Moneycontrol Research
Highlights
- Decent operating numbers (ex-Arysta), driven by healthy growth in LatAm and Europe
- Profitability hit by recurring PBT loss from acquisition inventory write-down and transaction costs
- Higher debt load following the takeover leads to higher interest costs
- Domestic business saw muted growth due to erratic monsoons
-------------------------------------------------
Post the big-ticket acquisition of Arysta Lifesciences last year, United Phosphorus Limited (UPL) reported a subdued set of results for Q4 of 2018-19. While operating performance (ex-Arysta) was healthy, consolidated numbers took a hit.
Key positives
- Excluding Arysta numbers, UPL reported a 15 percent YoY growth in top line, driven by 26/18/13 percent growth in revenue from LatAM/Europe/North America, respectively. Operations in India and RoW (rest of the world) grew 7 percent and 2 percent, respectively.
- Higher revenue prior to the takeover was driven by 7 percent annual increase in volumes, aided by 5 percent uptick in realisation and 3 percent gains from the exchange rate.
- While there was some disruption in raw material supply from China, LatAm reported a healthy growth. The growth in LatAm was driven by strong growth in Sperto and Unizeb products.
- Sugar beet portfolio and higher fungicide sales following wet weather in South Europe pushed up the overall top line from Europe.
- The year saw rise of working capital due to spot purchases of raw materials from China. According to the management, working capital is expected to go up further in the current year.
- Despite the ongoing trade war, the performance in North America gained traction, mostly driven by healthy sales in the herbicide portfolio.
Key negatives
- Sharp uptick in raw material cost, along with forex losses and write-offs in depreciation and amortisation, pushed down the quarter’s profitability substantially.
- The burden of higher debt in the wake of the Arysta acquisition bumped up interest costs to nearly Rs 140 crore. However, after the repayment of debt at the UPL level, overall interest cost dropped 1.2 percent YoY to Rs 400 crore.
- The quarter’s profitability was impacted by recurring PBT loss from Arysta’s acquisition costs.
- Domestic business saw a muted growth with a mere 4 percent YoY uptick in revenue due to erratic rainfall in the last monsoon season.
- High inventory accumulation in North America is a point of concern for upcoming quarters.
- Drought-like conditions in Australia too impacted performance in the region.
Other comments
- Of the total $3 billion debt, UPL has swapped USD 1.5 billion in euro and USD 400 million in yen, which is expected to reduce the cost of borrowings by ~150 bps. This is favourable as UPL has substantial presence in both Europe and Japan after the acquisition.
-The management has guided for 8-10 percent revenue growth in FY20 for the combined UPL business with 16-20 percent of EBITDA growth.
- According to the management, working capital days are expected to be 100-110 days.
-The management expects this merger to bring revenue and cost synergies of Rs 350 crore and Rs 200 crore, respectively, in the next three years.
Outlook
UPL shares have seen a noticeable rally in the past few months, trading close to the 52- week high. The scrip has gone up almost 45 percent from its 52-week low and is now trading at 18x 2020e price to earnings.
The operating performance (ex-Arysta) during the quarter appears decent and costs arising out of the Arysta merger have impacted net profit. We expect performance to improve owing to an attractive line-up of product portfolio.
However, the company has substantial exposure to various geographies. Anomalies related to weather conditions and exchange rates bring uncertainty to the company’s performance. While synergies from the Arysta deal will start reflecting in the performance after 1-2 years, we see expenses and higher leveraging impacting margins in the near term.
For more research articles, visit our Moneycontrol Research Page.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
