Shares of Agri-input company UPL Ltd tanked more than 2 percent in Tuesday's trade after the company's disappointing March quarter performance, primarily led by a decline in post-patented product prices with ramp-up of supply from China as well as lower sales in North America.

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The stock was trading 2.31 percent lower at Rs 698.90 per share on the NSE. On a year-to-date basis, it fell 3 percent, while UPL shares were down 10 percent in the last one year. The company's market capitalisation was Rs 53,649.68 crore. The stock's 52-week high was Rs 848 and its 52-week low was Rs 607.8.

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UPL Ltd's consolidated net profit fell 43 percent to Rs 792 crore along with muted top-line growth of 4 percent for the January-March period. Revenues for the quarter, however, grew 4 percent year-on-year to Rs 16,569 crore.

Gross margin contracted 900 basis points to 40.7 percent led by provisioning for high-cost inventory and an unfavourable product mix. This coupled with management guidance of fiscal 2023-24 Ebitda growth of 8–12 percent implies pressure on realisations and inventory losses in the current scenario, posing earnings risk.

Management guides for Ebitda growth of 8–12%

For fiscal 2023-24, the management guided for revenue growth of 6–10 percent and Ebitda growth of 8–12 percent, according to analysts at Nuvama Institutional Equities. Though top-line growth will be primarily driven by volume growth as realisation may continue to soften, the brokerage sees the pressure on margins with liquidation of high-cost inventory and weak pricing environment from China.

On balance sheet, though management guided they would maintain net debt/Ebitda below 1.5 times, analysts believe that an improvement in cash flows with working capital reduction. However, given the historical track record, the brokerage argues that future cash flows may fuel further inorganic growth opportunities.

The operating performance deteriorated, down 16 percent on-year, due to liquidation of high-cost inventory, idle capacity costs Rs 2.0-2.5 billion to achieve competitive inventory position and unfavorable region mix.

Gross debt/net debt reduced to Rs 230 billion/Rs 169 billion in FY23 from Rs 258.7 billion/Rs 189 billion in FY22 (i.e. net debt reduced by $440 million as against the guidance of $ 500 million in Q3FY23.

What should investors do?

The analysts have cut their FY24/25 earnings per share(EPS) by 22/8 percent. "Even as we acknowledge the earnings risk, we anticipate a sustained improvement in balance sheet while inexpensive valuations protect downside risk," the brokerage said in a research note.

Nuvama has retained a ‘buy’ call on the stock with a target price of Rs 966 from Rs 1,024 earlier.

Factoring in UPL's weak March quarter performance, Motilal Oswal has cut their FY24/FY25 earnings by 13 percent/9 percent. The brokerage has reiterated its 'Neutral' rating with a target price of Rs 750 per share.

The company's board has recommended a dividend of Rs 10 per equity share, which is 500 percent on the face value of Rs 2 each.