Holding company discount, debt are a drag on agro firm UPL restructuring

UPL shares tumble after rejig; brokerages flag holding company discount and limited value unlocking amid persistent debt overhang

The stock of the country’s largest agrochemical company UPL was down 14.25 per cent on Monday after it announced a restructuring exercise aimed at simplifying group structure and housing key businesses under separate listed entities.

 

Investors were, however, not enthused by the move given valuation concerns, debt overhang and holding company discount.

 

The purpose of the restructuring is to keep both the domestic (UPL SAS) and global (UPL Corp) businesses under one crop protection entity while separating the seeds (Advanta) and post-harvest (Decco) units into another entity.

 

Apart from this, there is the specialty chemicals business (Superform) which will be kept as a separate unit.

 

While the crop protection and seeds/post harvest entities (after Advant IPO) will be listed separately, the company is yet to take a call on the listing of the specialty chemicals business.

 

Post restructuring, the existing listed entity will become a holding company for the group and house formulations, research and development (R&D) and Superform.

 

Some brokerages believe that the restructuring fails to simplify overall structure and unlock value.

 

While the businesses are separate, overall shareholding structure remains complicated, says Elara Securities. Prashant Biyani and Yashi Jain of the brokerage believe that the move is unlikely to generate incremental value for shareholders and instead creates concerns on the holding company discount.

 

In the short term, it is a negative, as its shifts from financial discipline hopes to restructuring flaws, they added.

 

Kotak Research, too, believes that the reorganisation will not serve the purpose of value-unlocking with the chief drawback being the likely emergence of potentially large holding company discounts at UPL.

 

The share-swap ratio implies a lower valuation for UPL SAS of about ₹8,800 crore — less than half the entry price of private equity (PE) investors in 2022.

 

Further, the restructuring keeps the debt levels unchanged and this has been a key overhang on the stock. While the restructuring, according to Nuvama Research, aims to gain administrative and business synergies, thereby unlocking value, it keeps total debt similar even though redistributed between two entities.

 

Net debt in UPL Global (the crop protection entity) should be ₹19,000 crore while that in the standalone business should be ₹3,200 crore.

 

Deleveraging, according to Archit Joshi and Rohan Ohri of the brokerage, would remain contingent to cash flow generation and working capital management, which in their view is event neutral.

 

UPL plans to bring down net-debt-to-operating-profit metric to 1.2-1.5 times in the medium term compared to levels of 4.6 times in FY24 and 2.1 times in FY25. The company is slated to end FY26 with leverage of 1.6 to 1.8 times.

 

Other brokerages, however, believe that the transaction is a win-win for minority and PE holders and will help simplify structure. It would enhance strategic focus and unlock shareholder value by enabling clearer investment choices. It will offer an opportunity for existing PE investors to exit their positions.

 

Antique Stock Broking believes that the Advanta listing will be a key near-term trigger for the stock. Manish Mahawar and Riju Dalui of the brokerage expect profitable growth, sustained cash flow, and balance sheet deleveraging to be the re-rating catalyst for the stock in the medium term.

 

The restructuring will also help on the debt front, believes Motilal Oswal Research. The restructuring strengthens the group’s deleveraging roadmap, as independent platforms allow capital raises at the subsidiary level, such as the Advanta IPO, points out the brokerage.