While UPL has reported weaker-than-expected Q1FY24, we note (1) farmer offtake has remained intact and it will eventually result in revival in volume growth in H2FY24, (2) Seeds segment continues to report strong performance with volume growth of 14% YoY, indicating healthy farming activity and (3) India crop protection business suffered due to shift in agri season and delay in monsoon; we believe it is likely to recover in Q2FY24. While we model volume recovery in H2FY24, we model realizations to remain muted due to increase in supplies in global agrochem market.

UPL reported revenue decline of 17.2% YoY. EBITDA and PAT declined 30.2% and 39.8%, respectively YoY. EBITDA margin contracted 350bps YoY due to revenue decline but stable fixed costs. Due to reduction in trade inventory, revenues declined sharply YoY. Volumes and price realisations declined 10% and 9%, respectively YoY.

Likely recovery in H2FY24

The company has indicated that the off-take by end consumers (farmers) has largely remained stable. Hence, volume growth is likely to recover soon. However, steep increase in global supplies has led to price correction and reduction in trade inventory. It expects the price correction to continue in coming quarters too but expects strong revival in volume growth in H2FY24.

Reduction in revenue and earnings guidance

The company has cut FY24 revenue guidance from +6-10% revenue growth to +1-5% revenue growth and EBITDA growth guidance from +8-12% to +3-7%. While the industry-wide impact is likely to hurt UPL, we believe if the company is able to gain market shares, it will be DCF accretive.