Buy: Well positioned for more outperformance

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Securities and Capital Markets (India) Private Limited View HSBC Global Research at: https://www.research.hsbc.com   UPL is likely to sustain earnings growth momentum and continue to positively surprise the Street, in our view  We are especially bullish on LatAm, where there are signs of robust growth in FY17e and structural growth in next 3-5 years  We raise our PE-based TP to INR785 (from INR645); UPL remains one of our high conviction picks within the sector Earnings can continue to surprise on the upside, in our view. UPL shares have risen c35% in the past six months. The key investor question now is whether UPL can continue its strong earnings growth. Our detailed region-by-region analysis in this note shows that UPL’s outperformance vs. global peers should continue in FY17-19e. LatAm and India remain key to growth. We see robust better-than-industry growth for UPL in LatAm and India, which account for c55% of sales and nearly 75% of sales growth. We are especially bullish on LatAm for four reasons. 1) We expect the overall planting area to rise c3% in the 2016-17 harvest season due to weak currencies encouraging exports and Argentina recently abolishing export taxes. 2) Brazil’s cultivated area could expand by 2-3% p.a. in the long term as the country has huge pastures that could be converted for agricultural use. 3) UPL’s key product Unizeb (25-30% of LatAm sales), which tackles Asian Rust disease, is part of a booming category. We estimate Asian Rust is a USD2bn market and has the potential to more than double in value as farmers continue to seek better solutions to protect soybean crops. 4) We see opportunities for UPL in Argentina and among Brazil’s corn growers, with the extension of Unizeb for use on corn a key driver. Increased Glyphosate resistance in soybean also provides a window for UPL’s Glufosinate products in LatAm. Overall, we expect UPL to see 20%-plus constant currency growth in LatAm in FY17/18e. In India, good sowing this year has been a boon for UPL, which is well placed to gain market share from smaller players that offer largely generic products. US and Europe are important to margins. The US, Europe and Rest of World are 45% of sales but contribute 60-65% to EBITDA, by our estimates. We are confident in UPL not just sustaining but improving margins in these regions. Most of its key products – such as, Lifeline, Interline and Satellite – have 5-10% higher margins than others. UPL’s Europe sales should see much better growth post FY17e as it gradually launches cereal-related products, which are a USD5bn category in Europe. Reiterate Buy and raise TP to INR785 (from INR645). We raise our FY17/18/19e EPS forecasts by 2%/7%/9% due to higher growth assumptions in LatAm and currency benefits. Our FY17/18/19 EPS estimates are 5%/9%/12% higher than consensus, which we believe continues to underestimate UPL’s LatAm growth potential and also currency benefits. We value UPL using a target PE of 18x (was 16x) on FY17e EPS, given EPS growth expectations have increased. Downside risks: adverse currency moves and weather, and poor acquisitions.15 September 2016 MAINTAIN BUY TARGET PRICE (INR) PREVIOUS TARGET (INR) 785.00 645.00 SHARE PRICE (INR) UPSIDE/DOWNSIDE 696.30 +12.7% (as of 14 Sep 2016) MARKET DATA Market cap (INRm) 376,084 Free float 70% Market cap (USDm) 5,618 BBG UPLL IN 3m ADTV (USDm) 16 RIC UPLL.BO FINANCIALS AND RATIOS (INR) Year to 03/2016a 03/2017e 03/2018e 03/2019e HSBC EPS 30.30 38.89 48.22 58.84 HSBC EPS (prev) - 38.33 44.94 54.16 Change (%) - 1.5 7.3 8.6 Consensus EPS 29.74 37.22 44.37 52.71 PE (x) 23.0 17.9 14.4 11.8 Dividend yield (%) 0.7 0.9 1.1 1.4 EV/EBITDA (x) 14.1 11.1 9.2 7.7 ROE (%) 20.5 25.9 25.8 25.4 52-WEEK PRICE (INR) Source: Thomson Reuters IBES, HSBC estimates Alok Deshpande* Analyst HSBC Securities and Capital Markets (India) Private Limited alokpdeshpande@hsbc.co.in +9122 2268 1245 Kumar Manish* Analyst HSBC Securities and Capital Markets (India) Private Limited kmanish@hsbc.co.in +9122 2268 1238 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations UPL Ltd (UPLL IN) EQUITIES AGRICULTURAL PRODUCTS India 320.00580.00840.00Sep 15Mar 16Sep 16Target price: 785.00High: 660.85 Low: 373.45 Current: 696.30Buy: Well positioned for more outperformance  EQUITIES  AGRICULTURAL PRODUCTS 15 September 2016 2 Financial statements Year to 03/2016a 03/2017e 03/2018e 03/2019e Profit & loss summary (INRm) Revenue 134,132 167,951 193,360 219,814 EBITDA 28,280 35,690 42,539 50,008 Depreciation & amortisation -5,017 -7,001 -7,395 -7,802 Operating profit/EBIT 23,264 28,688 35,144 42,206 Net interest -6,223 -4,657 -5,517 -6,054 PBT 15,946 23,750 29,627 36,151 HSBC PBT 16,259