UPL makes the right moves with mega debt retirement plan

Healthy fundamentals and expectation of a strong second half of 2020-21 cheer investors

Shares of agrochemical major UPL rallied about three per cent on Wednesday after the company successfully redeemed $410 million worth of dollar-denominated bonds before their due date of October next year.

The move is in line with the company’s earlier commitment to reduce its overall debt and is seen addressing one of investors’ key concerns. The company is on track to meet its guidance of reducing overall debt by $700 million in the current financial year, say analysts. Last quarter, UPL said it had reduced its gross debt by Rs 770 crore (about $100 million).

“We expect UPL to generate free cash flow of Rs 3,800 crore (approx $500 million) in FY21 and help the company repay its debt to the tune of $675-700 million (vs guidance of $700-750 million),” says Aditya Jhawar, research analyst at Investec Securities. Jhawar says, the company also has elevated cash reserves of Rs 8,000 crore, a significant portion of which could be used for debt repayment, as per the management.

Expectations of a strong operational performance in the second half of 2020-21 are also adding to the optimism. “UPL expects strong demand in H2 driven by record crop prices across regions and market share gains in key regions such as Latin America, North America, Asia among others,” said brokerage firm Phillip Capital in a recent note.

 

Continued traction in the seeds business as well as pick up in Bio-solutions segment post Arysta integration are seen aiding growth, the note added.

Stock valuations, too, remain favourable at current price. At 6 times its FY22 estimated enterprise value to EBITDA, the 5th largest global agrochemicals maker trades at a steep discount of 40 per cent to its 5-year historical average.

However, the valuation discount is mainly on account of recent events regarding governance issues. Although, the management has clarified its position on each instance, the frequency and nature of issues have kept investors cautious.

“We believe that the multiple corporate governance issues faced by the company recently are fully discounted in the price and at current valuations the stock presents a good opportunity to accumulate on the back of expectations of robust second half, debt reduction and strong traction across key geographies,” said Avinash Gorakshakar, Head of Research, Profitmart Securities.

Those at Edelweiss Securities say, given UPL's strong business fundamentals and solid global franchise, we maintain 'buy' with target price of Rs 615.