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Corporate realignment creating distinct pure-play platforms

UPLL announced a strategic corporate realignment of its business by creating distinct ‘pure-play’ platforms such as a global Crop Protection platform (UPL Cayman), an India Seeds platform (Advanta Enterprise), an India Agtech platform (UPL SAS), and other global businesses (UPLL). ADIA, Brookfield, KKR, and TPG are separately investing INR40.4b (USD500m) for minority stakes in these businesses.

* A wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA), Brookfield, and TPG will invest INR15.8b (~USD200m) for a 9.09% stake in UPL SAS, an India Agtech platform, at a valuation of ~INR173.8b (~USD2.2b), valuing the entity at 27x FY22 EBIDTA.

* KKR will invest USD300m (~INR24.6b) for a 13.33% stake in Advanta Enterprises, a Global Seeds platform, at a valuation of ~USD2.25b (~INR184.5b), valuing the entity at 26x FY22 EBIDTA.

* ADIA and TPG will hold 22.2% stake in UPL Cayman, which will be the Global Crop Protection platform (excluding India).

* These investments are independent transactions for which separate agreements have been agreed.

Net cash inflow from these transactions is ~INR20.6b (~USD259m), which the management indicated will be partly used to repay debt.

* ADIA and TPG will exit the non-Crop Protection business of UPL Corporation, i.e., the International Seeds business and other global non-Crop Protection businesses (Decco, Animal Health, and Health and Nutrition) for USD241m, valuing the entity at 13x FY22 EBIDTA.

* ADIA, Brookfield, and TPG will invest USD200m for a 9.09% stake in UPL SAS. KKR will invest ~USD300m in Advanta for a 13.33% stake. The total inflow stands at USD500m.

* Net inflow from the entire realignment exercise is ~USD259m (i.e. ~INR20.6b).

Strategic rationale for the realignment

* To create a distinct pure-play platform to accelerate growth with different investors.

* Unlocking value: To facilitate ‘fair value recognition’ of ‘pure-play platforms’ each having varied growth prospects, profitability, and capital intensity.

* To enable efficient capital allocation and resource deployment.

* To simplify the group structure by aligning the different operating business segments.

Key highlights from the realignment

Here is the breakdown of the three-pronged realignment exercise:

UPL Sustainable Agri Solutions (SAS)

* India’s largest ‘Integrated Agtech platform’ will include the India Crop Protection business, SWAL, Adarsh Farm Services, and the Nurture digital platform.

UPL Corporation

* The global Crop Protection business (excluding India) is to be transferred to UPL Cayman. ADIA and TPG will hold 22.2% stake in UPL Cayman.

* ADIA and TPG will exit the non-Crop Protection business of UPL Corporation: the International Seeds business and other global non-Crop Protection businesses (Decco, Animal Health, and Health and Nutrition) for USD241m.

* While the International Seeds business is to be divested to Advanta Enterprises, the other global non-Crop Protection businesses will continue to be fully owned by UPL Corporation.

Realignment of the Global Seeds business

* The India and International Seeds businesses will be consolidated under Advanta Enterprises, incorporated as an Indian subsidiary of UPLL. KKR will hold 13.33% stake in this entity.

The ‘corporate realignment’ exercise is expected to be completed over the next 45- 90 days, subject to the customary closing conditions and shareholder, regulatory, and lender approvals.

Valuation and view

* UPLL has a simplified the group structure by aligning operating business segments and unlocking the fair value of all these distinct pure-play entities. This is expected to result in building a focused strategy for each business.

* The expected net inflow of INR20.6b will be partly utilized to repay debt, thereby reducing the financial cost to some extent.

* After incorporating the business restructuring and debt repayment of USD200m, we largely maintain our earnings estimate for FY24.

* The net debt-to-EBITDA ratio (including perpetual bonds) is expected to reduce to 1.8x/1.1x in FY23/FY24 from 2.2x in FY22. Cash flow generation and debt repayment remain the key monitorables, amid a high inflationary environment in FY23. We maintain our Neutral rating on the stock with a TP of INR750.

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