UPL Ltd continues to show strong signs of growth on the power push up from Latin America. Revenues, volumes and operating profit were up 17 per cent, 23 per cent and 19 per cent, respectively, in the month of September quarter.
This significant growth of the company is driven by India and Latin America. Together, these two regions generated more than half of its sales last fiscal year.
Latin America is the clear outlier in the race among the two. Revenues are up 34 per cent. In the first two quarters they rose 26 per cent, better than the 10 per cent rise in India.
This strong show, however, failed to impress investors who drove the stock down 1 per cent on Friday. A one-time expense related to the Advanta Limited merger weighed on profit growth. Excluding this item, profit would have grown 44 per cent and led to earnings upgrades.
Nevertheless, the UPL share price is still up 47 per cent from a year ago, much better than the 10 per cent rise in the BSE 500 index. Management commentary remains optimistic. It maintained revenue growth guidance of 12 to 15 per cent and 60 to 100 basis points expansion in margins on strong prospects in India and Latin America. A hundred basis points equals to one percentage point.
The growth is again expected to be driven by Latin America, which is seeing traction in the agriculture activities. Last fiscal year, the region alone generated 32 per cent of UPL’s sales.
Rallis India Ltd, which released its second quarter results last week and exports agrochemicals to Brazil, also added that prospects are looking up in the region.
According to the market analysts, the company has been gaining market share in Brazil and expects to outperform the industry in the near term.
With the prospects for the domestic market also looking positive due to good soil moisture as well as improved groundwater levels, analysts expect the company to perform better in the second half of the financial year and possibly even beat its own revenue growth guidance.
The expectations have driven up the company’s stock and valuations in the past several months. At 16 times one-year forward earnings estimates, UPL shares are no longer cheap.
For this to continue to outperform the broader markets, profitability should maintain pace with revenue growth.
Despite low raw material costs as well as strong volumes, margins expanded less than 30 basis points in the September quarter.
While this indicates strong competition along with pricing pressures, the slow progress is weighing on earnings estimates. Better profitability can drive earnings and also maintain the out performance of the stock.
Source: www.dynamiclevels.com
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