Nov. 11, 2019
> The worry is that the slowdown will keep competitive pressures high, hurting UPL results and derailing debt reduction plans
> Operations in India were weighed down by untimely and excess rains
When UPL Ltd announced the $4.2 billion Arysta LifeScience Inc. acquisition last year, investors cheered the move as the move was expected to catapult the company into the big league. The acquisition was debt-funded. Benefits from the combined reach of the two companies were projected to pay for the incremental debt within a stipulated time, making the acquisition earnings-accretive for investors.
One year down the line, that plan is under threat. The stock has fallen 8% since its September quarter results were announced. It showed a sharp slowdown in the agro-chemicals company’s key business markets. Revenues grew only 1% in Europe and fell 1% in North America. Growth in the Indian market stood at 6%, while sales in the rest of the world dropped by 4%. The only region that did well was Latin America where revenues increased 24%, helping UPL end the quarter with an overall sales growth of 11%.
Operations in India were weighed down by untimely and excess rains. North America sales were hit by floods, early snowfall and reduction in corn acreages. Tough market conditions intensified pricing pressure, hitting realizations. So while volumes grew by 15%, revenue grew only 11%. Gross margins moderated on a year-on-year basis, due to the price erosion. “UPL faced pricing pressure led by correction in raw material cost and intense competition in few key products," analysts at Antique Stock Broking Ltd said in a note.
And, contrary to expectations of a reduction in debt, the company’s indebtedness has seen a notable build-up. Net debt rose by 9.3% from March this year. The worry is that continued slowdown will keep competitive pressures high, hurting UPL’s earnings performance, and derail its debt reduction plans further.
In an earnings call with analysts, the UPL management maintained its sales and operating growth guidance of 8-10% and 16-20%, respectively, for the current fiscal year. It also plans to reduce debt by $500 million in 2019-20, helped by business recovery in the second half of the fiscal year and a pullback in working capital needs.
While the commentary will reassure investors to some extent, much depends on the business recovery in North America and the overall competitive landscape. “Despite the miss in performance this quarter, UPL is confident of achieving the expected synergies driven by 16-20% Ebitda growth in FY20E. However, we believe implied Ebitda growth of about 25% (in H2) is a tall ask; hence, we are pruning FY20 Ebitda by 4%," analysts at Edelweiss Securities Ltd said in a note to clients.