This Chemical Stock Plunges To A 3-Year Low On Disappointing Q3; Registers Loss Of Over Rs 1,200 Crore

Agrochemical giant UPL witnessed a sharp drop of over 8% in its shares, hitting a nearly three-year low of Rs 490 per share on February 5. The company's disappointing performance in the October-December quarter sent shockwaves through the market, causing it to emerge as the top loser on the Nifty 50 index.

UPL reported a net loss of Rs 1,217 crore, surpassing the street's estimate of Rs 527.80 crore and marking a contrast to the net profit of Rs 1,326 crore in the same period the previous year. The alarming dip in revenue, down by nearly 28% from Rs 13,679 crore to Rs 9,887 crore, has been attributed to a widespread slump in sales across major markets, excluding the Rest of the World (RoW) region, which managed a 12% growth.

The decline in revenue is a result of weakened demand, inventory destocking, and plummeting prices, which has left brokerages cautious about UPL's growth outlook. This dismal performance has prompted several brokerages to downgrade the stock, adding more pressure to an already beleaguered situation.

One of the key contributors to UPL's poor performance has been the sharp reduction in sales across all major markets. From a 20% drop in India to a substantial 64% decline in North America, the company faced headwinds in various regions. The only silver lining was the RoW market, which managed to post a growth of 12%.

The overall EBITDA margin took a hit, plummeting to 4.21% in the third quarter, a contrast to 22.2% in the same period the previous year. Persistent pressure on pricing, higher discounts, and forex losses played a pivotal role in this sharp erosion.

Looking ahead, UPL anticipates continued pressure in the January-March period, given the prevailing weak demand environment. The company now expects business to normalize from the second quarter of FY25, delaying the recovery timeline from the earlier projection of H2 of FY24.

In response to the disappointing results, financial experts are reevaluating their outlook on UPL. Jefferies, while reducing its price target on UPL to Rs 635 per share, has retained its "buy" call. The brokerage also slashed its FY25-26 EPS target by 13-15%, highlighting that an FY25 PE of 9x, coupled with demand recovery and inventory liquidation, would be pivotal to UPL's re-rating. Jefferies predicts a net loss not only for Q4 but also for the entire FY24.

Motilal Oswal Financial Services echoed similar sentiments, reducing its FY25-26 EPS targets for UPL by 11-23% in response to the subdued Q3 performance. The firm foresees near-term challenges for UPL due to weakness in the global agrochemical industry. This weakness stems from high inventory levels as distributors opt for need-based tactical purchases and declining agrochemical prices fueled by aggressive competition from Chinese post-patent exporters.

As of 11:10 am on the National Stock Exchange (NSE), UPL's shares were trading with an 8% cut at Rs 491 per share. The stock has experienced a decline of over 25% in the last year. Investors are closely monitoring how the company responds to the downturn and implementing strategies for a potential recovery.