Fundamental Analysis of UPL: Chemicals are the basic raw materials that are required for many products. Whether it’s the detergent we use, the materials that are used for the construction of our house, or the food that we eat, chemicals are involved directly or indirectly.
In this article, we shall do a Fundamental Analysis of UPL, a chemical company. We shall take a look at its business, the industry that it functions in, its financials, and its future plans. So keep reading to find out!
UPL – About the Company
UPL Limited (formerly United Phosphorus Limited) incorporated in 1969, is the largest producer of agrochemicals in India. The company manufactures agrochemicals, industrial chemicals, chemical intermediates, and specialty chemicals. Further, it produces and sells field crops and vegetable seeds.
It is the fifth-largest agrochemical company globally. With a presence in 138+ countries, it has access to 90% of the world’s food baskets. With more than 13,600 products, the company provides agricultural solutions for various arable and specialty crops. These include crop protection solutions, bio solutions, seeds, and post-harvesting services.
Other Businesses
UPL holds a majority stake in BEIL (Bharuch Enviro Infrastructure), a company that is engaged in the collection and disposal of solid/hazardous wastes from member industries in the regions. Further, CEL (Chemo Electronic Laboratory) is part of UPL’s diversification strategy.
The company is one of the largest manufacturers of toxic gas detection devices in India and the only manufacturer of chemical detector tubes in India.
Manufacturing facilities
UPL has 23 manufacturing facilities – 9 in India, 2 in Spain, 4 in France,3 in Argentina, and 1 in UK, Vietnam, Netherlands, Italy, and China. They are certified under ISO 9001 for quality assurance, 14001 for Environment Pollution Control norms, and OHSAS 18001 for health and safety.
Growth Strategy and Competitors
UPL Limited has made more than 40 successful acquisitions in the last 25 years. Its growth strategy is to acquire companies that have a significant presence in the industry. In FY19, UPL acquired Arysta Life Science which had 14 formulation plants for $ 4.2 billion.
Some of the major competitors of the company are P I Industries Ltd, Sumitomo Chemical India Ltd, Bayer CropScience Ltd, and Bharat Rasayan Ltd.
Industry Overview
UPL Ltd is a part of the Indian agrochemical industry. This industry faced headwinds in FY22, due to a sharp rise in prices of basic chemicals and intermediates global supply chain disruption, and their dependence on China for intermediates.
As a result, companies hiked prices across categories, to pass on rising input costs. However, agrochemical companies largely benefitted from price hikes and channel filing for the Kharif season. Further, the demand outlook for domestic as well as global markets remains positive given remunerative crop prices.
The industry is seeing a gradual shift from generics towards specialty/value-added products owing to higher effectiveness and increasing affordability. These products are estimated to contribute ~25-30% of India’s current agrochemical sales. The industry’s growth is estimated at a CAGR of 8% to 10 % in the next three years.
Financials of UPL
Revenue and Profitability
| Year | Revenue | Profitability |
|---|---|---|
| 2018 | 17,378 | 2,123 |
| 2019 | 21,837 | 1,561 |
| 2020 | 35,755 | 2,175 |
| 2021 | 38,694 | 3,453 |
| 2022 | 46,240 | 4,303 |
The company acquired Arysta Life science in February 2019. As a result, there was a significant increase in its market share from 17.6% to 24.6%. Further, there was a change in its financial result and financial position. Therefore the financial statements for FY 19 and prior years are not comparable to the latest financial statements.
Agri input companies faced a number of challenges in FY 2022, owing to erratic rainfall that damaged crops and impacted pesticide use during the Kharif season. Spiraling input costs due to the sharp rise in prices of basic chemicals and intermediates led to pressure on margins for agrochemical manufacturers.
However exports business fared well. The company derives 95% of its revenue from Agro Activity and 5% from Non-Agro Activity.
FY22 was the best year for the company so far with a record-high revenue of ₹ 46,240 crores, as compared to ₹ 38,694 crores a year ago. The company delivered robust growth and ended the year with the highest-ever EBITDA and net profit.
Further, its net profit increased from ₹ 3,453 crores in FY 21 to ₹ 4,303 in FY 22. Its 3 Yr CAGR sales growth (%) was at 45.52% and its 3 Yr CAGR Net Profit (%) grew at 66.03%. In general, sales and profitability have shown an increasing trend over the past three years.
UPL derives a majority of the revenue from Latin America (39% of the revenue), followed by North America (17% of the revenue), Europe (15% of the revenue), India (12% of the revenue), and the remaining 17% from the rest of the world.
Return Ratios and Debt
The company has an ideal return on equity of 16.72%. However, it has a low return on capital employed of 13.67%.
UPL Ltd acquired Arysta Life science in 2019. This was an upfront cash deal. Most of these funds were borrowed. This deal has increased the borrowings of the company from ₹ 6,665 crores as on 31st March 2018 to ₹ 29,142 crores in March 2019. Currently, its borrowings are at ₹ 6,232 crores.
The company has reduced its borrowings significantly. It has a slightly high debt-to-equity ratio of 1.19. Ideally, it should be between zero and one. However, it has a good interest coverage ratio of 4.27. This indicates that the company has the capability to pay interest on its outstanding debt.
Fundamental Analysis Of UPL – Key Metrics
| Particulars | Values |
|---|---|
| Face Value (₹) | 2 |
| EPS (₹) | 50.97 |
| ROE (%) | 16.72 |
| Debt to Equity | 1.19 |
| Current Ratio | 1.41 |
| Market Cap (Cr) | 49,922 |
| Promoter’s Holdings (%) | 28.98 |
| Dividend Yield (%) | 1.5 |
| Stock P/E (TTM) | 13.05 |
| Sector PE | 35.94 |
| Net Profit Margin | 9.3 |
The company’s shares are trading at Rs 670 levels. It is a large-cap company with a market capitalization of Rs 51,788 crores. The company’s shares are trading at a price-to-equity ratio of 13.05, which is significantly lower than the sector PE of 35.94.
Hence, the stock could be undervalued and its price may rise in the future. However, a deeper analysis is required to know the reason behind a low PE ratio.
Shareholding
The company’s promoters have a low stake of 28.96%. Interestingly, Foreign Institutional Investors (FIIs) hold a 36.44% stake in the company. Domestic Institutional Investors (DIIs) hold 16.47% and the remaining is held by the public.
Future Plans Of UPL
We took a look at the financials of UPL Ltd. Let’s take a look at the company’s future plans:
- UPL Ltd. plans to expand its research and development centers. Further, it plans to improve its infrastructure and enhance its capabilities.
- It also plans the process development of post-patent and
off-patent active ingredients, using non-infringing, cost-effective, eco-friendly, safe, economically viable processes, and employing principles of green chemistry. - Moreover, it plans to develop innovative, safe, cost-effective, non-toxic, and environmentally friendly pre-mix formulations and combinations.
- It is looking forward to continual quality improvement and cost reduction for existing products and processes.
- Further, it plans to protect the inventions and innovations in processes and products by capturing the inventions at an early stage of R&D and applying for patents.
In Closing
In this article, we took a look at the fundamental analysis of UPL. We understood that the company manufactures a variety of chemicals. Then we took a look at the industry and its functions. Later we went through its revenue, profitability, and key metrics like return ratios, debt, and shareholding. Finally, we took a look at its future plans.
That’s all for today’s reading, folks. We hope to see you around. Happy investing, until next time!
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