JM Financial has a buy call on UPL with a target price of Rs 780.The current market price of UPL is Rs 639.70.Time period given by the analyst is year when UPL price can reach the defined target.View of the brokerage on the companyOne-off expenses impact PAT: (i) UPL had a one-off cost of Rs 200mn for LATAM restructuring loss on dilution in Associates.
Additionally, in 2QFY19, Arysta acquisition expense was Rs 370mn.
These two resulted into a total impact of Rs 570 mn.
(ii) Other income was at Rs 320mn (-74 per cent QoQ and -58 per cent YoY).
UPL attributed this decline in other income to changes in the accounting post-transition to Ind AS.
(iii) Additionally, exchange differences impacted negatively by Rs 520 mn.
(iv) Finally, effective tax rate was higher at 29 per cent likely due to higher India sales.Other takeaways from the conference call: (i) UPL reported a constant currency growth of 12 per cent YoY in Revenue with 4 per cent growth contributed by price increase and 8 per cent by volume, (ii) LATAMs contribution to revenue grew to 41 per cent (37 per cent in 2Q18).
Excluding Argentina (which was impacted due to currency), all other key countries in LATAM reported growth with strong performance in Brazil.
UPL will push campaign in South Cone (in South America) to drive leadership in fungicide resistance management in soybean, (iii) In India, during 2Q, cotton crop was impacted due to erratic rainfall in Maharashtra and Andhra Pradesh.
However, UPL believes that water reserves in dams in Southern India are good and therefore, prospects of Rabi crop are good, (iv) UPL received 4 registrations that will result into important launches for next season, potentially providing growth avenues, (v) Europe saw a reduction in beet acreage but sales volumes were maintained due to low opening inventory, (vi) RoW growth was led by Africa on back of new product registrations, (vii) UPL maintained capex guidance of Rs 15bn for FY19 of which Rs 8bn has been incurred till date.Maintain BUY with target price of 780: We do not currently integrate Arysta into our estimates pending regulatory approvals and need for more balance sheet details.
We continue to like the derisked business model of UPL and the economies of scale.
We maintain BUY with P/E multiple of 14 and average earning for FY20 and FY21 with TP of 780.
Key risks to our estimates are 1) higher raw material costs/difficulty in passing through raw material costs resulting into margin pressures and 2) Volatility in foreign exchange.