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UPL's Q1FY20 results (Outperformer) - Decent show amidst tough macro; maintains FY20 guidance

Q1FY20 result highlights 

• Despite tough global environment , UPL continued to outperform global peers driven by robust growth in Latam
• UPL’s Q1FY20 revenues  registered 7% growth to Rs79bn ( in line with our est) led by 5% volume growth
• Among key geographies, Latam witnessed strong growth of 25            %yoy, while North America and RoW grew by 6% and 7% respectively, revenues from India and Europe were declined by  3% yoy  and 8% yoy respectively on account of adverse weather conditions
• Cons EBITDA (excluding PPA adjustments) grew by 11% to Rs16.5bn  (above our est of Rs15.7bn). EBITDA margins expanded by 50bps to 21% ( est: 20%) driven by US$18.6m cost synergies
• Net debt up by Rs7.95bn qoq; mgt cited higher WC investment and residual payments for recent M&A transactions. Maintained guidance for Rs31-35bn reduction in net debt March’20
• FY20E guidance: Management maintains its guidance for revenue growth of 8-10 % (assuming FY19 base of Rs325bn for combined entity) and EBITDA growth of 16-20% (assuming FY19 base of Rs69bn)

Impact on financials: Cut FY20 / 21 EPS by 15.5 %/ 7.5%  to largely factor in updated non-cash charges related to Arysta transaction

Valuations & view

UPL’s strong Q1 operating performance versus peers combined with FY20 EBITDA / net debt guidance for the merged entity underlines our significant value creating potential of the UPL-Arysta combination. While the strategic rationale for the business has been fairly apparent, market has been apprehensive on the execution aspects. UPL management’s ability to meet/ surpass most of the initial guidance on the merger in a relatively small timeframe underlines their strong execution capability and adds further comfort on the long term outlook of this business. We are particularly enthused by Rs31.5-35bn net debt reduction guidance in FY20 as it can significantly de-lever the balance sheet by FY21 and address the primary investor concerns on this transaction and drive a further re-rating of the business. Maintain Outperformer with a target price of Rs706(15x FY21E).