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MOSL: UPL (Buy)-On a firm footing in North America-Changing crop mix and favorable positioning to augur well

UPL: On a firm footing in North America; Changing crop mix and favorable positioning to augur well

(UPLL IN, Mkt Cap USD6.6b, CMP INR899, TP INR1035, 15% Upside, Buy)

 

The North America - a key market for UPLL - is the third largest agrochemical market after LATAM and Europe. North America contributed 18% to UPLL's annual revenues, while it contributed 23% to revenues in 4QFY18. Further, 42% of UPLL's total revenue from North America in FY18 was realized in 4Q.  In this report, we analyze the North American agrochemical market and crop mix from UPLL's perspective. We also met UPLL's management to better understand the company's position in North America (primarily the US), outlook for ongoing season and update on the Arysta consolidation. Key highlights from the analysis and management interaction:

• The acreage in the US is likely to shift towards maize/cotton from soybean owing to high closing stock of soybean. This should augur well given that maize constitutes 24% of the total agrochemical market in North America v/s soybean's share of 15% despite similar acreage in both crops.
• Glufosinate is the highest revenue contributor for UPLL in North America. Since glufosinate targets crops that constitute 66% of the total acreage in the US (maize and soybean), therefore growth is likely to be driven by glufosinate-based products.
• The integration of Arysta with UPLL is on track with a likely integration cost of USD40-60m, spread out over FY20. So far, transaction cost (legal fees, etc.) of INR1,520m has been incurred in 9MFY19.
• The integration would aid in realizing cost synergy of USD100-110m in the first year (FY20) and thereon, an additional USD100-150m per year. Further, revenue synergy to the tune of USD350-400m is expected over a period of three years.