Buy UPL, target Rs 1,220: HSBC

HSBC has maintained buy recommendation on UPL with a target price of Rs 1,220.

"We maintain our buy rating a target price of Rs 1,220, which implies about 28 per cent upside," said the brokerage.

Shares of UPL closed 8.51 per cent down at Rs 869.6 on 20 June, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.


Investment rationale:

Soyabean demand and pricing is likely to remain under pressure due to as-yet unresolved US-China trade tensions, events like ASF and rising US exports to EU and other countries, which might keep Brazil price premiums in check, unlike in 2018.

China soya-bean imports are down around 25 per cent YoY (Sep 18-May 19) and imports from Brazil are now falling (9 per cent lower YTD 2019). Despite high US-China tensions, soyabean premiums have not widened, indicating weakness in demand.

USDA estimates US inventory at 27mt as of end-2018/2019 season (up 125 per cent YoY and versus five year average) and 113mt of production in 2019/2020. In the event of non-resolution of a trade deal, and even with an expectation of normalising exports, inventory would still be more than 20mt next year, which would not augur well for a recovery.

Our global agro-inputs team estimates a 30 per cent reduction in pork production in China could lower global soyabean demand by approximately 4 per cent if not substituted (which is unlikely), equating to around 17 per cent lower China demand. This could be added pressure and, if played out, could dent a pick-up in Brazil soyabean exports for rest of the year.

Soyabean pesticide consumption forms approximately 55 per cent of the Latin America market and assuming no substitution lower China demand could lead to an approximately 7 per cent decline in Brazil soyabean exports. However, this translates to only about 3 per cent reduction in LatAm soyabean pesticide consumption on our estimates.

UPL derives approximately 35 per cent of its revenues from Latin America and the brokerage expects the impact of lower China demand to be non-material.

UPL has a strong growth profile in Latin America in times of crisis, led by market share gains. Thus, lower prices could be a silver lining given farmers’ preference for high quality and low priced products, where UPL has an advantage.

In addition, trade tensions could cause pesticides imported from China to become expensive in the US due to higher tariffs, potentially benefiting Glufosinate-based products, which would be positive for UPL’s herbicide portfolio in US.

However, any resulting global slowdown due to trade tensions could be a risk both to the industry and UPL’s growth outlook.