30 April 2018 India Chemicals Company Update UPL Ltd BUY A consistent outperformer in a challenging industry UPL reported 4Q18 Revenue/EBITDA/PAT of INR 57bn / INR 12.2bn / INR 7.7bn (+7%/+8%/+6% YoY respectively), in-line with JMFe of INR 59.1bn/11.3bn / 7.87bn. Geographically, (i) India business grew 6% YoY with growth in new fungicides and successful farmer reception of 3 new launches, (ii) LATAM business grew 7% YoY driven by product launches throughout the value chain, (iii) Europe grew at 7%YoY(against the industry negative growth rate of 2%) driven by sugar beet herbicide portfolio (iv) ROW grew at 5% YoY driven by double digit growth in Africa and key South East Asian countries, and (v) North America revenue grew at 7% YoY (outperforming industry growth of 3%) mainly due to the partnership deal with Bayer and success in the mid-west market. Overall, UPL continued to grow across geographies and grew at 7% against flat growth in agro-chemical industry. We continue to remain positive on UPL driven by its consistent performance in a challenging industry environment. Re-iterate BUY with TP of INR 930. Operationally in-line with JMFe: UPL reported revenue at INR 57bn (+7% YoY/-4% JMFe). However, the gross margins declined marginally to 49% owning to higher raw material costs. The impact of higher raw material costs is being felt by most of the agro-chemical companies, but UPL with in-house manufacturing facilities is relatively less impacted. At the analyst meet, UPL management indicated that they would invest more to further reduce import dependence further. Therefore, results were in line with EBITDA at 12.2bn (+8% JMFe) and PAT at 7.7bn (-2% JMFe). Management outlook on business environment: (i) Guidance: Management indicated a revenue growth guidance of 10-12% for FY19 and is targeting an EBITDA growth of 12-15%. (ii) UPL has approached the current market with future plans to invest in manufacturing units for backward and forward integration with an increased Capex of 1500 Crore (iii) Tariff wars: On the current scenario of potential tariff wars and its impact on company, management indicated that potential tariff wars present greater uncertainties but could also provide more opportunities (iv) Business Environment: Management indicated that for key grain commodities, the stock-to-use ratio is expected to fall, which could result into an increase in grain prices. (v) Mergers/Industry consolidation: Management believes the recent big mergers will take 2-3 years to bring an impact. (vi) Management stated that they are offering full lifecycle crop solution and therefore expressed confidence in growth. (vii) Government Initiatives: In India, government s agri-initiatives are an encouraging factor for the industry and bring lot of optimism to the industry specifically measures that could double farmers incomes.(vii) Management believes in increased investments in precision farming to reap benefits. Mehul Thanawala mehul.thanawala@jmfl.com Tel: (91 22) 66303063 Recommendation and Price Target Current Reco. BUY Previous Reco. BUY Current Price Target (12M) 930 Upside/(Downside) 23.3% Previous Price Target 935 Change -0.5% Key Data UPLL IN Current Market Price Market cap (bn) INR754 INR384.2/US$5.8 Free Float 71% Shares in issue (mn) 509.3 Diluted share (mn) 509.1 3-mon avg daily val (mn) INR1,163.2/US$17.4 52-week range 903/673 Sensex/Nifty 34,970/10,692 INR/US$ 66.7 Price Performance % 1M 6M 12M Absolute 3.3-9.3-6.4 Relative* -2.6-13.8-19.9 * To the BSE Sensex We broadly retain our earnings and Re-iterate BUY: We make slight adjustment to earnings estimate for FY19/20 based on the guidance given by the management and the outlook of monsoon. We therefore, broadly maintain our Target Price at INR 930 (previously INR 935) for Mar-20 valuing UPL at 16x PE. Maintain BUY. Financial Summary Net Sales 1,40,482 1,63,118 1,76,747 2,03,890 2,37,176 Sales Growth (%) 16.2 16.1 8.4 15.4 16.3 EBITDA 23,950 29,852 34,466 41,797 49,214 EBITDA Margin (%) 17.0 18.3 19.5 20.5 20.8 Adjusted Net Profit 10,508 17,998 20,279 23,940 29,633 Diluted EPS (INR) 20.6 35.4 39.8 47.0 58.2 Diluted EPS Growth (%) -23.3 71.3 12.7 18.1 23.8 ROIC (%) 17.6 21.1 21.7 21.8 23.1 ROE (%) 17.9 27.3 25.0 24.1 24.3 P/E (x) 36.5 21.3 18.9 16.0 13.0 P/B (x) 5.5 5.2 4.3 3.5 2.8 EV/EBITDA (x) 17.6 14.0 12.1 9.9 8.2 Dividend Yield (%) 0.7 0.6 0.8 0.9 0.9 Source: Company data, JM Financial. Note: Valuations as of 27/Apr/2018 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited
Exhibit 1. 4Q18 result review Q4FY18 Q4FY18E % var Q4FY18 %YoY Net revenue from operations 56,910 59,116-4% 53,420 7% Expenses COGS 29,020 26,880 8% 27,720 5% Employee Benefit expenses 4,300 6,029-29% 4,300 0% Other Expenses 11,410 14,881-23% 10,140 13% EBIDTA 12,180 11,326 8% 11,260 8% As a % of sales 21% 19% 224bps 21% 32bps Depreciation and Amortization Expenses 1,840 1,648 12% 1,870-2% Other income 1,180 1,223-4% 1,460-19% EBIT 11,520 10,901 6% 10,850 6% Finance Costs 4,100 2,153 90% 2,130 92% Exchange impact on finance costs -2,030 0 NA 880-331% PBT 9,450 8,748 8% 7,840 21% Exceptional Items 60 0 NA -9-752% PBT after Exceptional items 9,390 8,748 7% 7,849 20% Tax expense 1,660 875 90% 560 196% Tax rate % 18% 10% 768bps 7% 1054bps PAT 7,730 7,874-2% 7,289 6% Add : Share of Profit from Associate Co -360 0 NA 130-377% Less: Minority Interest 10 0 NA 10 0% PAT after minorities 7,360 7,874-7% 7,409-1% No of shares - Basic 509 510 507 Basic EPS 14 15-6% 15-1% Exhibit 2. Geographical overview Q4FY18 Q4FY18E % var Q4FY18 %YoY India 4,600 4,774-4% 4,340 6% Europe 9,830 10,076-2% 9,160 7% North America 12960 13,111-1% 12,140 7% Latin America 17,650 18,929-7% 16,464 7% ROW 11,870 12,226-3% 6,870 5% Total revenue 56,910 59,116-4% 53,420 7% Exhibit 3. UPL valuation 1 yr Forward PE 16 EPS 58.12 TP (INR) 930 JM Financial Institutional Securities Limited Page 2
Financial Tables (Consolidated) Income Statement Net Sales 1,40,482 1,63,118 1,76,747 2,03,890 2,37,176 Sales Growth 16.2% 16.1% 8.4% 15.4% 16.3% Other Operating Income 0 0 0 0 0 Total Revenue 1,40,482 1,63,118 1,76,747 2,03,890 2,37,176 Cost of Goods Sold/Op. Exp 67,805 78,162 79,536 91,750 1,06,729 Personnel Cost 14,335 16,269 18,558 20,389 23,718 Other Expenses 34,392 38,835 44,187 49,953 57,515 EBITDA 23,950 29,852 34,466 41,797 49,214 EBITDA Margin 17.0% 18.3% 19.5% 20.5% 20.8% EBITDA Growth 1.6% 24.6% 15.5% 21.3% 17.7% Depn. & Amort. 6,760 6,720 6,659 7,324 8,219 EBIT 17,190 23,132 27,807 34,474 40,995 Other Income 3,157 4,436 3,712 4,036 4,320 Finance Cost 7,041 7,351 8,177 8,612 8,364 PBT before Excep. & Forex 13,307 20,217 23,341 29,898 36,952 Excep. & Forex Inc./Loss(-) -1,291-808 -570 0 0 PBT 12,016 19,410 22,771 29,898 36,952 Taxes 1,648 1,888 2,733 5,681 7,021 Extraordinary Inc./Loss(-) 0 0 0 0 0 Assoc. Profit/Min. Int.(-) 974 253 262 277 297 Reported Net Profit 9,394 17,269 19,777 23,940 29,633 Adjusted Net Profit 10,508 17,998 20,279 23,940 29,633 Net Margin 7.5% 11.0% 11.5% 11.7% 12.5% Diluted Share Cap. (mn) 509.2 509.1 509.1 509.1 509.1 Diluted EPS (INR) 20.6 35.4 39.8 47.0 58.2 Diluted EPS Growth -23.3% 71.3% 12.7% 18.1% 23.8% Total Dividend + Tax 2,140 2,170 3,664 3,969 3,969 Dividend Per Share (INR) 5.0 4.2 6.0 6.5 6.5 Cash Flow Statement Profit before Tax 13,307 20,217 23,341 29,898 36,952 Depn. & Amort. 6,760 6,720 4,252 4,841 5,666 Net Interest Exp. / Inc. (-) 7,041 7,351 8,177 8,612 8,364 Inc (-) / Dec in WCap. -5,342-4,687-10,531-3,989-6,980 Others -1,371-2,648-2,460-3,014-3,298 Taxes Paid -4,092-1,888-2,733-5,681-7,021 Operating Cash Flow 16,303 25,065 20,047 30,667 33,682 Capex -9,538-11,875-11,000-15,000-15,000 Free Cash Flow 6,765 13,190 9,047 15,667 18,682 Inc (-) / Dec in Investments 332-447 0 0 0 Others -7,405 1,480 1,700 2,824 3,108 Investing Cash Flow -16,610-10,842-9,300-12,176-11,892 Inc / Dec (-) in Capital 0 157 0 0 0 Dividend + Tax thereon -2,134-3,148-3,664-3,969-3,969 Inc / Dec (-) in Loans 9,568 13,168 9,002-2,000-2,000 Others -5,333-7,351-8,177-8,612-8,364 Financing Cash Flow 2,101 2,826-2,839-14,581-14,333 Inc / Dec (-) in Cash 1,794 17,049 7,908 3,910 7,457 Opening Cash Balance 10,098 11,892 28,940 36,848 40,758 Closing Cash Balance 11,892 28,940 36,848 40,758 48,215 Balance Sheet Shareholders Fund 58,881 73,158 89,271 1,09,243 1,34,907 Share Capital 857 1,014 1,014 1,014 1,014 Reserves & Surplus 58,024 72,144 88,257 1,08,229 1,33,893 Preference Share Capital 0 0 0 0 0 Minority Interest 438 330 402 488 595 Total Loans 48,230 61,398 70,400 68,400 66,400 Def. Tax Liab. / Assets (-) -5,093-6,701-6,701-6,701-6,701 Total - Equity & Liab. 1,02,456 1,28,186 1,53,373 1,71,430 1,95,202 Net Fixed Assets 45,212 50,367 57,115 67,274 76,608 Gross Fixed Assets 60,726 69,512 80,512 95,512 1,10,512 Intangible Assets 7,636 7,517 7,517 7,517 7,517 Less: Depn. & Amort. 26,276 32,996 37,247 42,088 47,754 Capital WIP 3,125 6,333 6,333 6,333 6,333 Investments 1,603 2,050 2,050 2,050 2,050 Current Assets 1,17,954 1,44,685 1,68,262 1,87,972 2,16,586 Inventories 37,866 41,559 53,266 60,888 70,828 Sundry Debtors 51,002 56,568 60,530 68,708 79,925 Cash & Bank Balances 11,892 28,940 36,848 40,758 48,215 Loans & Advances 4,558 3,444 3,444 3,444 3,444 Other Current Assets 12,637 14,175 14,175 14,175 14,175 Current Liab. & Prov. 62,312 68,916 74,054 85,865 1,00,043 Current Liabilities 45,970 54,896 58,977 67,499 77,530 Provisions & Others 16,342 14,020 15,077 18,366 22,512 Net Current Assets 55,642 75,769 94,208 1,02,106 1,16,543 Total Assets 1,02,456 1,28,186 1,53,373 1,71,430 1,95,202 Dupont Analysis Net Margin 7.5% 11.0% 11.5% 11.7% 12.5% Asset Turnover (x) 1.3 1.3 1.2 1.2 1.2 Leverage Factor (x) 1.8 1.9 1.9 1.8 1.6 RoE 17.9% 27.3% 25.0% 24.1% 24.3% Key Ratios BV/Share (INR) 137.5 144.3 176.1 215.5 266.2 ROIC 17.6% 21.1% 21.7% 21.8% 23.1% ROE 17.9% 27.3% 25.0% 24.1% 24.3% Net Debt/Equity (x) 0.6 0.4 0.4 0.3 0.1 P/E (x) 36.5 21.3 18.9 16.0 13.0 P/B (x) 5.5 5.2 4.3 3.5 2.8 EV/EBITDA (x) 17.6 14.0 12.1 9.9 8.2 EV/Sales (x) 3.0 2.6 2.4 2.0 1.7 Debtor days 133 127 125 123 123 Inventory days 98 93 110 109 109 Creditor days 124 134 136 138 139 JM Financial Institutional Securities Limited Page 3
History of Earnings Estimate and Target Price Date Recommendation Target Price % Chg. Recommendation History 27-Nov-16 Buy 750 27-Jan-17 Buy 750 0.0 2-May-17 Buy 925 23.3 1-Aug-17 Buy 950 2.7 31-Oct-17 Buy 950 0.0 29-Jan-18 Buy 935-1.6 JM Financial Institutional Securities Limited Page 4
APPENDIX I JM Financial Institutional Securities Limited (formerly known as JM Financial Securities Limite d) Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. Board: +9122 6630 3030 Fax: +91 22 6630 3488 Email: jmfinancial.research@jmfl.com www.jmfl.com Compliance Officer: Mr. Sunny Shah Tel: +91 22 6630 3383 Email: sunny.shah@jmfl.com Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. Sell Price expected to move downwards by more than 10% Research Analyst(s) Certification The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein. JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the investor. JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies) covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services. JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to, or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in, it may have potential conflict of interest at the time of publication of this report on the subject company(ies). Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014. The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report. The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report. While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. JM Financial Institutional Securities Limited Page 5
The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time. This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction. This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions. Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala (ruchir.jhunjhunwala@jmfl.com) on +65 6422 1888 in respect of any matters arising from, or in connection with, this report. 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In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to JM Financial Securities. This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report. Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. 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