Jeffries: Maintain ‘buy’ on UPLL with revised PT of Rs 745

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Updated: September 12, 2019 2:04:16 AM

UPLL has dipped 17% from its Jul'19 highs, post a sharp uptick of 70%+ from Oct'18 lows. Q1FY20, first full quarter post Arysta, was erratic as it factored PPA* effect (inventory, depreciation).

Albeit, UPL management retains its FY20e outlook of 8-10% sales, 16-20% EBITDA growth & deleveraging of Rs 31.5-35bnAlbeit, UPL management retains its FY20e outlook of 8-10% sales, 16-20% EBITDA growth & deleveraging of Rs 31.5-35bn

UPLL has dipped 17% from its Jul’19 highs, post a sharp uptick of 70%+ from Oct’18 lows. Q1FY20, first full quarter post Arysta, was erratic as it factored PPA* effect (inventory, depreciation). Albeit, UPL management retains its FY20e outlook of 8-10% sales, 16-20% EBITDA growth & deleveraging of Rs 31.5-35bn. We stay bullish on scale/product mix benefits from Arysta. Interim hiccups (leverage, capex, wcap) should be ironed out by biz synergies & accretive C/Fs. Buy.

Arysta acquisition has catapulted UPLL as the 5# largest crop protection player globally (earlier 7#), with presence in 138+ countries and employee base of 10,300+. UPLL’s TTM consolidated revenue stood at $4.7bn, with op-margin at 18.8%. Further, the combined entity holds 1,023 patents and 12,400 registrations worldwide (6,500+ of UPLL ; 5,800+ of Arysta).

Geographically, UPLL’s biz. (now including Arysta) is diversified across Latin America 35%, Europe 18%, North America 16%, India 10% and rest of world 21%. The company enjoys ~14% market share in India’s organised crop protection segment. We believe its diversified model acts as a strong moat, alleviating climatic & crop risks. Core UPL is robust in India, the US, western Europe & Australia, whereas Arysta’s stronghold includes Africa, Russia, Eastern Europe, Latin America and the Middle East.

Capitalising on Arysta, UPLL is likely to bolster its portfolio of bio-solutions and seed treatment products.

Factoring slower pace of synergy accruals, primarily in FY20e and higher PPA adjustments (mainly depreciation), we cut FY20/21/22e EPS by ~13%/5%/3% respectively. Maintain PE at 16x i.e. ~10% premium to the stock’s historical 5 year average. Maintain Buy with revised PT of Rs 745 (earlier Rs 780). Key risks: Delay in synergies from Arysta integration, higher than estimated PPA adjustments.

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