UPL First buyback after 8 years and future scenario
On Monday, UPL was one of the few companies in the Nifty 50 index to finish higher. The board of the agro supplies supplier authorised a repurchase of equity shares last week, amid allegations that the company's promoters are in discussions to sell it. The repurchase was authorised by the board on March 2, and the share sale reports were released the following day.
This will be UPL's first repurchase in eight years, according to Moody's Investors Service. The business last did a stock repurchase in 2014. Listed firms are increasingly using buybacks to return cash to shareholders. The IT services business is a good example.
The promoter group for UPL is not anticipated to participate in the repurchase. As a consequence, according to Moody's estimates, a successful repurchase may increase promoters' share in UPL by 50 basis points to 28.7%.
A repurchase, on the other hand, might offer support for the stock, particularly in light of the current equity market fall, assisting its valuation and the promoters' share sale discussions. It's worth noting that the repurchase price is 20% more than the stock's current market price. The Rs 1,100 crore repurchase also sends a crucial message about UPL's financial situation. It means the business is on track with its profits, cash flow, and debt reduction goals.
"In this context, a repurchase is expected as a result of the company's robust cash inflows in Q4" (FY22). In general, 80% of yearly OCF for UPL is produced in the second half of the year," Investec Securities analysts said in a report. The OCF stands for operational cash flows.
Readers may remember that UPL was plagued with debt as a result of its $4.2 billion purchase of Arysta LifeScience Corp. UPL has concentrated on deleveraging and debt repayment in the aftermath of the Arysta acquisition. UPL's readiness to perform its first buyback after the Arysta purchase suggests the firm is well on its way to debt reduction, with enough cash put aside for a buyback.
In January, UPL prepaid a number of debts. It is expected to repay additional debt in the current quarter, bringing the net debt to EBITDA excluding perpetual bonds down to less than 2 times by the end of the current fiscal year, perhaps as low as 1.9 times. Net debt to EBITDA was 2.2 times at the end of FY21, down from 3 times in FY20. Earnings before interest, taxes, depreciation, and amortisation are referred to as EBITDA.
"The buyback will be paid for with UPL's consolidated cash, which is expected to total $500 million by December 2021. "However, we estimate UPL's strong free cash flow production to allow a $500 million decrease in gross debt each year," Moody's says.
Despite the epidemic and other hurdles, UPL's steady development has allowed it to repay its debts. Revenues increased in the previous two fiscal years, and the company's performance in the first nine months of FY22 surpassed growth expectations.
For UPL, the fourth quarter of the fiscal year is often robust. The corporation liquidates inventory created in the previous quarter (9M FY22) and utilises the profits to pay off working capital debts throughout the quarter. These ideas seem to be on the right track. The company's sales growth estimate for FY22 is expected to be exceeded by the majority of analysts.
"A positive agricultural forecast in Latin America and North America (weather + robust farm commodity prices) bodes well for UPL and should assist in debt reduction," says Investec.
Of course, not everything is as it seems. Commodity prices have risen again, and supply chain limitations have resurfaced as a result of the European war. UPL may face difficulties as a result of its global presence.
Raw material price increases may drive up manufacturing costs, while supply chain bottlenecks might cause demand fulfillment challenges. Furthermore, it is unclear why the promoters desire to leave the firm after growing it into a worldwide corporation. The stock will also benefit from clarity on the stake sale and earnings performance.