As part of strategy, UPL(formerly known as United Phosphorus Ltd) on November 23 announced the amalgamation of the group’s seed firm Advanta (UPL holds 48.4 per cent) with itself. The motto of the consolidation is to provide all-agri-solutions through one single entity and enhance shareholder value. UPL will issue 1 equity share and 3 convertible preference shares against every equity share of Advanta.
Further, holders of 100 GDRs will be issued 106 GDRs of UPL and 100 FCCBs of UPL will be issued for 100 FCCBs held in Advanta. The company will issue 77.5mn fresh equity shares and 181.8mn preference shares to Advanta’s shareholders.
Post-merger UPL’s promoter shareholding in combined entity will decline from 29.8 per cent to 27.8 per cent. The amalgamation process will roughly take about eight to nine months for the completion and consolidated annual report will be from FY2017E.
Since the beginning of the ongoing financial year, the share price of UPL and Advanta climbed 28.23 per cent and 29.17 per cent to Rs 438.15 and Rs 467.80, respectively on November 24. Benchmark index BSE Sensex fell over 6 per cent during the same period.
In the past five years, UPL registered net profit growth of 16.8 per cent annually to Rs 1,144.03 crore in 2014-15. The company posted net profit of Rs 526.16 crore in 2009-10. Advanta’s bottomline grew 25.29 per cent annually in the last five years.
According to market experts, the management of UPL has indicated that the amalgamation will bring synergetic benefits in terms of presence across value chain from seeds to post-harvest activities, increase in geographical reach, improvement in customer access, strong focus on innovative and differentiated products and cost and financial benefits, to save annually around Rs 90 crore and another Rs 240 crore as synergetic benefits. Management has also guided to reduce net debt to Rs 3400 crore (current Rs 4530 crore) by FY16.
Market experts are bullish on UPL shares post the announcement of the amalgamation. Sharekhan in a research note said, “The amalgamation of Advanta with UPL will be a synergistically beneficial deal in three to five years, and it will help both the companies to improve its operational efficiency and improve its growth prospects which will improve its cash flow and return ratios in long term. However, synergy benefits will take a couple of years to reflect at earnings level. We see the deal as supportive with re-rating trigger for UPL over medium to long term. We have our ‘Buy’ rating on the stock with an price target of Rs 550.”
Edelweiss is also bullish on UPL shares. The brokerage house said, “Our positive stance on UPL stems from its diversified agricultural business model and sharpened focus on organic growth along with strengthening balance sheet. We have not considered the impact of the merger in our estimates currently. UPL has been trading in the 6-15x P/E range over the past 5 years. We maintain ‘Buy’ ration of UPL shares with target price of Rs 560.”
UPL has 28 manufacturing facilities in 9 countries and is 11th agrochemical company globally.