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UPL's Q3FY19 results (Outperformer) - Operationally strong; Arysta closure secured

Q3FY19 result highlights 

• Consolidated revenues grew by 17.3%yoy to Rs49.2bn (est. Rs46.5bn) led by 6% volume growth, 7% price increase and 5% forex impact
• Among key geographies, Latam and Europe witnessed strong growth of 26% yoy and 37% yoy respectively , while North America and  RoW grew by 21% and 13% respectively, revenues from India declined by 21%
• GMs improved by 30bps to 54.8% Controlled growth in overheads led to 22.6%yoy growth in EBITDA to Rs10.1bn ahead of estimates of est.Rs9.3bn. EBITDA margins rose by 88bps yoy to 20.6% vs est 20%.
• Forex loss of Rs780m and exceptional charge of Rs910m related to Arysta acquisition charges impacted profitability. This coupled with higher interest cost (Rs2.2bn vs est of Rs1.7bn ) and lower other income (Rs370m vs est of Rs600m) led to 16% yoy decline in  PAT to  Rs4.7bn. Adjusted PAT stood at Rs5.5bn (est: Rs5.7bn)

Key positives: Strong revenue growth, EBITDA margin expansion; strong guidance on Arysta revenue / cost synergies

Key negatives: Higher interest costs, lower other income;

Impact on financials: Maintain our Earnings Estimates

Valuations & view

UPL continues to deliver stable operating performance through a combination of steady volume growth and tight cost control.  In FY19E, we expect UPL’s volume growth trajectory to remain strong (~8-9%), led by success from new product launches in its key markets. Moreover strong growth outlook across key exports markets in the forthcoming season and expected improvement in commodity prices in coming quarters should accelerate revenue and earnings growth momentum. In the long run, we believe the recently announced deal of Arysta life Science is a transformational one and can create significant strategic value for UPL along with potential meaningful upside (pls refer to our note highlighting the Arysta transaction details (). Overall, we expect UPL’s earnings to witness CAGR of 26% over FY18-21E led by US$50m/US$150m   gains from cost synergies for FY20E/FY21E.  Maintain Outperformer with a target price of 1,111 (14x FY21E PER).