Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss

• UPL delivers higher-than-expected growth in Q3
• Oberoi Realty enters new geography
• Key budget highlights
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,780 | +203.15 (1.16%)
FII Net Sold: INR 183.60 crore

Sensex: 59,558.33 | +695.76 (1.18%)
DII Net Bought: INR 425.96 crore

Company News

UPL delivers higher-than-expected growth in Q3; What’s up and What do you need to know?

Financial Performance 

• UPL Limited delivered all-around Q3 Bloomberg Consensus Estimates beat, with Revenue / EBITDA / PAT all exceeding expectations by 11% / 6% / 13% on the back of broad based growth across the regions, barring India
• Revenue growth of 24% YoY was driven by 11% / 13% YoY growth in volumes and pricing
• Operating margins contracted for the company, by 2.5% to 21.6% owing to inflationary trends in Raw Materials and elevated fuel and freight costs
• Bottom line grew by 18% YoY to INR 9.4 Bn, driven by lower interest outgo (the company prepaid debt to the tune of INR 94 bn in Jan’22)

Business Performance 

• Top-line growth across geographies was driven by growth in volumes, which benefited from favourable pricing; India was an outlier to this trend, with numbers flat YoY
• Gross Margins improved for the company, on the back of effective Raw Material Sourcing (why don’t they do this every time 🤨, jk jk) and in-house manufacturing of key AIs despite steep RM Inflation
• The company registered its first product through its Meiji collaboration for a rice protection pesticide in India, with more such registrations planned in SouthEast Asia (for the coming quarters)
• The company’s digitisation investment stood at INR 530 Mn for the quarter, and INR 1.99 Bn for 9MFY22; UPL is building a platform to digitise entire value chain of services
• UPL’s efficient management of supply chain, enabled wider product reach amidst a challenging environment (increasing freight & fuel costs), with the company indicating limited impact in Q4, primarily on the back of increased volume performance during 9MFY22

Interesting! Going forward? 

• Based on 9MFY22 performance, and looking at rising volume / pricing trends, the company indicated in their earnings call, an expectation to outperform their earlier FY22 guidance of revenue / EBITDA growth
• UPL indicated that their net debt / EBITDA is estimated to print at below 2x by FY22 end, on the back of improving margins, and continued prepayment of debt obligations (expected to prepay ~USD350 – 400 Mn by FY22end, paid USD 125 Mn in Jan’22)
• Collaborations with Meiji and FMC have started yielding results for the company, with the initial product rollout and registration adding breadth to the offerings and will likely accentuate in the coming quarter

Nice! Final thoughts? Stock performance, valuations et al.

• Robust quarterly performance, coupled with strong industry tailwinds (globally at-least) are likely to drive financial performance in the coming quarters
• Likewise, collaborations coming to fruition (think: Meiji, FMC) ++ improved overall business performance (supply chain, working capital, gross margins) are bound to positively impact the company
• YTD the stocks up ~3.3%, with 6 month performance looking weak; the stock currently trades at 5.8x 2YR FWD EV / EBITDA, with scope for expansion, when comparing to global peers, and taking into consideration growth & returns profile?

Budget Highlights 1: 

The total budget stands at Rs. 39.45 lakh crore, here’s an overview – 

• The key requirement was to maintain balance between improving growth prospects post the pandemic and ensuring fiscal sustainability (fiscal deficit, inflation etc)
• Good news comes in the form of increased tax collections and a healthy proposed government capex, a reduced fiscal deficit and impressive growth rate
• Complaints include lack of focus on agricultural sector and fuel subsidies, miss of divestment targets and no relaxation on taxation slabs for the public
• Likewise, net-market borrowings will likely fund a whopping 67% of fiscal deficit, largely through G-Sec issuance

Numbers that hold value –

• FY22 should see a GDP growth projection of a whooping 9.2%
• Fiscal deficit for FY22 at 6.9% and FY23 at estimated 6.4% (GFD / GDP)
• Capex by GoI has been increased by 35% (to Rs. 7 lakh crore); ~2.9% of GDP
• Tax / GDP ratio to remain steady at 10.7%
• Budgeted dis-investment proceeds slashed to INR 650 Bn (for obvious reasons)
• FY23 Net / Gross borrowings remained elevated at INR 11.2 Tn / 14.3 Tn, with large dependence on G-Sec issuance

Other Key highlights – 

• The government announced the launch of sovereign green bonds, introduction of digital rupee, clean energy and providing infra status to data centres
• Major one for all your crypto lovers, was 30% tax on income generated from digital currencies (++ is its no longer illegal right?😝)

Company News

Oberoi Realty enters new geography; What’s up and What do you need to know? 

Financial Performance 

• The company posted record sales of INR 20 Bn (+2x YoY / QoQ) pre-sales, boosted by Elysian / Goregaon (know that one?), which accounted for 64% of overall sales; Overall 9MFY22 pre-sales touched INR 32 Bn,
• Oberoi’s investment in Sky City Mall / Commerz 3 and premium payment of INR 14 Bn, drove negative Free Cash Flow generation for the quarter, at INR 10 Bn
• New launches (apart from ones listed above), including Sky City (Borivali) and Maxima (JVLR) reported highest sales in a non-launch quarter, while Mulund also witnessed sales improving sequentially (+13% QoQ)

Business Performance 

• The company recorded P&L recognition for its most ambitious project (first time), 360 West, but still awaits OC for the project
• Occupancies in both office assets, Commerz 1 and 2 remained steady at ~53.5% and 97.4% respectively, with EBITDA % trending >90%
• The company is on-track with construction of new assets, including Borivali Sky City Mall (structure part likely ready by April) and Commerz 3 (70% completed)
• Mall & Hotel assets saw EBITDA % improving to 94% and 24% respectively, still below pre-Covid levels of 95-95% and 35-37% on average

Interesting! Going forward? 

• Launch pipeline for Oberoi Realty is intact for the next 12-15 months; besides Thane launch, the developer has 3 towers in Goregaon, and 2 towers in Borivali as potential launches in FY23
• The company maintained its commentary around 360 West, with sales likely once OC is received over the next 3-4 weeks

Nice! Final thoughts? 

• The company is veering away from its bread & butter (high-end sales), and launching projects in the ultra-competitive Thane market, results of which would define performance for the coming quarters
• Likewise, the a significant proportion of the office & retail annuity assets for the developer are under-construction (~42% of the GAV)
• Key catalysts in the future, to track would include bumper sales of 360 West, and limited competitive impact in Thane launch, with improved pick-up of smaller sizes

Budget Highlights 2 : some stock specific updates (finally 🙄) 

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Thursday, 3rd February: 3M, Cadila Healthcare, Gail (India), Godrej Properties, Grindwell Norton, ITC, JK Tyre, Lupin, Pfizer, PI Industries, Titan Company, GMM Pfaudler, Varun Beverages, Prince Pipes

Friday, 4th February: Astral, Bank of India, Divi’s Labs, Firstsource Solutions, IOLCP, ABFRL, Shree Cement, Tata Steel, Interglobe Aviation, Godrej Agrovet, Alkem Labs

Educational Topic of the day 

Direct Tax and Indirect Taxes

Direct taxes are paid in entirety by a taxpayer directly to the government (Income Tax, Wealth Tax, Estate Tax).

Indirect Tax is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another (GST).