For investors tired of the dreary story in agriculture and the volatile earnings of the agriculture inputs companies, UPL Ltd provided a neat escape. Geographical diversification and a strong presence in Brazil, a large market for agriculture inputs, helped the company deliver steady earnings growth even as several other listed peers struggled to maintain growth tempo. The outperformance was rewarded handsomely. As valuations expanded, the stock doubled in the last three years.
But this belief was tested last week. The stock slumped 6% last Thursday after the company unexpectedly reported muted performance for the December quarter (Q3). Revenue increased by a tepid 7%. Operating profit trailed Street estimates as excess inventories and price erosion weighed on realizations.
With the benefit of hindsight, signs of softness in growth were visible from the beginning of this fiscal year. As the adjoining chart shows, growth slowed materially from the June quarter. Cumulatively, revenue growth so far this fiscal stood at 7%, slower than 14% in the previous fiscal. The extent of challenges was under-estimated. Dry spells and delay in crop sowing leading to missed sprays impacted agriculture inputs sales in Brazil, a key market for UPL.
While troubles in the Brazilian market became apparent only in the December quarter results, the expectations are some of the summer crop sales will spill over into the current quarter, helping revenues. But sowing delays have cascading effects. Reports say that harvest delays and subdued crop prices may impact winter corn sowing this season in Brazil.
Of course, given its diversified presence, UPL should weather the turbulence in Brazil better, as reflected in management retaining the 8-10% revenue guidance for the current fiscal year. Further, UPL is better positioned on the raw material costs front, which is an emerging challenge for agrichemical companies now. Thanks to its backward integration, the firm is better placed to capture the new product opportunities and manage raw material costs better, which rose recently due to supply disruptions in China. “The Glufosinate opportunity (especially in North America) remains under-appreciated, in our view. UPL’s strong manufacturing pedigree and broad distribution puts it in a unique position to capture the opportunity from molecules going off patent as well as capacity disruptions in China,” says a note from Investec Securities.
That should please investors. But for the stock to get its mojo back, the firm should regain growth momentum, a key attribute that brought it into the limelight in first place.