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UPL's Q3FY20 results (Outperformer) - Strong operational performance amidst tough macro

Q3FY20 result highlights 

• Despite tough global environment, UPL continued to outperform global peers driven by robust growth in Latam. UPL’s Q3FY20 performa revenues  registered 7% growth to Rs88bn ( slightly above our est of Rs85.6bn) led by 10% volume growth
• Among key geographies, Latam and India witnessed strong growth of 21%yoy and 42%, while RoW grew by 7%, however North America and Europe declined by  12% yoy  and 27% yoy respectively on account of adverse weather conditions and US- china trade tensions
• Gross margins remained flat at 42% despite change in geographical mix ( lower contribution like US and Europe) owing to improvement in product mix
• Cons EBITDA grew by 22% to Rs20.7bn (above est of Rs18.3bn). EBITDA margins  improved by 200bps to 23.3% ( est: 21.4%) driven improvement in  product mix and  US$30m cost synergies achieved in this quarter
• Net debt up by ~Rs31bn over March’19 due to forex impact of Rs8.2bn), 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)

Impact on financials: Increase FY20E EPS by 5%. Introduce FY22E EPS of Rs57.7/share

Valuations & view

UPL management’s success in delivering reasonably strong revenue / profitability growth in 9MFY20 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).