The share price of UPL cracked as much as 15% in the intraday trading session today, February 23, even as the company pitched its sweeping restructuring as a value-unlocking exercise. The sharp fall in the stocks is on the back of investor concerns about rising leverage, post-reorganisation debt levels and possible dilution outweighing the long term benefits of the overhaul.
Lets take a look at what brokerages have to say in this regard and the investment rationale guiding them –
Nuvama on UPL – What exactly is changing?
According to the brokerage report by Nuvama, “UPL Limited announced a restructuring to create a unified crop protection entity by merging UPL SAS and UPL Corp, which would be listed as UPL Global while UPL Limited shall stay the holding company for the formulation business, R&D, Superform and Advanta.”
The brokerage further noted, “The demerger aims to drive synergies and enable value unlocking.” The company has also maintained that the transaction is cash and tax neutral and does not materially alter the capital structure.
But the Street is looking beyond structure and focusing on financial risk. The stock has already seen a recent run up, and investors appear unconvinced about the pace of deleveraging after the reshuffle. Debt reduction, many analysts say, will depend heavily on future cash flows and asset monetisation.
Why Nuvama turned cautious on UPL
Nuvama has downgraded the stock to ‘Hold’ with a revised 12-month target price of Rs 816. According to the brokerage report, “Given the recent stock run-up, unresolved leverage concerns and post-restructuring dilution, we downgrade the stock to ‘Hold’ with a revised target of Rs 816/share.”
It has also changed its valuation method. “We are revising valuation methodology to reflect the Street’s likely perception of UPL Limited as a holding company post-restructuring.”
The brokerage has adopted a Sum-of-the-Parts approach, assigning different Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortisation multiples to each vertical and factoring in a 20% holding company discount.
Nuvama added, “Given limited visibility on deleveraging, which remains contingent on future cash flows, and accounting for dilution from the UPL SAS merger, we downgrade the stock to ‘Hold’.”
Motilal Oswal on UPL: Neutral, not negative
Another brokerage, Motilal Oswal, has retained a ‘Neutral’ rating with a target price of Rs 730. According to the brokerage report, the restructuring is aimed at creating two separately listed verticals – Global Crop Protection and Seeds, so that “distinct structural drivers” can be valued independently.
The brokerage believes the move simplifies the group and improves transparency. It has projected that “We expect UPL to report an annualised revenue growth of 8% and profit growth 37% over FY25-FY28.”
However, Motilal Oswal has flagged a key overhang. “Considering the uncertainty in the Holdco discount, as UPL is bound to become a holding company, we reiterate our Neutral rating on the stock with a TP of Rs 730.”
Conclusion
Even if the restructuring is tax neutral, investors are questioning whether it meaningfully reduces consolidated net debt in the near term. Plans such as the initial public offering of Advanta and possible monetisation of Superform could bring in funds, but timelines and valuations are still evolving. There are also concerns about dilution arising from mergers within the group.