500% Dividends: Hidden Gem? Sow Seeds Of This Agrochemical Stock In Your Portfolio, 31% Upside Ahead

1 agrochemical stock is seen as an underapreciated gem! This would be UPL Limited, formerly United Phosphorus Limited. UPL has dipped over 22% in a year when the market was soaring to record high levels. Its 5-year gains are marginal and in single-digits up to 7% amidst the majority of indices and stocks blooming to give double-digit-to-triple-digit returns. Sensex itself has skyrocketed by 99% in 5 years, but UPL failed to do so. So why is, UPL a hidden gem and it has a huge buying opportunity to reap hefty returns in the future?

In its research note, JM Financial said, "We believe that the market is overlooking UPL's seeds business (Advanta) due to the ongoing challenges in the agrochemicals sector. The seeds business stands unaffected by inventory destocking phenomenon. As per our understanding, owing to its strong focus on R&D, Advanta has grown to become a global leader in sorghum seeds and a strong player in canola, field corn, vegetable and other seeds."

Accordingly, JM believes that UPL has just touched the tip of the iceberg with ~2-3% market share in the conventional seeds market.

In the brokerage's opinion, Advanta is likely to continue to capture market share from the top 4 players by i) expanding its product offering and geographies and ii) leveraging UPL's supply chain to cross-sell.

JM's note added, "Advanta's sales are likely to witness 15% CAGR over FY23-26E (similar to ~15% CAGR over FY16-FY23) owing to market share gains. Further, on account of EBITDA margin expansion, it could demonstrate ~18% EBITDA CAGR over the same period (~22% CAGR over FY16-FY23). We believe Advanta has strong positioning advantage (similar to Big-4 BASF, Corteva, Syngenta, and Bayer), offering end-to-end solutions to the farmer."

This enables it to use UPL's supply chain and cross-sell its seeds to farmers. The brokerage highlighted that Advanta has been witnessing strong traction in grain sorghum in Argentina, Australia, and the USA driven by its proprietary technologies.

Considering Advanta's rapid growth, JM's report added, "We value the seeds business separately and ascribe a target multiple of 18x FY26E EV/EBITDA (implying ~25x FY26E PAT). This translates to a Rs 269bn valuation for Advanta. In our view, this multiple is justified given the business has a) high entry barriers, b) large addressable market, c) the possibility of robust ~18-20% EBITDA/EPS growth over the next couple of years, and d) strong margin and return profile. (KKR had invested USD 300mn in Advanta in Oct'22 for a 13.33% stake, valuing it at INR 184.5bn (or ~17x FY'24E EBITDA))."

Because of the huge potential in Advanta, JM is optimistic about UPL share price. Its target price implies a potential of nearly 31% upside in UPL going forward.

JM's note added, "We now value the seeds business separately, ascribing a target multiple of 18x FY26E EV/EBITDA (owing to strong entry barriers, large TAM, possibility of continued strong growth, and robust margin profile), valuing it at INR 269bn. In our view, CMP seems to be valuing this business only at Rs 120bn (or 8x FY26E EBITDA). We reiterate BUY with Mar'26 TP of Rs 730."

UPL is a dividend-paying stock. It has a good track record of rewarding its shareholders for the last 5 years. In 2023, the company paid 500% dividends amounting to Rs 10 per share. Currently, it has a dividend yield of 1.8%.

On BSE, UPL shares are just at Rs 558.70 apiece. Its market cap is at Rs 42,687.22 crore.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.