UPL shares emerge as top Nifty 50 loser on Tuesday on muted Q4 results; should you own it? Here’s what brokerages say

UPL shares emerged the biggest Nifty 50 loser on Tuesday, following disappointing Q4FY23 earnings released by the company on Monday. UPL share prices ended at ₹694.40 apiece, down by ₹21 or 2.94% on NSE. 

The consolidated net profit for the March quarter was recorded at 792 crore, a 42.6% year-over-year (YoY) decline. The company reported a consolidated net profit of 1,379 crore for Q4FY22.

The post-patent product prices, the increase in supply from China, and reduced sales in North America were the main causes of the subdued quarter.

The company’s consolidated revenue from operations rose by 4.5% to ₹16,569 crore from ₹15,861 crore during the same quarter previous fiscal (Q4FY22).

With a target price of ₹925 per share, global brokerage firm Jefferies has kept its ‘buy’ recommendation on UPL. It claims that due to a substantial fall in operational profit margin (OPM), it missed fourth quarter projections.

Let’s take a look at what the domestic brokerages say:

Kotak Institutional Equities

According to the brokerage’s analysis, the company’s Q4FY23 results were significantly lower than anticipated due to severe margin pressures brought on by price erosion in the post-patent product portfolio and a comeback of Chinese competition.

If industry overcapacity is not reduced, the brokerage predicts that these issues will persist for at least another one to two quarters, and possibly even longer.

“We cut FY2024-25E EPS by 16-19%, resulting in a cut to our March 2024 FV to ₹690 (from ₹830), and lower our rating to ‘reduce’,” said the brokerage in its report.

Motilal Oswal Financial Services Ltd

According to the brokerage, the company reported subdued revenue growth for the fourth quarter of fiscal year 23 of 4% YoY, which was principally driven by a drop in post-patented product prices due to an increase in supply from China and reduced sales in North America. Due to the liquidation of expensive inventory, idle capacity expenses to attain competitive inventory position, and an unfavourable region mix, operating performance declined.

“Factoring in UPL’s weak 4QFY23 performance, we cut our FY24E/FY25E earnings by 13%/9%. We reiterate our ‘Neutral’ rating with a target price of ₹750,” said the brokerage in its report.

Nuvama Institutional Equities

The report claims that the company disappointed because its Q4FY23 EBITDA/PAT decreased by 16%/42% YoY and there was only 4% top-line growth. Due primarily to provisioning for expensive inventory and an unfavourable product mix, gross margin decreased by 900 basis points to 40.7%.

This puts profitability at risk because it indicates pressure on realisations and inventory losses in the current situation, coupled with management estimate for FY24E EBITDA growth of 8–12%.

“We are cutting FY24/25E EPS by 22/8%. Even as we acknowledge the earnings risk, we anticipate a sustained improvement in balance sheet while inexpensive valuations protect downside risk. However, at current valuation of 10.2x FY25E EPS, we believe the stock protects downside risk, not to mention sustained improvement in balance sheet. We retain ‘buy’, keeping the target multiple intact at 13x with a revised target price of ₹966,” said the brokerage in its report.

Elara Capital

“FY24 may remain challenging for UPL, due to high interest rates, a sharp reduction in technical prices and subdued demand. We reduce our EBITDA estimates by 16% for FY24E & 15% for FY25E and our PAT estimates by 22% for FY24E and 13% for FY25E. We reiterate ‘Buy’ with a lower target price of ₹936 from ₹1,004 based on 7x (unchanged) FY25E EV/EBITDA, but the stock may underperform in the short term, due to near-term challenges in the global agrochemicals industry,” said the brokerage in its report. 

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