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MOSL: UPL (Neutral)-LATAM continues driving overall growth; Big miss; leverage remains a concern

UPL: LATAM continues driving overall growth; Big miss; leverage remains a concern

(UPLL IN, Mkt Cap USD6.6b, CMP INR596, TP INR630, 6% Upside, Neutral)

 

• performance below expectations: Revenue (including Arysta) rose 91% YoY to INR79.1b (our estimate: INR81.9b) in 1QFY20. However, on a like-to-like basis (i.e., including Arysta in 1QFY19), revenue was up 7% YoY (volume growth: 5%, price growth: 1% and exchange gain: 1%). Reported EBITDA was up 47% YoY to INR12.5b (our estimate: INR18b; +11% YoY on a like-to-like basis). Adj. PAT declined 13% YoY to INR4.9b (our estimate: INR8.1b).
• LATAM continues leading growth; India/Europe drag: LATAM revenue grew 25% YoY - the fourth straight quarter of 25%+ YoY growth. However, India/Europe revenue declined by 8%/3% YoY owing to delayed/weak weather conditions. Consol. gross margin was hurt by lower revenue contribution from the relatively higher-margin European business. Synergy benefit was USD20m on revenue front and USD18.6m on cost front.
• Key concall takeaways: (i) Maintained guidance of 8-10% revenue growth and 16-20% EBITDA growth for FY20. (ii) Debt increased by INR7.95b QoQ due to USD90m payout on account of increased working capital in Arysta and USD13-14m payout for Biopen, an acquisition in Costa Rica.
• Valuation view: We cut our earnings estimate by 2%/9% for FY20/21 to factor in higher depreciation and interest cost. High debt remains a key concern owing to the Arysta acquisition (significant rise in net D/E from 0.4x in FY18 to 1.8x in FY19). We value the stock at 14x FY21E EPS (~10% discount to its five-year average trading multiple, mainly due to its highly leveraged balance sheet). Our TP of INR630 implies a 6% upside. Maintain Neutral.