Company Update | Agro Chemicals
July 24, 2018
UPL
HOLD
UPL Corporation Ltd, international arm of the UPL (United Phosphorus Ltd),
CMP
`633
has entered into an agreement to acquire Arystra Lifesciences for US$4.2bn,
Target Price
`680
making it to Top 5 in the world. UPL will now have sales of US$5bn &
Investment Period
12 Months
20%+EBDITA margins (pre synergies).Transaction provides UPL a perfect
match with powerful synergies across geographies, crops and products,
Stock Info
strengthened through best-in-class manufacturing & differentiated R&D
Sector
Agrichemicals
capabilities. Acquisition is funded part by equity of US$1.2bn & Debt of
Market Cap (` cr)
32,112
Net Debt (` cr)
2,579
US$3bn. It expects Net Debt/ EBDITA of 2.5-2.7x after accounting for
Beta
1.4
synergies V/s 3.2-3.5x as of now. On EPS front, the transaction will add
52 Week High / Low
902/534
Rs10-12 in FY2020. The merger is expected to close in late CY2018 and
Avg. Daily Volume
54,588
Face Value (`)
1
early CY2019. We recommend a HOLD.
BSE Sensex
36,719
Expanded & diversified product portfolio: UPL boasts of an agrochemical
Nifty
11,085
product portfolio that is spread out across geographies and crops. The
Reuters Code
UP LL.BO
Bloomberg Code
UP LL.IN
acquisition will not only boost UPL’s product portfolio for crops where it
already has a strong presence, but also in those where it has limited presence
Shareholding Pattern (%)
(e.g. wheat, barley, nuts and a wide variety of specialty crops). According to
Promoters
27.7
MF / Banks / Indian F ls
13.8
management, Arysta has a strong presence in bio solutions (among top eight
F II / NR Is / OCBs
50.1
global players) and seed treatment (ranked fourth globally).
Indian P ublic / Others
8.4
Strengthened presence in Europe: The overseas revenue mix for UPL is tilted
Abs.(%)
3m 1yr 3yr
in favor LataM (33% of its sales) as of now; Europe contributes just 13% of its
Sensex
6.6
13.9
40.4
sales. However, post the acquisition of Arysta (for which Europe revenue
UP L
(16.3)
(27.1)
97.9
contribution is at 39% and LataM is at 36% of sales), UPL will have a more
balanced geographical revenue mix, with LataM accounting for 33-34% of
sales & Europe’s contribution rising to 24% of sales.
Cost synergies to improve: Arysta relies on contract manufacturers for raw
material sourcing from low-cost manufacturing countries like India, China
3-year price chart
and Eastern Europe. The company also almost entirely sources its AIs from
third-party manufacturers. Management has guided for cost synergies of
1000
US$100-120mn in the first year of consolidation and US$200mn annually
900
thereafter.
800
700
Key Financials
600
Y/E March (` cr)
FY2017
FY2018
FY2019E
FY2020E
500
Net sales
16,312
17,378
19,811
38,656
400
16.1
6.5
14.0
71.2
% chg
300
Adj. Net profit
1,800
2,086
2,221
2,637
200
% chg
71.3
15.9
6.5
18.7
EBITDA margin (%)
17.8
19.8
18.8
19.7
EPS (`)
35.5
41.1
43.8
52.0
Source: Company, Angel Research
P/E (x)
17.8
15.4
14.5
12.2
P/BV (x)
4.3
3.5
2.9
2.5
RoE (%)
27.1
25.2
22.1
20.1
RoCE (%)
19.1
19.8
20.3
19.0
Sarabjit Kour Nangra
EV/Sales (x)
1.9
1.8
1.5
1.4
022-39357800 Ext: 6806
EV/EBITDA (x)
10.8
9.0
8.2
6.9
Source: Company, Angel Research Note: CMP as of June 24, 2018,FY20 represents a merged
no’s
Please refer to important disclosures at the end of this report
1
UPL
Outlook & Valuations: While the acquisition of Arysta would drive significant
benefits, it would also result in a highly leveraged balance sheet for UPL.
FY2020 net D/E would jump from 0.1 to 1.9x and FY2020 net debt to EBITDA
would rise from 0.4 to 3.3x. Thus, the ROE and ROCE of the company will
come down to 22.1% & 20.3% to 20.1% & 19.0% respectively. In addition, the
EPS has come down from Rs54.1 to Rs52.0 for FY2020E, on back of the
acquisition because of the interest and depreciation expenses increasing more
than the synergy benefits, especially during first year of acquisitions. We, we
believe that the stock will given the financials, will trade lower multiples. Thus,
we recommend a hold with a price target of Rs680.
July 24, 2018
2
UPL
Research Team Tel: 022 - 39357800
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Disclosure of Interest Statement
Aurobindo Pharmaceuticals
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
Reduce (-5% to -15%)
Sell (< -15%)
July 24, 2018
3
