Something is rotten in the state of UPL Ltd

Over the last few days, UPL has consistently been among the major losers on the street. The fall has been sharp and it has been rapid. For instance, the shares of UPL recently hit its 52-week low of Rs.618.05. The stock is now down as much as 23% in the last one month, which is a rather precipitous fall in stock price. Incidentally, UPL is one of the leading players in the business of pesticides and agrochemicals and is directly linked to the agriculture sector. UPL also has a very strong global franchise with a huge reach across Latin America.

The stock has been on a downtrend ever since it completed its buyback recently. It may be recollected that UPL bought back 13.43 million (1.343 crore) equity shares at an average price of Rs.813.92 per share. This resulted in a cash utilization of Rs1,094 crore representing nearly 99.43% of the buyback size. The strong response to the buyback indicated that there was a rush from investors to exit the stock at attractive prices. This was interpreted as ta negative signal and led to the sharp fall in the stock price.

There are no real concerns on the UPL performance front. For example, the company expects more than 10% revenue growth and EBITDA growth in excess of 12-15% in the current fiscal year FY23. This is likely to be supported by superior growth of the high-margin differentiated and sustainable solutions business of UPL.

The company is also likely to gain from the accelerated penetration in select markets apart from efficient cost and supply chain management would also reduce the funds locked in working capital cycle.
Working capital has been a major challenge for the company. It will continue to focus on optimising working capital and streamlining its funds locked in the working capital cycle.
 

This is likely to result in enhancement of the return on the capital employed (ROCE) and sharply better leverage ratios; both on the operating leverage front and the financial leverage front. The company is also committed to maintain their investment grade credit rating and recently Moody’s also maintained its current ratings.

According to the experts in the area, UPL’s strategy to expand their differentiated and sustainable (D&S) solutions offerings and the sharp focus on increasing penetration in high-growth crops segments are likely to drive growth and margins in the coming quarters. The one big risk is the high debt levels as well as the net debt levels (net of cash). This has resulted in a huge interest burden, muted coverage ratios and a high solvency risk in the balance sheet. This could result in a cut in estimates in the coming years.

The one issue that remains unresolved in the UPL case is the management issue and that is a major overhang for the company. The promoter Shroff family has been looking to exit the company once they find the right buyers. There is an ongoing dispute between the sons of the promoters and that has proved to be a major overhang for the stock. In short, the stock looks confused at this point of time and the sharp correction post the buyback exactly reflects this confusion in the minds of investors and analysts.