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Market share gains and cost synergies from M&A help UPL in March quarterqrcode

May. 26, 2020

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May. 26, 2020
>  UPL aims to improve its net debt to Ebitda from three times at the end of FY20 to two times in end-FY21

>  It plans to use the cash on its books to repay debt once the current business environment stabilizes
The UPL Ltd stock has risen about 45% from their 52-week lows in March after the company reassured investors twice in April, first about the state of operations and then about its debt. But it is still down about 37% from its highs in mid-February, and has fallen much more than the 25% in the Nifty 50 index. March quarter results released after market hours on Friday should support the recovery in the stock.
On a like-to-like basis, adjusting for the Arysta LifeScience Corp. acquisition, revenues grew 26% March quarter.
Operating profit margin was more or less flat at 19.5%. But thanks to better volumes (up 29%), operating earnings jumped 25% from the year ago.
The company gained market share in some key markets. “UPL delivered 22% USD growth (26% in INR) in Q4 vs. 7.3% for five major global peers, suggesting market share gains," Emkay Global Financial Services Ltd said in a note.
A large part of the company’s earnings performance is driven by cost and revenue synergies accruing from the Arysta acquisition. Revenue synergies contributed 11% to overall growth in rupee terms, estimates Emkay Global. Excluding the revenue and cost synergies, operating earnings will likely be flat.
Even so, that is unlikely to upset investors. After all, cost synergies and leverage of combined scale were the primary motives behind the Arysta acquisition. The fourth quarter and full year FY20 results amply demonstrate these benefits.
UPL did not provide annual guidance citing business volatility in the current quarter.
But it did say it is “confident" of growing its revenue and operating earnings on a full year (FY21) basis and that further clarity may be provided in coming quarterly results. The company expects to benefit from geographical expansion, better revenue, product mix and cost reduction measures.
Importantly, it aims to further improve its credit metrics, improving net debt to Ebitda from three times at the end of FY20 to two times in end-FY21. Ebitda is earnings before interest, taxes, depreciation, and amortization. “We believe that UPL should be rerated from its 5-yr low valuations due to continued market share gains, improvement in margins on the back of synergies, and reduction in adj. net debt/Ebitda to 2.0x by FY22E could trigger a possible rating upgrade in FY22," add analysts at Emkay.
The company did not provide a specific debt reduction target for the current fiscal. It plans to use the cash on its books to repay debt once the current business environment stabilizes. This is one variable investors need to watch out for.

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