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Yet another quarter of strong performance by LATAM
Big miss; maintain Neutra
* Lower-than-expected operating performance: UPLL (including Arysta) reported overall revenue of INR78.2b (v/s est. INR76.3b) in 2QFY20, up 84% YoY. However, on like-to-like basis (including Arysta in 2QFY19), revenue grew 11% YoY (volume growth: 15%, price: -1%; exchange: -3%). Reported EBITDA stood at INR15.4b (v/s est. INR18.1b; +11% YoY on like-to-like basis), up 83% YoY. The miss was due to lower-than-expected gross margins, owing to product and geography mix changes. Adj. PAT was up 6% YoY at INR3.6b (v/s est. INR5.9b). 1HFY20 like-to-like revenue/EBITDA grew 9%/11%.
* LATAM sustains growth; muted show in North America, Europe and ROW: LATAM delivered revenue growth of 24% YoY in 2QFY20 – the fifth consecutive quarter of 20%+ YoY growth. However, North America (NA) and Rest of World (ROW) declined 1% and 4%, respectively, owing to competitive pressure (in NA) and severe drought conditions in South East Asia. Consolidated gross margins were dented due to (a) lower revenue contribution from Europe/US regions, which yield higher margins, (b) product mix changes, and (c) currency depreciation. According to management, cost and revenue synergy from the Arysta acquisition stood at INR1.9b in 2QFY20.
* Key concall takeaways:
(i) Maintained guidance for 8-10% revenue growth and 16-20% EBITDA growth in FY20, and
(ii) Gross debt as at Sep’19 stood at INR309b v/s INR293b in Mar’19; UPLL maintains its debt reduction guidance of USD500m in FY20.
* Valuation view: Factoring in the miss to our earnings estimates in 2QFY20, we have cut our annual PAT estimates by 13%/6% for FY20/FY21. High debt remains a key concern owing to the Arysta acquisition; significant rise in net D/E from 0.4x in FY18 to 1.8x in FY19. We value the stock at 13x FY21E EPS (~15% discount to its five-year average trading multiple, primarily due to its highly leveraged balance sheet) and arrive at target price of INR553. Maintain Neutral.
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