Published on 8/06/2019 10:41:11 AM | Source: Motilal Oswal Securities Ltd

Neutral UPL Ltd For The Target Rs.1,067 - Motilal Oswal

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Arysta acquisition completed – earnings momentum intact

Valuations fair and leverage rises; Downgrade to Neutral

* In-line operational performance:

UPLL’s (ex-Arysta) revenue increased 15.2% YoY (7% by volume, 5% by price and 3% by FX) to INR65.6b (our estimate: INR65.6b) in 4QFY19. EBITDA grew 17.7% YoY to INR14.3b (our estimate: INR14.4b), with the margin expanding 50bp YoY to 21.9% (our estimate: 22%). Adj. PAT grew 39.5% YoY to INR10.7b in the quarter. Other income came in lower at INR590m (v/s INR1,180m in 4QFY18), but the impact was more than offset by a lower tax rate (2.8% v/s 17.7% in 4QFY18) and a decline in finance cost (INR2.6b v/s INR4.1b in 4QFY18).

* For FY19, revenue grew 14% to INR198.7b, with the margin expanding 60bp to 20.8%. Adj. PAT increased 17% to INR26.1b.

* Key highlights of Arysta consolidation:

On incorporating Arysta’s financials (for two months, i.e. Feb-Mar’19), consol. revenue stands at INR85.3b for 4QFY19 (INR218.4b in FY19), with a margin of 16.5% (18.8% in FY19). PAT came in at INR2.1b (INR22.1b in FY19), impacted by multiple acquisitionrelated costs and the purchase price allocation impact. Management has guided for combined entity pro forma revenue of INR325b and EBITDA of INR69b in FY19, taking the full-year financials of Arysta into account. Revenue and EBITDA growth guidance for FY20 on this annualized base stands at 8-10% and 16-20%, respectively.

* LATAM continues leading growth, Australia drags RoW:

LATAM delivered growth of 26% YoY in 4QFY19 – the third consecutive quarter of 25%+ YoY growth – driven by Sperto and Unizeb. Europe (+18% YoY) and North America (+14% YoY), too, performed well. Growth in India was moderate (+6.7% YoY), while continued drought in Australia impacted the RoW business (+2.1% YoY). The performance hereon is likely to be driven by LATAM (growth estimated at 15% YoY for FY20). India prospects also appear good, with growth expected to jump from 4% in FY19 to 11% in FY20.

* Valuation view:

While the Arysta acquisition bodes well from the mediumterm 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. 


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