UPL
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+1.95 (+0.28%)
NSE Volume
7.2L+
Broker Reports
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UPLL’s results were significantly ahead of our estimates driven by (1) focus on improving product mix for higher margin and differentiated products (2) higher than anticipated shift in geographical mix headed towards more profitable regions like India and Europe. LATAM revenue declined 16% YoY due to order postponement (close to the season) and some delays in supply chain thereby shifting sales from Q1 to Q2. North America’s revenue declined 14% as buying resorted to pre-buying in 4Q, amidst COVID uncertainty. India business grew 27% driven by strong market demand. Expanding cost leadership status across product lines, integration related synergistic benefit on raw material cost and savings in SG&A expenses will likely continue to drive margin expansion for UPL. We roll forward to Sept’22 earnings, increase our EBITDA/APAT estimates by 5%/3% for FY21 & 8%/8% FY22 to factor in higher than anticipated benefit on gross margins & reduction in SG&A expenses. UPL continues to be among the most attractive stock in the global agchem space (Peer comparison in Exhibit- 2). Maintain Buy with revised target price of Rs 606 (Previous Rs 498) based on 7x Sept’22 EV/EBITDA (Implied P/E 11.5x)
BUY
We have upgraded our topline/EBITDA/APAT by 3%/3.6%/11% for FY21E and 2.6%/0.6%/5.8% for FY22E but lowered our target price from Rs542 to Rs497 based on 7.0x FY22E EV/EBITDA (implied P/E on TP- 11x) due to lower than expected debt reduction (considering perpetual bond as part of debt). UPL continues to be among the most attractive stock in the global agchem space (Peer comparison in Exhibit- 2). Maintain Buy. UPL results were marginally better than our estimates with topline/EBITDA/APAT growth of 31%/48%/44% YoY (PLe 26%/46%/33%). However, results cannot be compared with Q4FY19, as it included only 2 months of Arysta’s financials. In FY20 (on like to like basis) UPL clocked a commendable 13%/18% growth in Topline/EBITDA and reduced working capital by ~25 days. But miniscule reduction of Rs11bn in net debt was disappointing (considering perpetuals as part of debt) and total net debt (incl perpetual) stands at Rs249bn v/s Rs260bn as on FY19. While UPL will continue to do well with 8% topline CAGR we expect North America, Asia and Africa to be growth drivers in FY21. Management’s visibility on reduction in raw material and fixed cost coupled with accelerated growth in North American business gives us confidence of a possible 70-100 bps margin expansion in FY21. We expect net debt reduction of ~Rs24bn each in FY21E and FY22E resp but Net debt: Equity & Net Debt: EBITDA of 1.3 & 3.0 in FY21E and 1.1 & 2.4 in FY22E (considered perpetuals as part of debt) are key monitorables.
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Maintaining Buy on relative stability in CPC sector We maintain Buy on Indian CPC MNC UPL with our reduced TP of Rs484 (+62.6% from CMP) on account of long term prospects in UPL Arysta portfolio and immunity of the farm chemicals sector from the COVID 19 related disruption. We have cut our TP by 31.2% based on 8.4%/8.6%/14.5% cut in FY20E/FY21E/FY22E EPS and have valued UPL on a lower PE of 10.3x vs. 14.5x earlier after rolling over to FY22E - to account for potential balance sheet related risks (due to the high leverage) and persistent increase in working capital. The prospects for reducing the leverage depend heavily on potential synergy benefits from the Arysta merger, which we have built into our FY21-FY22E. Our stress valuation model based on lower growth and margin assumptions implies a valuation of Rs394, which still offers 32% upside from CMP. Key catalysts are (i) potential growth in volume in Europe, US and Emerging Markets (EM), which coupled with merger synergies will likely improve margins (ii) reduction in net debt/EBITDA, which is likely to address concerns about excessive leverage and ratings (iii) Gradual increase in RoE from 12.5% in FY20E to 18.7% in FY22E and (iv) stock trades at compelling valuation of 6.3x PE on our base case and 7.8x PE under stress assumptions on FY22E.
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UPL results were a beat vs NBIE and the street – Adjusted PAT came in at Rs7.76bn vs our estimate of Rs4.2bn and Blomberg estimate of Rs7.4bn. Gross margin came in line at 42%. EBITDA margin was a beat at 23.6% vs 3QFY20E of 18.5%. We have raised earnings by 23%/6% for FY20E/FY21E. We maintain Buy based on 29.7% upside from CMP to our revised PE-based TP of Rs704 (up 2.6%). Key catalysts: i) potential improvement in margins and cash flows from higher value products as well as Arysta merger synergy to support 40.5% EPS CAGR over FY20- 22E ii) likely easing of working capital pressures and reduction in net debt/EBITDA ratio from 6.82x in FY19 to 2.05x by FY22E, which should address concerns over the debt overhang iii) Attractive FCF yield of 12.1% on FY22E and iv) stock trades at attractive valuation at 11.2x PE on Sept21E EPS post the 9.6% correction over the last one month. This gives comfort on potential risk to the chemical business posed by China disruption from the corona virus.
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UPL’s topline growth of 81% YoY @ Rs 89 bn (PLe Rs 94.7 bn) and APAT growth of 41% @ Rs 7.8 bn (PLe Rs 7.8 bn) was driven by LatAM (up 21% YoY) & India business (up 42% YoY) and integration & cost control benefits on employee cost and other expenses. UPL continues to gain significant market share in Brazil (across Corn, Soy, Cotton, Cane and plantation crops), North America and India (certain segments). UPL’s capabilities in manufacturing and outsourcing are progressing well to increase its competitiveness. It has maintained its topline, EBITDA and debt reduction guidance for FY20 as the growth momentum is expected to continue in 4Q. Globally, the company is emerging as a reliable partner in manufacturing for companies who are diversifying their sourcing away from China and its clout is expected to increase further if business disruption gets elongated due to Coronavirus in China. Size has changed the game for UPL and its negotiating power has increased with both vendors and clients. Maintain Buy with target price of Rs 740 based on 8.0x Sep’21E EV/EBITDA.
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The management also sounded positive on near term outlook, especially for LatAm based on (i) the delayed pick-up in sowing data for key crops and soya rust infestation and (ii) encouraging performance of UPL’s Spectro (insecticide) as well as Arysta’sClethodim (herbicide) in Brazil, a leading CPC market in the world with reported annual sales of more than US$10bn.Key concerns: (i) the recent US-China partial trade deal that may impact Brazil crops and CPC sales on the margin - however management expects higher crop exports from the US to partly offset the trade deal impact and (ii) increase in working capital, which is likely to reverse with improving business prospects in the 2HFY20.We have tweaked our TP up 3% from 665 to Rs686 based on Sept21E PE of 14.5x ( 8% discount to global peers and 4% discount to SD-1 on 5 year median) Maintain Buy based on Sept 21PE with TP of Rs686 (15.3% upside from CMP).
BUY
Despite hiccups in 1H’20, UPL is expected to sail though in 2H due to its continuous focus on resistance management, cost leadership along with proprietary/generic products, diversified presence across all crops & geographies. Size has changed the game for UPL and its negotiating power is expected to increase with both vendors and clients. Its increased clout in the market enables it to maximize revenue and profits along with gaining market share. We have introduced FY22 nos, downgraded our EBITDA & PAT estimates for FY20/21 and reduced out target EV/EBITDA multiple to 8.0x (from 8.5x) due to higher than expected share of revenue from LatAM (lowest margin contribution geography). We maintain our earnings estimates and expect revenue, EBITDA and APAT to grow at CAGR of 34%, 53% and 35% between FY19-21E. Maintain Buy with target price of Rs 740 (Previous- 752) based on 8.0x Sep’21E EV/EBITDA.
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Behemoth in the making
UPL’s FY19 annual report highlighted a) potential opportunities in Arysta Lifescience, b) its initiatives towards manufacturing key molecules and achieving self-sufficiency, c) immense growth prospects for glufosinate and its swelling product portfolio backed by strong R&D. Acquisition of Arysta Lifescience helped UPL establish as a global leader in crop protection products. The strength of UPL lies in manufacturing, proprietary off-patent & specialty products, deep marketing reach and R&D capabilities. UPL is working on building competences for expanding digital services and processes by investing in artificial intelligence tools to analyse customer needs, using robotic sensors to access real-time on-field farmer data etc. Continued focus on resistance management, cost leadership along with proprietary/generic products, diversified presence across all crops & geographies helped UPL to outperform industry growth as well as mitigate the impact of volatility arising out of trade wars and natural calamities. Maintain Buy with revise target price of Rs745 based on 8.5x FY21E EV/EBITDA (Previous – Rs752).
UPL’s FY19 annual report highlighted a) potential opportunities in Arysta Lifescience, b) its initiatives towards manufacturing key molecules and achieving self-sufficiency, c) immense growth prospects for glufosinate and its swelling product portfolio backed by strong R&D. Acquisition of Arysta Lifescience helped UPL establish as a global leader in crop protection products. The strength of UPL lies in manufacturing, proprietary off-patent & specialty products, deep marketing reach and R&D capabilities. UPL is working on building competences for expanding digital services and processes by investing in artificial intelligence tools to analyse customer needs, using robotic sensors to access real-time on-field farmer data etc. Continued focus on resistance management, cost leadership along with proprietary/generic products, diversified presence across all crops & geographies helped UPL to outperform industry growth as well as mitigate the impact of volatility arising out of trade wars and natural calamities. Maintain Buy with revise target price of Rs745 based on 8.5x FY21E EV/EBITDA (Previous – Rs752).
BUY
UPL results on track Maintain. Buy UPL has reported financials including Arysta for 1QFY20 vs UPL excluding Arysta in 1QFY19. Financials for 1QFY20 include provisions related to Arsyta deal on inventory (Rs4.2bn) that has affected gross margins, EBITDA and depreciation. The results including these adjustments have come in line with our estimates (which also include the above adjustments) at the EBITDA level. PAT has come in lower because of lower than expected other income. EBITDA margin came in lower at 15.7% vs our estimate of 17.4% on revenue reported at Rs79.1bn (beat of 8%).
BUY
UPL’s continuous focus on resistance management, cost leadership alongwith proprietary/generic products, diversified presence across all crops & geographies has enabled it to outperform industry growth plus minimise the impact of volatility arising out of trade wars and natural calamities. We maintain our earnings estimates and expect revenue, EBITDA and APAT to grow at CAGR of 35%, 48% and 29% between FY19-21E. Maintain Buy with target price of Rs 752 based on 8.5x FY21E EV/EBITDA.
BUY
We believe that some of these concerns are either premature or unsubstantiated at this stage and in any case largely priced in, following the above correction in the stock. The more pertinent concerns are related to accounting, earnings and cashflows from the Arysta business. We maintain our forecasts and upgrade our rating on the stock from Accumulate to Buy based on our TP of Rs1,129 that implies 20.4% upside from CMP.
ACCUMULATE
We believe the growth appears reasonable, given the strong global footing in a consolidating market leading to potentially higher market share and improving margins. We expect revenues to grow at a CAGR of 32.8% over FY19-21E and PAT to grow at a CAGR of 31.5% over FY19-21E. At a CMP of INR 1,016, UPL is trading at a valuation of 17.8x FY20E EPS and 15.8x FY21E EPS. We valued the company by assigning a P/E multiple of 20x on the FY20E EPS of INR 57.1 and arrived at a target price of INR 1,142.0 (potential upside – 12.4% ). We have an ACCUMULATE rating on the stock.
BUY
We have factored a synergy gain of USD 45mn and USD 70mn for FY20E and FY21E (we thus believe that with managements expectation of USD200mn synergy, there are upside risks to our estimates). UPL is expected to deliver a OCF yield of 9.9/9.1% and a FCFF yield of 7.2/6.1% in FY20E/FY21E, respectively, which lead us to assume a 10x EV/EBITDA multiple to arrive at a TP of ` 1,206 (implied P/E multiple of 13.7x FY21 EPS). We resume coverage, with a Buy rating.
BUY
Maintain Buy with revised a PT of Rs. 1,086:
UPL is better placed to benefit from globalrecovery in the agri commodity space over the next 2-3 years. UPL (ex Arysta) reported revenue and earnings growth of 14% and 10% y-o-y, respectively, during FY2019. With synergiesand integration benefits flowing through, webelieve growth momentum should accelerate further, as the acquisition will further strengthen UPL’s position in the global agri chem market. We maintain our Buy rating on the stock with a revised price target (PT) of Rs. 1,086.
UPL is better placed to benefit from globalrecovery in the agri commodity space over the next 2-3 years. UPL (ex Arysta) reported revenue and earnings growth of 14% and 10% y-o-y, respectively, during FY2019. With synergiesand integration benefits flowing through, webelieve growth momentum should accelerate further, as the acquisition will further strengthen UPL’s position in the global agri chem market. We maintain our Buy rating on the stock with a revised price target (PT) of Rs. 1,086.
NEUTRAL
While the Arysta acquisition bodes well from the medium- term growth and synergy (cost synergy of USD200m+ and revenue synergy of USD350m+ over three years) perspective, it has resulted in a significant rise in net D/E from 0.4x in FY18 to 1.8x in FY19. As a result, RoCE dipped from 19.8% in FY18 to 10.3% in FY19, and we expect it to recover only up to 12.3% in FY21. We maintain our estimates of 9%/14%/20% revenue/EBITDA/PAT growth in FY21. Moreover, the stock has run up ~85% over the last one year, providing limited room for a further upside. We, thus, downgrade the stock to Neutral, valuing it at 14x FY21E EPS (~10% discount to its five-year average trading multiple, primarily due to its highly leveraged balance sheet). Our target price of INR1,067 implies a 5% upside.
ACCUMULATE
The management was upbeat on the progress in integration with Arysta on strategy, culture and operations during the post-result analyst meet. UPL reaffirmed the targets for merger synergies, but extended the timeline for cost savings from two years to three years. We have revised our forecasts based on the FY19 results- raised earnings in legacy UPL( ex- Arysta) on the healthy growth outlook; but cut our forecast for consolidated UPL-Arysta earnings on reduced Arysta estimates. We are downgrading our rating on UPL from Buy to Accumulate on our marginally reduced TP of Rs1129/sh (0.44% cut) following the 31-49% rally in the stock over the last 6-12 months.
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Our estimateson EBITDA growth and finance cost is conservative than the management’sguidance hence there might be upside risks to our earnings projection. The downside risk to our earnings projection can come from the expected volatility that the LatAM agchem industry may see as a result of widespread swine flu in Asia & Africa and change in protein consumption mix as a consequence of that. We retain BUY recommendation with revise target price of INR 1126 based on 8.5x FY21E EV/EBITDA (Previous- 8.0x).
BUY
Indian generics agrochemicals company UPL Ltd (UPLL) is set for robust growth after the recent US$4.2bn all-cash buyout of global competitor Arysta LifeScience Inc. The Indian multinational is present across the entire crop protection chemicals (CPC) and seeds chain. UPLL caters to all categories focused on key crops and geographies, including Latin America (LatAm), its largest market. UPLL is present in 133 countries with 79% of its revenues coming from overseas markets. We forecast FY19-21E EPS CAGR of 41% for the UPLL-Arysta combine (including synergies). We initiate coverage on UPLL with a Buy rating and a target price of Rs1,134, up 24.2% from the current market price.
BUY
We remain positive on UPLL’s holistic growth prospects and maintain our estimates (revenue/PAT CAGR of 32%/19% over FY18-21) and value UPLL at a P/E of 14x (~10% discount to its three-year average trading multiple, primarily due to the highly leveraged balance sheet). Our TP of INR1,035 implies 15% upside. Maintain Buy.
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About
UPL Ltd.
NSE: UPL | BSE: 512070 | ISIN: INE628A01036 | Sector: Chemicals
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