Currency depreciation in Europe and Latin America shaved 11 percentage points off of growth, while price increases contributed one percentage point. Photo: Pradeep Gaur/Mint
Shares of UPL Ltd fell by 3.22% on Monday after it reported a substantial slowdown in revenue growth. Against the Street’s estimate of 11% growth, and its own growth a year ago of 14%, revenue in the September quarter increased by just 5%. Cumulatively, revenue in the first half of the fiscal year rose by 8%, compared with 13% a year ago.
The company’s performance got affected by two factors. Adverse foreign currency movement was one. Excluding the exchange rate impact, sales would have risen 15%. But currency depreciation in Europe and Latin America shaved 11 percentage points off of growth, while price increases contributed one percentage point.
Secondly, sales declined in Europe. Revenues from the region fell by 10% as dry weather advanced harvests, reducing the scope for agrochemicals usage. According to the management, demand for insecticides was lower. The situation may remain tough for the rest of the year. The company expects the European market to remain flat or report a decline in growth. Last fiscal year, 17% of UPL’s revenue came from Europe. Other markets that are clouding its growth outlook are India and the US.
In India, inventories are accumulating. If low moisture and water levels in the reservoirs actually affect sales, business in India can slow further in the rest of the year. In the US, the company is facing headwinds from lower crop acreages and fewer episodes of insect attacks. India and the US together generated two-fifths of UPL’s revenue last fiscal year.
Despite these pressures, the company has maintained its full year revenue growth forecast of 12-15%. But this excludes the currency impact. “We maintain 12-15% growth based on volume and price increases. Currency is one (factor) we cannot predict,” the management told analysts. The company expects new products to aid growth in Brazil.
While that could comfort investors, tough market conditions and currency volatility are risks to its performance. Inventories are rising and working capital requirement has gone up by 7.5% in the first half of the current fiscal year. As a result, short-term borrowings rose sharply compared with March, and over the year-ago quarter.
As the winter crop season gathers pace, the management expects some of these pressures to ease. But that projection is based on stable second half. If the market situation deteriorates further, the building up of pressures can affect the company’s debt and interest costs.
While the first half has been a disappointment, stabilization of the agrochemical market is crucial for revival of the stock, which has lost 16% in the last three months.
The writer does not own shares in the above-mentioned companies.