On the right track. Source: Company Data; PL Research

Transcription

1 On the right track December 09, 2013 Balwindar Singh Rating BUY Price Rs170 Target Price Rs210 Implied Upside 23.5% Sensex 20,997 Nifty 6,260 (Prices as on December 06, 2013) Trading data Market Cap. (Rs bn) 75.0 Shares o/s (m) M Avg. Daily value 548 Major shareholders Promoters 28.86% Foreign 39.77% Domestic Inst % Public & Other 19.11% Stock Performance (%) 1M 6M 12M Absolute (1.4) Relative (1.9) (3.3) 29.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: UPLL.BO, BB: UPLL IN) (Rs) Dec12 Feb13 Apr13 Source: Bloomberg Jun13 Aug13 Oct13 Dec13 We met up with the Senior management of UPL to get an update on the business environment and the outlook, going ahead. Post the detailed interaction with UPL, our conviction remains intact, as UPL is treading on the right track, improving product mix, undertaking cost saving initiatives, consolidating supply chain, reduction in working capital, FCF generation and gradual reduction of debt. For FY14E, management maintained its organic top line growth of 12 15% YoY, with margin improvement of 100bps YoY. Net working capital is likely to remain rangebound within days. UPL continues to trade at attractive valuations of 7.7x/6.7x FY14E/15E earnings estimates, respectively, which is at a discount of 30 40% to its peers. With sustained earnings growth, lower working capital and gradual reduction in debt, we believe, UPL is likely to get re rated. We roll over valuations to FY15E, resulting into target price of Rs210 (previous Rs185). Focus on FCF generation and reduction in debt gradually: UPL repaid Rs4bn of debt in H1FY14, while in H2, it plans to repay almost Rs2bn. However, due to a steep Rupee depreciation witnessed in H1, net debt stood at Rs28bn in Sep 13 (compared to Rs25bn in Mar 13). Gross debt stood at Rs38bn (Rs42bn in Mar 13). UPL targets to reduce its net D/E to 0.3x (currently 0.6x) over the next two years. Management acknowledged that their focus clearly is on generating FCFF and utilizing it to reduce debt gradually. UPL s optimum cash balance is Rs8 10bn and any surplus cash will be likely used for reduction in debt. Contd 2 Key financials (Y/e March) E 2015E Revenues 76,936 91, , ,312 Growth (%) EBITDA 14,054 16,539 19,541 22,243 PAT 6,735 8,469 9,760 11,179 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2015E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Visit Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Improving working capital: UPL has been able to reduce its net working capital days significantly over the last few quarters. Net Working Capital improved by 12 days YoY to 101 days at the end of Q2FY14 compared to 113 days last year. Though much of the improvement in working capital has come through renegotiation of higher creditors days, management highlighted that this is sustainable and working capital is likely to remain in days range. Despite increasing contribution of Brazil, UPL has been able to maintain debtors days at 110 through various initiatives (increasing share of crops which have lower cycle, barter system for crops, bills discounting etc.). Focus on integration rather than acquisition: UPL completed 24 acquisitions during the last decade and has consequently emerged as a global player, with its operations across continents. With sizeable presence across geographies, UPL s focus is now on integrating and creating synergies rather than undertaking any further acquisitions. India business strong momentum to continue: H1FY14 is witnessing India business growing by 26% YoY. Widespread monsoons, coupled with timely arrival, resulted in robust kharif and also created a favourable environment for ensuing rabi. UPL continues to focus on increasing the share of branded products in India (currently 75% of sales compared to 66% of sales two years back). New inlicensed molecule, Ulala, launched in FY13, has received an encouraging response and has rampedup to Rs500m of sales. UPL expects Ulala to enter the Rs1bn esteemed category over the next two years. Exhibit 1: India Revenues India Revenues 30,000 25,000 15,000 5, % 15.0% 5.0% December 09,

3 North America Season getting off to a good start: Previously, there had been concerns of inventory pileup in the North American region as last year witnessed a delayed start to the season, resulting in inventory builtup at dealers level. However, management clarified that channel inventory levels are not threatening and UPL expects a strong season in North America this year. While industry has been growing at 56% p.a., UPL last year clocked topline growth of 15% YoY in North America. Management also highlighted their internal target of growth by at least 200bps higher than industry growth rate across all regions. Exhibit 2: North America Revenues North America Revenues 25,000 15,000 5, % 25.0% 15.0% 5.0% Europe growth likely to remain muted: Growth in Europe is likely to remain muted at 34% due to the mature nature of the industry. Exhibit 3: Europe Revenues Europe Revenues 25,000 15,000 5,000 December 09,

4 Brazil gaining ground: Brazilian agrochemicals market is worth US$10bn and has been p.a. Post the acquisition of DVA Agro, UPL has undertaken various steps to garner incremental market share (launching new molecules, extension labels, grow UPL s share of products in DVA s portfolio), drive cost synergies (consolidating Latin American supply chain with DVA, reducing overheads), reduce working capital (launch new molecules in crops which have smaller cycle, bills discounting) and reduce interest costs. Exhibit 4: RoW Revenues incl. LatAm RoW Revenues incl. LatAm 60,000 50,000 40,000 30, DVA contributed Rs11bn to revenues, while it reported losses of Rs44m in FY13. Management highlighted that DVA remains on the right track and margins have improved by bps gradually. We estimate DVA s EBITDA margins at 8 10% at the time of acquisition, while margins have currently improved to 11 12%. Guidance: For FY14E, UPL maintained its guidance of 1215% organic growth, with margin improvement of 100bps YoY. Management sounded fairly confident of achieving this guidance. Over the medium term, UPL targets similar organic topline growth, with slight margin improvement every year. Maintain earnings estimates; roll over valuations to FY15E: We maintain our estimates of Rs22.1/25.3 for FY14E/15E, respectively. We rollover valuations to FY15E, resulting in target price of Rs210 (previous Rs185). December 09,

5 Income Statement Net Revenue 76,936 91, , ,312 Raw Material Expenses 41,421 46,874 53,659 59,866 Gross Profit 35,515 44,992 51,969 58,446 Employee Cost 6,856 8,646 9,929 11,121 Other Expenses 14,605 19,807 22,499 25,082 EBITDA 14,054 16,539 19,541 22,243 Depr. & Amortization 2,924 3,537 3,916 4,361 Net Interest 2,477 2,840 3,151 3,086 Other Income Profit before Tax 8,654 10,162 12,473 14,796 Total Tax 1,514 2,032 2,994 3,847 Profit after Tax 7,139 8,130 9,480 10,949 ExOd items / Min. Int. (2,656) (1,137) Adj. PAT 6,735 8,469 9,760 11,179 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract C/F from Operations 1,620 16,985 8,897 14,898 C/F from Investing (6,599) (8,147) (4,500) (4,500) C/F from Financing (2,282) (817) (6,634) (7,527) Inc. / Dec. in Cash (7,260) 8,021 (2,237) 2,872 Opening Cash 16,712 10,190 15,482 13,246 Closing Cash 7,002 15,482 13,246 16,117 FCFF (14,971) 8, ,415 FCFE 1,531 16,190 (694) 4,415 Key Financial Metrics Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT (7.1) Balance Sheet Abstract Shareholder's Funds 41,731 46,452 54,669 64,304 Total Debt 31,475 39,270 38,270 36,270 Other Liabilities 6,956 7,972 7,972 7,972 Total Liabilities 80,162 93, , ,546 Net Fixed Assets 13,951 15,668 16,252 16,391 Goodwill 21,335 23,000 23,000 23,000 Investments 9,906 10,187 10,187 10,187 Net Current Assets 33,973 43,539 50,171 57,668 Cash & Equivalents 7,002 15,482 13,246 16,117 Other Current Assets 50,499 58,893 68,936 76,015 Current Liabilities 23,527 30,836 32,010 34,464 Other Assets 997 1,301 1,301 1,301 Total Assets 80,162 93, , ,546 Quarterly Financials Y/e March Q3FY13 Q4FY13 Q1FY14 Q2FY14 Net Revenue 22,956 28,207 24,558 23,316 EBITDA 4,042 5,372 4,566 4,259 % of revenue Depr. & Amortization 961 1, Net Interest Other Income Profit before Tax 2,348 3,374 3,019 2,420 Total Tax Profit after Tax 1,735 3,769 2,127 1,546 Adj. PAT 1,735 3,277 2,537 1,805 Key Operating Metrics Revenues growth (%) India North America Europe Rest of World December 09,

6 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 54.0% 24.6% 19.8% 1.6% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12months Accumulate : Outperformance to Sensex over 12months Reduce : Underperformance to Sensex over 12months Sell : Over 15% underperformance to Sensex over 12months Trading Buy : Over 10% absolute upside in 1month Trading Sell : Over 10% absolute decline in 1month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. December 09,