Target: ₹1,100
CMP: ₹798.15
Rising soft commodity prices due to ongoing geopolitical tensions, higher demand for UPL’s Glufosinate as a key competitor faces supply issues, and benefits of price increases taken last year bode well for UPL’s revenue and profitability in the coming quarters despite margin pressure from higher logistics costs.
The focus on differentiated and sustainable products that have potential to expand UPL’s EBITDA margins to 25 per cent is a key PE rerating catalyst in the long-term.
We cut FY22-24CL EPS by 1-3 per cent on higher logistics cost assumption, but reiterate our Buy rating with an unchanged target price of ₹1,100.
We see strong quarters ahead for UPL led by higher soft commodity prices, benefits of price increases taken in Aug-Sep 2021, and greater demand for UPL’s Glufosinate (herbicide) as Bayer’s Glyphosate faces supply issues.
UPL should be able to comfortably exceed its revenue/EBITDA and debt repayment guidance for FY22 despite higher logistics costs from the recent spurt in commodity prices. Russia- Ukraine contributes less than 2 per cent to revenue, and UPL remains unaffected from the crisis so far with no major supply chain disruptions.
UPL has three product categories: post-patent (plain-vanilla chemical products); differentiated (value-added chemical products); and sustainable (biological-based next generation products, a $4 billion market). UPL expects incremental $2.5 billion risk adjusted revenue in five years from 15 molecules in development, mostly in the differentiated and sustainable category.