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Debt reduction on track
* UPL reduced net debt by ~USD900mn in Q4FY20. This implies a ~USD500m reduction in net debt in FY20, given a rise in debt by ~USD400mn in 9MFY20. UPL refinanced USD400mn as perpetual debt in Feb’20, which is now excluded from net debt calculations and hence, UPL reported USD1.3bn reduction in net debt vs. USD900mn in our model.
* Our back of the envelope calculation suggests that UPL’s working capital stood at 108days as of March’20, above our estimate of 120days. Given liquidity challenges that could emerge due to Covid-19, we maintain our conservative WC assumption of 120days for FY21/22.
* We believe that with global agri acreages up 2-4% across geographies, demand for agriinputs should remain resilient. This is corroborated by strong revenue performance of global peers in Q1CY20 (Bayer AG: +6.1% yoy, BASF SE: +6.4% yoy).
* Merger synergies are on track. Our EBITDA margin estimates of 22.1%/22.5% for FY21/22 are conservative, considering 466bps improvement in Q3FY20 EBITDA at 23.7%. We maintain Buy, with a TP of Rs500 (based on 7x FY22E EV/EBITDA) and OW in our EAP.
Commentary from global peers points to resilient demand
UPL’s global peers (Bayer AG, BASF AG and ADAMA) have indicated that demand for agro chemicals is intact despite Covid-19-related challenges. Q1CY20 results for Bayer (+6.1% yoy) and BASF (+6.4% yoy) point to a resilient demand environment.
Gross debt flat yoy, net debt declines
UPL’s gross debt was flat at ~USD4.2bn in FY20 but net debt declined by ~USD500mn to USD3.3bn. UPL has USD875m in cash. We believe that with a possible threat to liquidity due to Covid-19-related disruptions, UPL will not prepay its gross debt. Hence, we increase our gross debt assumption for FY21 but our net debt assumption remains unchanged. We marginally decrease our FY20/21/22E EPS by 4%/2%/2%, primarily due to a rise in interest cost, offset partially by higher other income on the higher cash balance. UPL has USD500mn bonds due for repayment in Oct’21 and hence, UPL will not prepay gross debt in FY21.
Possible rating upgrade in FY22?
As per Moody’s rating rationale, it could upgrade UPL’s credit rating if leverage below 2.5x net debt/EBITDA on a sustained basis. Our estimate of adj. net debt/EBITDA of 2x for FY22 could possibly trigger a rating upgrade in FY22. (Refer to exhibit 11 & 12 on page 6)
Key risks are: Adverse weather, regulatory risk, supply-chain disruptions and forex.
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