UPL Ltd faced a significant downturn in its stock value, plunging by 10% during early trading on a Monday, marking a new 52-week low. This sharp decline came in the wake of the agrochemical giant’s reported losses for the quarter ending December 2023. The company’s performance has led to a recalibration of expectations by various brokerage firms, with many revising their target prices downward and altering their ratings on the stock due to its underwhelming financial results.
For the third quarter of the fiscal year 2023-2024, UPL disclosed a net loss of INR 1,217 crore, a stark contrast to the net profit of INR 1,087 crore reported in the same period the previous year. Furthermore, the company’s revenue from operations witnessed a significant drop, declining by 28% to INR 9,887 crore from INR 13,679 crore year-over-year.
The financial downturn for UPL in Q3 can be attributed to several key factors, including global channel destocking and persistent pricing pressures within the post-patent segment, which were further compounded by increased rebates. These challenges led to a dramatic reduction in the company’s EBITDA margin, which fell to 4.21% during the quarter, down from 22.2% in the comparable period last year.
Analysts have highlighted the severity of UPL’s financial woes, noting the impact of price erosion, rebates, and the burden of high-cost raw material inventories, which collectively led to the substantial net loss. The road to recovery appears arduous, with expectations of a slow and gradual improvement in financial performance. Kotak Institutional Equities pointed out the alarming increase in balance sheet leverage due to the EBITDA plunge, emphasizing the company’s precarious financial state.
The projection for UPL’s earnings per share (EPS) has been drastically revised, with an anticipated loss of INR 18.3 for the fiscal year 2024. Although a slight margin recovery is expected in the fiscal year 2025, revenue growth projections remain modest at 2% for the year. Consequently, adjustments have been made to the EPS estimates for the fiscal years 2024 to 2026, leading to significant reductions ranging from 47% to 167%.
Amidst these challenges, UPL’s stock experienced a sharp decrease, falling by 9.65% to INR 482, thereby reaching its 52-week low. This downturn has significantly eroded the company’s market capitalization, which now stands at less than INR 37,750 crore. The stock’s decline of over 37% from its 52-week high of INR 780 in February 2023 underscores the severity of the situation.
Analysts at Nuvama Institutional Equities have also expressed concern over UPL’s financial health, noting the gross margin erosion and the resultant wipeout of EBITDA by 86% year-over-year. The combination of rising interest costs, foreign exchange losses, and decreased operating leverage contributed to the net loss. Although there is optimism that margin pressures may ease in the fiscal year 2025, concerns about potential credit rating downgrades and balance sheet strains persist.
Despite the overwhelmingly negative outlook, some analysts, including those from JM Financial, maintain a positive stance on UPL. They attribute the dismal Q3 performance to factors such as higher rebates to distributors and product returns, as well as the liquidation of high-cost inventories. JM Financial anticipates a potential normalization in performance by the second quarter of the fiscal year 2025, supported by a transition to a low-cost inventory basis and gradual price normalization.
With the company facing challenges in generating operating cash flows and an increase in working capital requirements, net debt has escalated to $3.7 billion. However, UPL aims to reduce net debt to $2.5 billion through enhanced collections in the fourth quarter of the fiscal year 2024 and potential capital-raising initiatives.
In light of the third-quarter results and management commentary, JM Financial has adjusted its target price for UPL to INR 650, maintaining a ‘buy’ rating. This revised target price reflects a cautious yet optimistic view of the company’s ability to unlock value and navigate through its current financial difficulties.
In summary, UPL Ltd is currently navigating through a turbulent phase, marked by financial losses, operational challenges, and a cautious outlook from the investment community. While the path to recovery appears fraught with obstacles, the company’s strategic responses to its current predicaments and potential for gradual improvement offer a glimmer of hope for stakeholders.