Considering that farmers use agrochemicals throughout each agri season but pay only after harvest, the working capital of suppliers is elongated leading to lower asset turns.
We believe UPL’s acquisition of Arysta LifeScience Inc. is a move in right direction as it makes the former the world’s fifth-largest agrochemical player and releases the synergies in branding, distribution and manufacturing. In a low asset-turn sector like agrochemicals, both UPL and Arysta have the ‘right’ business models given that their EBIT margins are >12%, which is crucial to generate RoCE above the cost of capital. With the stated synergy benefits of US$200mn by FY22, we estimate UPL’s EBITDA margin to increase from 17.5% in FY19 to 21.7% in FY22E. We expect the company to report an earnings CAGR of 27.4% over FY19-FY22E and RoE in range of 14-17% (> Cost of capital) over same timeframe. Initiate with BUY and a DCF-based target price of Rs650 (14x Sept21E).
UPL has emerged a global player post its acquisition of Arysta Lifescience Inc. Considering the ongoing consolidation in global agrochemical market; we believe only the larger players will have ‘right to succeed’. They will benefit from economies of scale in manufacturing, distribution and branding. With acquisition of Arysta, UPL is world’s fifth-largest agrochemical player and we expect the resultant benefits due to synergies to be visible over FY19-22.
Considering that farmers use agrochemicals throughout each agri season but pay only after harvest, the working capital of suppliers is elongated leading to lower asset turns. Hence, it is necessary to have EBIT margin of >12% to ensure a RoCE above the cost of capital.
We expect UPL to report revenue and PAT CAGRs of 23.9% and 27.4% respectively over FY19-FY22E. RoE is also expected to remain above the cost of capital during the same period. Initiate coverage on UPL with a BUY rating and DCF-based target price of Rs650 (14x Sept21E).