UPL Ltd’s strong volume growth and market share gains resulted in higher YoY growth of international business; India business was flat YoY. The gross and EBITDA margin declined 51bps and 135bps YoY, respectively, due to higher RM and freight cost and working capital days decreased to 108 in Dec’21. The company prepaid Rs9.4bn loan in Q3FY22.

ICICI Securities models a steady improvement in return ratios due to reduction in finance costs and higher margins, and reduction in net working capital days.

Q3FY22 performance: The company reported revenue and EBITDA growth of 23.8% and 17%, respectively, YoY. Net profit was up 38.1% YoY. Gross margin declined 51bps due to high commodity cost. EBITDA margin declined 135bps YoY due to higher other expenditure. During the quarter, volume growth was 11% and price hike was 13% YoY.

Strong growth in North and Latin America: Despite supply chain challenges globally, UPL reported strong revenue growth YoY across all international geographies - Latin America (21.7%), Europe (25.5%), North America (56.6%) and rest of world (15.1%). India revenues were flat due to high sales return. Higher demand for herbicides resulted in healthy growth across geographies.

Reduction in finance cost: UPL has focussed on reducing finance cost in two ways – (1) reducing debt outstanding and (2) replacing high interest rate debt with low interest rate sustainable loan. During the quarter, the company prepaid Rs9.4bn of loan. It also raised second tranche of $700mn sustainability loan at 35bps lower rate.

Lower working capital investments: The net working capital days decreased from 117 to 108 YoY, due to lower receivable levels and increase in payable days. We model the company to reduce its working capital investments and remain confident of healthy cash flow generation ahead.

Market share gains: UPL has maintained its leadership and likely gained market share across geographies. We believe investments in innovation and launch of new products will help the company to accelerate market share gains.

Key highlights from Q3FY22 result and conference call

1. The company registered revenue growth of 23.8% YoY in Q3FY22, driven by strong growth across geographies. Volume growth and better realizations led to 11% and 13% growth, respectively.
2. Supply chain issues and higher freight costs continued to hurt margins during the quarter. EBITDA margin declined 135bps YoY.
3. Bunge invested in company’s subsidiary Sinagro (which distributes agrochemicals in Brazil).
4. UPL achieved #1 agrochemical ESG company ranking second time in a row by Sustainalytics.
5. It raised second tranche of $700mn sustainability loan (total: $1.45bn) at 35bps lower interest rate.
6. Most of the debt is long term but the company continues to prepay the debt to reduce interest costs. It has prepaid debt of INR9.4bn in Jan’22.
7. ESG efforts – UPL’s Nurture.farm completed its ‘crop residue program’, which helped ~25,000 farmers, covering ~425,000 acres to prevent the release of over 1 million ton of carbon emissions.
8. International business - Higher herbicide demand and higher realizations led to growth in Latin America. Buoyant commodity prices, constrained supply for key products and improved herbicide demand resulted in growth of North America business. Despite supply chain constraints and significant depreciation of Japanese Yen, rest of world achieved mid-teen growth led by the strong performance in APAC, Southern Africa and China.
9. The company is in line to bring net debt/EBITDA to below 2x levels.
10. It expects to complete ~Rs1.3bn of receivable securitization by end of FY22.