UPL shares crash 10% to hit 52-week low after weak Q3 results; brokerage see more downside

Shares of UPL Ltd crashed sharply, about 10 per cent, during the early trading session on Monday after the agrochemical player reported a loss in the December 2023 quarter. The brokerage firms have slashed their target prices sharply and are downgrading the stock after the disappointing performance from the counter.

Agrochemical major UPL reported a net loss of Rs 1,217 crore for the third quarter that ended December 31, 2023. It had posted a net profit of Rs 1,087 crore in the corresponding quarter last year. Its revenue from operations tumbled 28 per cent to Rs Rs 9,887 crore in Q3FY24 against Rs 13,679 crore in the year ago period.

The Q3 revenue and EBITDA continued to be impacted by global channel destocking and ongoing pricing pressure in the post-patent space, exacerbated by higher rebates. The company witnessed sharp erosion in the EBITDA margin to 4.21 per cent in the third quarter against 22.2 per cent in the year-ago period.

UPL’s 3QFY24 results were sharply weaker than expected, with price erosion, rebates and high-cost raw material inventory driving a large net loss. The outlook remains challenging: a recovery will take a few quarters and be very gradual, while balance sheet leverage has ballooned amid the plunge in EBITDA, said Kotak Institutional Equities.

"We now estimate an EPS loss of Rs 18.3 for FY2024. Thereafter, while we build in a margin recovery in FY2025, we expect revenue growth to remain modest at only 2 per cent for the year. We cut FY24E-26E EPS by 47-167 per cent," it added while downgrading to stock to 'sell' with a revised target price of Rs 390, signaling a downside risk of 27 per cent of its previous close.

Shares of UPL tanked 9.65 per cent to Rs 482 on Monday, hitting its 52-week low, following the announcement of results. The company was commanding a total market capitalization of less than Rs 37,750 crore. The scrip had settled at Rs 533.50 in the previous trading session on Monday. The stock is down over 37 per cent from its 52-week high at Rs 780, hit in February 2023.

UPL again posted disappointing results with persistent losses, much below estimates. Gross margin erosion of 1,670 bp to 36 per cent wiped out Ebitda by 86 per cent YoY to INR4.1bn while rising interest cost, forex losses and lower operating leverage led to a net loss of Rs 1,200 crore, said Nuvama Institutional Equities.

""Though margin pressure—amid falling RM prices and higher discounts to collect payments—shall subside in FY25, we see a risk of credit rating downgrades and pressure on the balance sheet. UPL has plans to raise money through a rights issue, but we are downgrading the stock to 'reduce' given near-term risk, it added with a revised target price of Rs 486 from Rs 718 earlier.

However, JM Financial remains positive on the stock, despite a flop show in December 2023 quarter. The extremely weak earnings was driven by higher rebates given to distributors and product returns, and liquidation of high cost inventories, it said.

Going forward, inventory rationalisation is unlikely to be repeated given the company will be entering FY25 on a low cost inventory basis. Going forward, price normalisation will be gradual given inventory destocking has not yet subsided. There is a possibility of normalised performance from 2QFY25, said JM Financial.

"Given no operating cash flows and working capital increase, net debt has risen further to $3.7 billion. The company expects to bring net debt down to $2.5 billion via higher collections in 4QFY24 and capital-raise opportunities at platforms," it added. JM has trimmed its target price to Rs 650 with a 'buy', factoring in 3QFY24 results and commentary and on account of value unlocking.

 

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