Will this 100-bagger agrichem stock deliver this season?

• UPL is a 100-bagger that has delivered stellar returns in the last 20 years.
• Due to low inventory stocking globally and El Nino impact, the stock has given negative returns in the last one year.
• Analysts believe that a good cropping season in its biggest market Brazil can be a positive trigger.
• The stock is also undervalued and has a good run-up ahead.

Mumbai-based agrochemical company UPL has always been a rewarding stock for long-term investors. It has been named in ICICI Securities’ list of 100-bagger stocks. The stock gave 324 times returns to its investors over 20 years, indicating that its business model can stand the test of time.

Yet, in the last one year, its stock fell by 13.6% on account of global headwinds. The company derives 40% of its business from Latin America with a majority of that coming from Brazil. And the global offtake of crop protection products like herbicides and pesticides has been dull all of this calendar year.

UPL’s most important market, Brazil, has been de-growing for the first half of this calendar year. The market also saw high sales returns. In the June quarter, non-selective herbicides sales were down by 53%, the company said in its Q1 investor presentation.

Coming off a supply chain disruption phase, the company like many of its peers was also impacted by Europe banning some herbicides. Distributors have turned cautious – leading to subdued exports from all agrochem players in India.

“Globally, there has been a shift from ‘high channel inventory’ earlier (due to multiple supply chain shocks earlier) to ‘carry minimal inventory’, basis commentary from global players,” said Axis Capital.

Rising cropping acreage

Yet, there are silver linings seen recently, say analysts. Brazil’s FY24 crop season is expected to be favourable, with 5% production growth in soybean along with acreage expansion of 3% year-on-year.

“This indicates upbeat farmer sentiment, presenting a favourable setting for the higher consumption of pesticides. A good season in LatAm can act as a trigger for the re-stocking of global pesticides,” said a report by HSBC Global Research.

Moreso, the market also saw farmer profitability fall in the past few years due to lower crop prices. Generic producers (like UPL) could be preferred over innovators.

The global industry of crop protection has put pressure on prices along with volumes. They too are showing signs of stabilization. “Prices of China exports have touched previous lows of 2019, indicating a trough. And Glufosinate (a herbicide) prices are already lower than pre-Covid-19 levels and now stabilising,” says HSBC Global Research.

Inherent value to be unlocked

In spite of being affected by nature’s vagaries, UPL has remained steady. It also implemented cost optimization initiatives resulting in selling, general, and administrative expenses (SG&A) being lower by 5% year-on-year.

“Entered a new chemistry by commissioning and commencing production at the phosgene plant in Dahej during the quarter to manufacture and market phosgene derivative products. Phosgene will also be used in the group’s agchem production,” the company said in its investor presentation.

In the June quarter, it pared down its net debt by $160 million to $3.19 billion. “UPL’s balance sheet remains protected, even after assuming a drain on profitability and elevated capital requirements. Although we acknowledge that headwinds remain an overhang, with signs of stabilisation, we expect value to be unlocked in the near future,” says HSBC Global Research.

The research firm also believes that its crop protection business is undervalued and has set a target of ₹775 even as the stock is currently trading at ₹602. The only risk to this assumption however is UPL’s inorganic growth strategy.

It has grown over the years through a series of acquisitions. And, any unfavourable acquisition could lead to a valuation multiple contraction, says HSBC Global Research.