UPL: Buyback to create more value

Promoters' stake to swell from 27.34 per cent to 29.81 per cent

When a company itself can create more value there may not be a need for the funds to be kept in the bank. Legends like Warren Buffett advocate buying back shares when the share prices trade below intrinsic value.

In the case of UPL (formerly known as United Phosphorus), earnings yield (FY16 EPS divided by current market price Rs 196), which is the return on current share price, alone is around 16% compared to the bank interest rate of 9-10%.

No wonder then that the company does not want to keep the money in the bank. It recently announced to buy back its shares at Rs 220 a share, which at the said price may bring down its cash in the banks to the extent of Rs 308 crore.

Even though it will lose some interest income, the net impact on the earnings and the share value will be far better. For instance, after this exercise equity capital of the company will come down by 3.16%. This, even after adjusted for the loss of interest income on the cash deployed for the buy back, will have net positive impact on the earnings in the region of 1%.

More importantly this exhibits that the management is more confident about the prospects of the company. After the buy back at the said price, it is estimated that the promoters holding in the company will increase to 29.81% as compared to 27.34% currently.

  "Between last buyback (completed in Dec-12) and now, the stock has got re-rated by 1 time PE. Further buy-back of shares would provide support to the current stock price and may lead to further re-rating. We maintain Buy with target price of Rs 235, which is based on 9 time FY15 EPS of Rs 26 per share)." said an analyst, who is tracking the company at Motilal Oswal Securities.  

In terms of valuations, its shares are currently trading 1.3 times its book value and mere 7.5 times estimated earnings of the FY15. At current market price, the stock is offering a dividend yield of 2%. The valuations seems quite reasonable for a company which is currently making a return on capital of about 20% and looking to grow its earnings by 20% annually over the next two years.

Market is not looking at the share prices alone, fundamentally also there are certain things that are said to be improving and leading to better prospects in the coming year. “Strong volumes and revenue growth coupled with gradual realization of synergies of DVA Agro would drive margin improvement and profit growth,” said the analyst.

Excluding currency impact, the company has plans to grow its revenues by 12-15% over the next one year. Additionally, the company is also working on the cost optimisation, which will likely lead to better margins in the coming year. It is also addressing the issues of working capital cycle as it intends to bring down its cash conversion cycle by 10-15 days to around 105 days. This will help in cash flows which will be used for reducing its gross debt.

“Debt reduction and working capital improvement are key for the company. With no major acquisition, net debt to equity should reduce from 0.5 time in FY13 to 0.1 time by FY16E (not factoring buy-back impact). Net profit CAGR (cumulative growth) of 11% over FY13-16 should improve cash flow," said Satish Mishara, analyst at HDFC Securities. Besides, the company is now looking to focus on existing international markets rather than expanding through the acquisition route, which should help in conserving cash and bringing down debt.