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UPL's Q2FY20 results (Outperformer) - In-line;H2 to be significantly stronger

Q2FY20 result highlights 

• Despite tough global environment, UPL continued to outperform global peers driven by robust growth in Latam. UPL’s Q2FY20 revenues  registered 11% growth to Rs78bn ( slightly above our est of Rs75bn) led by 14% volume growth
• Among key geographies, Latam witnessed strong growth of 24%yoy, while revenues from India and Europe grew by 6% and 1%, however North America and RoW were declined by  1% yoy  and 4% yoy respectively on account of adverse weather conditions
• Cons EBITDA grew by 11% to Rs15.3bn (in line with est of Rs15bn). EBITDA margins  remained flat to 19.7% ( est: 20%) driven by US$27m cost synergies achieved in this quarter
• Net debt up by ~Rs24bn over March’19 due to forex impact (Rs7.5bn), Rs9.6bn one-time payments and inventory build-up. Mgt maintained guidance for Rs31-35bn reduction in net debt by March’20 driven by seasonal reduction in NWC and higher OCF generation in H2.
• Maintains FY20E guidance: Mgt 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)
• FY20E guidance is fairly doable - Performa FY19 nos for combined entity indicate that H2 accounted for 56% / 58% of revenues / EBITDA. Our FY20E est (corresponding to lower end of mgt guidance) imply 11% /15% yoy revenue / EBITDA growth in H2. Notably, In H1, the company has delivered 9% /11% revenue / EBITDA growth despite significant macro challenges.

Impact on financials: No change in earnings estimates

Valuations & view

UPL management’s success in delivering reasonably strong revenue / profitability growth in H1F20 despite adverse macro environment and the challenges involved in integrating two large global businesses, underlines their strong execution capability and enhances comfort on the long term outlook of this business. Mgt has maintained its FY20 guidance. Successful execution of the Rs31.5-35bn net debt reduction guidance in FY20 will significantly de-lever the balance sheet 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).