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Company update: UPL (Outperformer) - Climbing up the leadership ladder!

UPL Ltd’s US$4.2bn Arysta acquisition will be transformational for UPL, catapulting the company to the 5th largest position within the global agrochemicals space (Top 4 players are innovators), in our view. Apart from a fairly diversified revenue mix across geographies and products, the deal will hasten UPL’s evolution from pure generics into a specialty play - organically, a difficult transition, but one that would push UPL into a new growth orbit. Management sees synergy opportunities of ~US$200m in costs by FY21E and US$400-500m in revenues over next 4-5 years. We estimate UPL to post revenue, EBITDA and PAT CAGR of 30%, 39%, and 26% respectively, over FY18-21E. Debt levels should progressively reduce with estimated FCF of Rs78bn over FY20-21E with manageable net debt/EBITDA of 3.2x by FY21E-end. Maintain Outperformer with a target price of Rs1,111 (14x FY21E PER/9.2x FY21E EV/EBITDA).

A perfect match: UPL and Arysta have complementarities across geography, product portfolio and customer mix. While Arysta is competitive in R&D capabilities and new product development, UPL has core strength in manufacturing. Post acquisition, UPL will gain access to Arysta’s pipeline of patented molecules acquired through Japanese alliances. The merged entity should emerge as one of the competitive global agchem players offering significant cross-sell/up-sell opportunities across the platform.

Compelling financial case: UPL estimates ~US$200m cost synergies by FY21E, driven by COGS rationalization (35-40% of synergies) and SG&A savings (30-35% share). The company has initiated steps to realize the synergies and is positive on achieving guidance. We estimate US$50m/US$150m gains from cost synergies for FY20E/FY21E, which would drive 39% consolidated EBITDA CAGR over FY18-21E, with 24.8% margin in FY21E. Potential revenue synergies are not in our estimates.

Bigger and better: Even prior to the proposed Arysta merger, UPL was a fairly competitive global generic agchem player (9th position - 13%/19% revenue/PAT CAGR over FY14-18). The proposed acquisition will enhance UPL’s opportunity landscape, putting in place multi-year growth platform with significant value-creating potential. UPL would be highly leveraged post the transaction (FY20E net debt of Rs325bn, a key risk that we would monitor), but the high proforma FCF of the combined entity provides comfort. The acquisition will enhance UPL’s FY20E/21E earnings by Rs10/Rs19, respectively. The stock trades at 9.5x FY21E PER / 7.3x FY21E EV/ EBITDA and offers significant ~48% upside potential.