> Compared to a revenue synergy target of $100 million in FY20, the firm has already attained benefits worth $106 million
> Debt continues to rise, notwithstanding the focus on deleveraging
Shares of UPL Ltd rose nearly 5% in a weak market on Monday after the company reported an impressive 22% jump in operating profit in the December quarter.
Revenue grew only about 7%, weighed down by weak US and European businesses. But profit margins rose about two percentage points, thanks to acquisition synergies playing out at Arysta.
Compared to a revenue synergy target of $100 million in the current fiscal, UPL has already attained benefits worth $106 million, point out analysts at Jefferies India Pvt. Ltd. Similarly, the company already achieved cost synergies worth $76 million against the target of $80 million for the full year.
Further, the management maintained its FY20 guidance of 8-10% growth in sales and 16-20% expansion in operating profit. It aims to reduce debt by $500 million, mainly through reduction in working capital in the current quarter Q4.
“UPL will be able to reduce its debt by $500 million in FY20 given the improved Ebitda in H2FY20 led by synergies and some respite on raw material costs front, and reduction in working capital days from 120+ days to 100-105 days by end-Q4," analysts at SBICAP Securities Ltd said in a note. Ebitda is earnings before interest tax depreciation and amortization.
Even so, some analysts are cautious. Growth at the company would be modest if one excludes the synergy benefits. This indicates a weak business environment.
Second, debt continues to rise, notwithstanding the focus on deleveraging. Note that net debt as of December is 11% higher than in March 2019. “High debt remains a key concern owing to the Arysta acquisition (significant rise in net debt to equity from 0.4 times in FY18 to 1.6 times in FY20)," analysts at Motilal Oswal adds.