 from Rs 1,351 crore in the same quarter last year. Operating profit margin for Q1FY21 stood at 24.24 per cent as against 17.09 per cent in the same quarter last year.

PAT for Q1FY21 stood at Rs 658 crore as against Rs 358 crore in the same quarter last year, showing an increase of 83.80 per cent. PAT margin for Q1FY21 stood at 8.40 per cent as against 4.53 per cent in the same quarter last year. ROCE for FY20 stood at 9.59 per cent. The company is trading at attractive valuation with a PE of 19.27x, which is lower than the 10-year median of 24.40x. Even on PB multiple, it is trading at 2.22x, which is lower than its 10-year median of 3.10x. By virtue of these factors, our recommendation to reader-investors is to BUY this stock.

 

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