UPL's debt reduction plan likely to fall short of target; stock rises

The UPL stock gained 17 per cent, spurred by a stellar show in its core markets of India and Latin America (Latam). Its proposal to cut debt, coupled with further synergy gains from the Arysta acquisition, contributed to the rise.

UPL is planning to raise funds to refinance $550 million (Rs 4,000 crore) of debt. Net debt at the end of the December quarter stood at Rs 29,654 crore.

Moody’s views the proposed issuance as credit positive for the company, given it will help achieve its debt reduction target by March 2020, and reduce leverage (net debt to operating profit) to below the 3.5x level, which is the downgrade trigger. Given that the funds raised will be a combination of debt and equity, analysts expect debt to reduce by $275 million. 
 

Amit Agarwal of Nirmal Bang Institutional Equities says the net debt to operating profit ratio following the issue will fall from 4.47x to 4.1x in the current financial year, and to 2.8 per cent in FY21. Investors, however, will have some misgivings as net debt will be reduced by only 50 per cent, says the brokerage firm. 
 

Half the issued instruments are considered as equity, which will entail a dip in return on equity. These two aspects seem to have taken some sheen away from a cheerful December quarter for the firm, says Agarwal.

Operating performance in the quarter was led by the Latam market, which posted its sixth straight quarter of more than 20 per cent year-on-year growth. This was on account of crop protection sales for soybean, as well as market share gains in sugarcane and cotton. The Indian market was another bright spot, growing 42 per cent driven by favourable conditions (Rabi crop), new launches, and high-value herbicide sales.

Both markets are expected to do well, going ahead. Close to 55 per cent of revenues comes from these two markets.

On the issue of Coronavirus, the management indicated that the impact on the company would not be significant, given that most of UPL’s manufacturing footprint is based in India.

Supply opportunities could, however, emerge in North America (13 per cent of revenues) as customers look for alternative suppliers to overcome disruptions in supplies from China.