UPL rating: Neutral — Synergies drove results in quarter

High debt a key concern for company; ‘Neutral’ maintained with target price of Rs 424

In Q4FY20, strong revenue growth was witnessed across geographies, barring Europe. On like-to-like basis (i.e. including Arysta in Q4FY19) revenue/ Ebitda a grew 26%/25% y-o-y; however, excluding synergies benefits, Ebitda stood flat during the quarter. In our view, high debt remains a key concern on the stock. Maintain Neutral.

Revenue grows across regions, barring Europe: UPL (including Arysta) reported overall revenue of Rs 111 bn in Q4FY20, up 31% y-o-y. Reported Ebitda stood at Rs 21.7 bn, up 17% y-o-y; Ebitda growth was restricted due to 300bpcontraction in gross margins to 43.9%.

However, adj. PAT declined 15% y-o-y to Rs 8.1 bn due to higher depreciation/ lower other income, offset by lower interest cost (due to forex gain of Rs 2 bn) and higher tax rate. For FY20, like-to-like revenue/ Ebitda grew 13%/18%. Revenue growth was driven by 16% volume growth, offset by 1% decline in prices and 2% forex impact.

In Q4FY20, strong revenue growth was witnessed across regions (North America: +45%, India: +36%, LatAm: 27% and RoW: +33%), barring Europe (down 2% y-o-y). According to management, for Q4FY20/FY20, cost synergy realised from the Arysta acquisition stood at Rs 2.4/7.7 bn and revenue synergies at Rs 9.5/17 bn.

Highlights from commentary
Draft proposal on banning 27 pesticides in India would not impact the export of these pesticides. FY21 guidance: Cost synergy of $150 m, revenue synergy of $200 m and capex of $260-275 m. UPL is aiming to reduce Net Debt to Ebitda to 2x by FY21 from 2.9x as of FY20.

Valuation and view
UPL’s FY20 revenue/Ebitda (like-to-like) grew 13%/18%, primarily driven by synergy benefits; excluding the same, base business’ (UPLL and Arysta; ex-synergy) operating performance remained flat. Additionally, net debt reduced by Rs 44 bn in FY20 (in line with guidance).

However, the same was achieved by issuing perpetual bonds worth Rs 30 bn. If we treat perpetual bonds as debt, then net debt has reduced only by Rs 12 bn in FY20 to Rs 250 bn. Thus, high debt remains a key concern for the company owing to the Arysta acquisition; net debt (including perpetual bond) to Ebitda still stood at 3.4x in FY20 and is likely to reduce to 2.7x in FY21. Expect revenue/Ebitda/PAT CAGR of 9%/12%/6% over FY20-22e.
We value the stock at 10x FY22e EPS and arrive at a target price of Rs 424; Maintain Neutral.