UPL: Arysta LifeScience acquisition done, focus now shifts to synergies

Industry:    May, 2019

Size does not seem to worry UPL Ltd, which completed the acquisition of Arysta LifeScience Inc., bumping up its revenue base by 60%, according to analyst estimates. However, despite this, the expanded base is not coming in the way of its growth tempo.

The company has guided for 8-10% revenue growth in the current fiscal year, in line with what it has delivered in recent years.

It expects operating profit growth to rise 16-20%, driven by portfolio expansion and market reach benefits from the acquisition.

The acquisition is estimated to bring revenue benefits of $100 million in FY20, with synergies rising to $350 million in its third year (FY22). This is estimated to result in operating profit benefits of $120 million in FY20 and $200 million from FY22 onwards. Much of the earnings benefits are expected to accrue from manufacturing and procurement synergies.

Since UPL’s commentary was reassuring, the stock gained 5.5% in the last two trading sessions, taking the gains in the last one year to 44%.

Apart from the benefits of the Arysta acquisition, the stock’s outperformance also reflects the steady show of UPL. Turbulence in the domestic market notwithstanding, revenues in the last quarter grew 15%, while the full-year growth was at 14%.

According to analysts, the company implemented price hikes for the fourth consecutive quarter, indicating improvement in the international agrochemical market.

The current stock price pegs UPL’s valuation at around 14 times its FY20 earnings estimates, richer than some of its global agrochemical peers.

“In view of better growth visibility over the medium term, led by an articulate strategy emphasizing on synergies, cash flows and deleveraging, we raise our target PE multiples,” Jefferies India Pvt. Ltd said in a note. PE stands for price-earnings multiple. Analysts at Antique Stock Broking Ltd concurred, saying the Street is not fully considering the synergy benefits of the Arysta acquisition.

Even so, investors should keep a wary eye on acquisition-related synergies as well as expenses, for they will determine eventual earnings.

Reported profit in the March quarter dropped 70%, due to the acquisition-related costs. According to Edelweiss Securities Ltd, UPL will see more such expenses in FY20.

Also, acquisition debt has driven up the company’s leverage ratios. Net debt-to-equity has risen to 1.8 times at the end of FY19 from 0.4 times in FY18.

But UPL plans to repay a portion of the debt (about 300 crore) in FY20. Acquisition debt can be repaid over five years if benefits accrue as per plan, points out one estimate.

If everything goes according to plan, the company’s Arysta bet may prove to be a rewarding one for investors.