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UPL's Q4FY19 results (Outperformer) - Operationally strong; Arysta guidance intact

Q4FY19 result highlights 

• UPL’s Q4FY19 revenues and EBITDA (Ex- Arysta) were in-line, while PAT was below our estimates on higher depreciation and amortization costs. (Our Q4FY19 estimates did not factor in the 2m Arysta consolidation and hence the reported Q4FY19 nos are not comparable to our est). During Q4FY19, UPL revenues/EBITDA/PAT (ex-Arysta) increased by 15.2%/18% yoy to Rs65bn/Rs14.3bn/Rs8.6bn respectively (est: Rs64bn/ Rs14.2bn/Rs9.2bn).
• Q4 has multiple Arysta related one-offs which have adversely impacted the reported profits. Reported PAT for Q4 was Rs2.06bn.
• FY20E guidance: Management has guided 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) – ahead of est. Moreover, management expects an aggressive debt reduction of Rs31bn-35bn in FY20E. Interest cost is expected to be 3.5%.

Key positives: Strong revenue and EBITDA growth; strong guidance on consolidated revenue / EBITDA and debt reduction

Key negatives: Higher depreciation and amortization costs 

Impact on financials: Cut FY20E/FY21E EPS by 6.4%/4.5% to factor in higher depreciation and amortisation costs

Valuations & view

UPL’s strong Q4 operating performance 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 1136(15x FY21E).​