FY20 debt reduction, profit target a tough ask for UPL: Analysts

UPL has lost more than 9 per cent in two trading sessions because of a weaker-than-expected September quarter performance. Ebitda growth of 11 per cent year-on-year failed to impress the Street as it would become tough for the company to hit the FY20 target of 16-20 per cent. The operating profit miss was mainly because of the gross margin contraction led by adverse product mix, geographical challenges, and currency movement. The key disappointment at the net profit level was led by a higher-than-anticipated forex loss and tax rate.

Among its key geographies, Europe continued to disappoint on the back of adverse market conditions (French legislation, Brexit, declining sugar beet prices, and weather) which affected growth. Growth in the region, which contributes 12 per cent to overall revenues, was restricted to just 1 per cent over the year-ago quarter. North America had its share of challenges. Weather conditions coupled with trade tensions impacted soy acreage. North America and rest of the world sales (combined contribution of about a fourth to overall) declined 4 per cent year-on-year. It was left to Latin America to do the heavy lifting in the quarter. The geography reported sales growth 24 per cent year-on-year. Sales in India also saw some recovery, registering revenue growth of 6 per cent.

Expectations of the Street on growth and synergy benefits post Arysta acquisition have remained high. However, with first-half disappointment, the Street sentiments have taken a beating. Analysts say that Ebitda growth of 11 per cent was supported by Arysta synergy gains of Rs 190 crore. Analysts at Antique Stock Broking now peg the cost synergy benefits at $50/100 million (versus guidance of $80-100/$200 million) in FY20/FY21, respectively.

The company has maintained its guidance of achieving synergy benefits and 16–20 per cent Ebitda growth during FY20 despite the miss in the quarter. Analysts, however, feel that implied Ebitda growth of about 25 per cent during the second half may be a tough ask. Analysts are pruning their FY20 estimates. Motilal Oswal Financial Services cut its profit estimates by 13 per cent and 6 per cent for FY20/FY21. High debt remains a key concern because the Arysta acquisition, with net debt to equity ratio rising from 0.4 times in FY18 to 1.8 times in FY19, they add. 

The company has guided for debt reduction by $500 million during the second half of the current financial year. Experts, however, remain watchful given the challenges the company’s up against on the operational front, especially in the first half of FY20. Analysts at IIFL say that the company’s guidance target looks challenging, particularly the debt reduction goalpost.