Maintain ‘buy’ on UPL with price target of Rs 745

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Published: November 9, 2019 3:19:02 AM

UPL mgmt is confident of achieving FY20e outlook at 8-10% sales, 16-20% EBITDA growth and debt reduction of Rs 3,150-3,500 crore.

UPL, UPL PPA, EBITDA, UPL mgmt, UPL consolidated gross, APATGross margin was impacted Y-o-Y by change in regional mix (higher Lat-Am sales).

Choppy near-term; robust long-term; FY20e outlook intact; retain: ‘buy’ UPL posted Q2 comp. sales/EBITDA growth at +11% Y-o-Y each, with op-margin at 19.7% (15.8% in Q1). Gross margin was impacted Y-o-Y by change in regional mix (higher Lat-Am sales). Post PPA (mainly depreciation), APAT stood at Rs 390 crore. Exceptional loss of ~Rs 300 crore dragged RPAT.

UPL mgmt is confident of achieving FY20e outlook at 8-10% sales, 16-20% EBITDA growth and debt reduction of Rs 3,150-3,500 crore. B/S: UPL’s consolidated gross / net debt as of Sept’19 stood at Rs 308bn / Rs 289bn. Net debt demonstrated an increase of ~Rs 25bn from Mar’19, of which Rs 7.5bn was towards exchange impact. Also, business seasonality warrants working capital (short term debt) to peak during Q2, Q3 and then notably drop in Q4. Mgmt. maintains its FY20e outlook for deleveraging at ~$500mn.

Synergies: With Arysta integration, the mgmt. envisages synergies over years 1/3 as follows (1) Revenue at $100/350+mn and (2) Cost at $100+/200+mn. In Q1, UPL attained $20mn in revenue synergies and $18.6mn in cost, wherein non-personnel savings stood at $10.6mn. In Q2, the company achieved ~$27mn in cost synergies.
Outlook Intact: UPL mgmt has maintained its FY20e outlook i.e. sales growth of 8-10% (FY19e base of Rs 325bn), EBITDA growth of 16-20% (FY19e base of Rs69bn), capex of Rs20bn (~50% for intangibles such as registrations), debt reduction to the tune of Rs31.5-35bn and net w.capital at 100-110 days.

Manufacturing; capex: Combined base stands at 48 plants (35 of UPL & 12 of Arysta). While UPL is focused on low-cost manufacturing of complex AI’s and formulations, Arysta embarks upon an asset light model aided by outsourcing. For FY20e, UPL mgmt expects capex outlay of ~Rs20bn (Rs12.5bn towards tangibles and the rest towards intangibles like product registrations).

Estimates; Buy: Factoring weaker profitability in Q2, we trim our FY20e EPS by ~4%. We retain our target PE at 16x i.e ~10% premium to the stock’s five year historical average. Maintain ‘buy’ with PT of Rs 745.

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