Institutional Equities UPL - Markets Mojo · Exhibit 5: Trend in innovation/new products’ share...

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Reuters: UPLL.NS; Bloomberg: UPLL IN

UPL

Leap Of Faith Indian generics agrochemicals company UPL Ltd (UPLL) is set for robust growth after the recent US$4.2bn all-cash buyout of global competitor Arysta LifeScience Inc. The Indian multinational is present across the entire crop protection chemicals (CPC) and seeds chain. UPLL caters to all categories focused on key crops and geographies, including Latin America (LatAm), its largest market. UPLL is present in 133 countries with 79% of its revenues coming from overseas markets. We forecast FY19-21E EPS CAGR of 41% for the UPLL-Arysta combine (including synergies). We initiate coverage on UPLL with a Buy rating and a target price of Rs1,134, up 24.2% from the current market price.

Key catalysts: Likely increase in herbicides’ share in Indian CPC mix, potential upside in seed business earnings, successful integration with Arysta, and healthy financials.

UPLL offers a de-risked portfolio across the entire CPC value chain with a multinational footprint across LatAm (37%), India (21.1%), North America (16%), Europe (11.5%), and Rest of the World (15.6%). Its product mix includes insecticides (25%), herbicides (29%), fungicides (26%), seeds (9%) and others (11%) covering crops including rice, wheat, cotton, soya, sugar beet, fruits & vegetables.

We see the UPLL - Arysta combine delivering proforma consolidated earnings CAGR of 41% over FY19E-FY21E based on revenue CAGR of 40.8%, and EBITDA margin at 22.8%-23.7%, assuming a normal weather and CPC usage.

We expect the RoE to be at 25.2% in FY19E, 32.5% in FY20E and 30.9% in FY21E, which compares with the last three years’ average RoE of 23.5%. This offsets the concern over the dip in Post-tax RoCE from 17% in FY18 to 10%, 12% and 13% over FY19E-FY21E. The company expects full synergies from Arysta buyout (US$350mn in revenues and US$200mn-US250mn in cost savings) to boost its EBITDA margin to 23%-24% and restore Post-tax RoCE to the pre-Arysta level over the next three years.

The stock trades at 9.5x PE and 7x EV/E on proforma FY21E for the UPLL-Arysta combine, after a 32.8% rally in stock price over the past 12 months. We have valued the stock based on: i) UPLL pre-Arysta at 15x P/E FY21E (10% premium to five-year median). ii) Arysta at 6.8x EV/EBITDA (global peer group average), including synergy benefits. Our target price implies 11.6x P/E on our proforma consolidated FY21E EPS for UPLL and Arysta combined.

Risks: i) Global cross currency movement, including US dollar, Brazilian real, and the euro. ii) Impact of weather on crop outlook/prices. iii) Crop infestation. iv) Delay and increase in costs of integrating Arysta with UPLL.

BUY

Sector: Agrochemical

CMP: Rs913

Target Price: Rs1,134

Upside: 24.2%

Milind Raginwar Research Analyst [email protected] +91-22-6273 8172

Key Data

Current Shares O/S (mn) 509.3

Mkt Cap (Rsbn/US$bn) 464.8/6.7

52 Wk H / L (Rs) 942/537

Daily Vol. (3M NSE Avg.) 1,934,766

Share holding (%) 3QFY19 2QFY19 1QFY19

Promoter 27.92 27.91 27.75

Institutions 51.46 50.96 54.47

Non-Institutions 20.62 21.13 17.78

One Year Indexed Stock Performance

Price Performance (%)

1-M 6-M 1-Yr

UPLL 7.7 38.1 29.5

Nifty Index 4.4 2.6 13.6

Source: Bloomberg

Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E

Revenues 163,120 173,780 220,682 388,418 437,304

EBITDA 29,850 35,050 44,377 88,527 103,558

Consolidated Net Profit Adj* 18,080 20,060 25,146 40,724 49,923

EV/FCF 44 103 -2 32 17

EPS 35.66 39.39 49.37 79.96 98.00

EPS growth (%) 43 10 25 62 23

EBITD Margin (%) 18 20 20 23 24

P/E (x) 26 23 18 11 9

EV/EBITDA 17 14 16 8 7

Net Debt/Equity (x) 0.4 0.4 1.4 1.2 0.9

RoCE (%) 19 17 10 12 13

RoE (%) 27 24 25 33 31

Source: Company, Nirmal Bang Institutional Equities Research

65

75

85

95

105

115

125

Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

UPL LTD Nifty 50

26 March 2019


UPL

Investment Rationale

Generics crop chemicals specialist

UPLL is positioned well to sustain its growth as a generics crop protection chemicals (CPC) company based on its domain expertise in complex synthesis and sourcing of active ingredients (AIs) or technical grades, significant presence in branded generics (85% of revenues), navigating the registration process in key target markets, and distribution & farmer extension services.

Key growth drivers for UPLL include likely increase in demand for:

Herbicides and fungicides in Latin America (LatAm), North America (NA) and Europe (EU), supported by existing brands and new launches.

o Herbicide opportunities in grain/cereal markets across all regions – wheat, corn, soya (US$20.8bn-US$23.5bn CAGR 2.4% CY16-CY21E) (Exhibit 1).

Insecticides for multi-billion markets like rice (US$5.1bn) and cotton (US$3.2bn).

Niche opportunities in fungicides for sugar, and fruits and vegetables, especially in Europe.

Exhibit 1: Category-wise CPC market value forecast

(US$mn) 2016A 2021E CAGR CY16-CY21E

Herbicides 20,874 23,493 2.4%

Insecticides 13,591 15,871 3.2%

Fungicides 13,943 15,511 2.2%

Other Crop Chemicals 1,512 1,840 4.0%

Total 49,920 56,715

Source: Company/Phillips McDoughall 2017

Re-rating prospects based on:

Likely structural shift in Indian pesticides market towards a higher share of herbicides, currently at 24% vs. insecticides at 53%, according to global consultant Phillips McDougall, and global herbicide market share of more than 40% (Exhibit 2).

Exhibit 2: India’s CPC share across categories versus global

Source: Phillips McDougall

Potential turnaround in UPLL’s Advanta seeds business across its loss-making regions/subsidiaries - this implies close to 2%-17% upside to our base case FY21E EPS for the company. This could take four to five years to unfold, but the market will likely start pricing this upside over the next two years.

42%

28% 27%

3%

24%

53%

19%

4%

0%

10%

20%

30%

40%

50%

60%

Herbicide Insecticide Fungicide Others

Global India


UPL

The realization of all potential synergies from the Arysta acquisition, and the positive impact of operating leverage on the combined UPLL-Arysta platform with combined assets of Rs554bn (US$7.9bn) and registration of more than 13,000 CPC products.

De-risked model to offset concerns over demand from seasonal vagaries and farmer buying power

The company’s business mix and geographical spread offers a sound de-risked business model in the CPC industry which is seasonal in nature and subject to the following uncertainties: (see Exhibit 3)

The vagaries of weather that can hurt crop sowing and production outlook.

Level of infestation and fluctuating fortunes of farmers - the key end-use customer for the CPC business.

Exhibit 3: UPLL’s geographical revenue mix (%)


UPLL is present across key categories – herbicides, fungicides and insecticides across critical markets including, LatAm, NA, EU, India and Rest of the World (see Exhibit 4).

Exhibit 4: UPLL’s product mix


Innovation of new products and brands has sustained UPLL’s growth over the past few years. (See Exhibits 5 & 6)

21 22 21 18 18 21

27 28 30 33 3337

20 19 18 18 1815

19 17 13 13 13 11

14 15 18 18 18 16

0

20

40

60

80

100

FY2014 FY2015 FY2016 FY2017 FY2018 YTD2019

(%)

INDIA LATAM NA EUROPE ROW

28 28 28 24 23 25

3325 27 28 29 26

2127

3027 29 29

18 20 15

12 9 11

9 10 9

FY09 FY14 FY15 FY16 FY17 FY18

Insecticide Fungicide Herbicide Others Seeds

(%)


UPL

Exhibit 5: Trend in innovation/new products’ share in UPLL’s revenues (%)

FY14 FY15 FY16 FY17 FY18

2.5% 5% 14% 15% 19%

Fungicide - Iris Unizeb Gold,

Glory

Elixir, Avancer

Gold Triziman

Insecticide Atabron,Ulala,

Acephate 97 DF - - Banter Sperto

Herbicide - Eros Lifeline,

Satellite, Interline

Moccasin Tripzin,

Mocassin

Nutrients - - - Wuxal Macarena,

Gainexa FC

Source: Company presentation 2018, Nirmal Bang Institutional Equities Research

Exhibit 6: Trend in UPLL’s revenues and EBITDA

(Rsmn) FY14 FY15 FY16 FY17 FY18

Revenues 109,020 120,910 140,482 163,120 173,780

EBITDA 21,510 23,630 23,950 29,850 35,050


The company has brands and products for various applications and infestations across categories covering key crops like wheat, soybean, corn, rice, and cotton (Exhibit 7).


UPL

Exhibit 7: UPLL’s product portfolio for target crops across applications and infestations

Type of application Infestation

Wheat (Global Opportunity $8.7 Bn)

Chemical fallow/Burn down/

Pre sowing Pre-emergence Post emergence

Septoria leaf spot

Rust Lepidoteran

Pest Sucking pest -

Products

Lifeline/Fascinate/ Tarang

Dost Total,Vesta,Shagun,

Firmup Avancer

Glow Manzate Uniron Phoskill -

Soybean (Global Opportunity $8.2 Bn)

Chemical fallow Pre-emergence

Post emergence-Gt Soybean

Post-emergence

Leaf spot Rust Lepidopteran Coleopteran

Products

Lifeline, Fascinate, Lifeline GT

Strim,Mocassin, Unimark,Satellite

, Shutdown

MTZ,Moccasin MTZ,Tripzin ZC

Interline

Tricor, Ultrablazer,

Storm, Galaxy,Inter

MOC

Unizeb Glory

Unizeb Glory,Unizeb

Gold

Phoskill,Invade,Atabron,Bisect, Uniron,Pulsar/ Pulsar,Gold

Phoskill

Corn (Global Opportunity $5.8Bn)

Chemical fallow Pre-emergence

Post emergence-Gt Corn

Post-emergence

Leaf Blight Maize Rust Lepidopteran Thrips

Products

Lifeline,Fascinate Strim,Moccasin,

Coyote Interline,Tarang,Lifel

ine GT,Inter MOC Motif,Moccas

in Glory Uthane

Spolit,Invade,Atabron,Bisect, Uniron,Pulsar/Pulsar Gold,Lance

Lancer Gold,Phoskill

Rice (Global Opportunity $5.2Bn)

Pre-emergence Post-emergence

Sheath Blight

Black Bug/Stink Bug/Leaf

folder

Stem Borer Blast

Products

Holdown,Sathi,Eros,Eros gold

Stam,Stampyr, Satellite Plus

Cougar,Conquer

Plus,Glory

Ustaad,Chix, Akito,Invade,

Disect

Kaardon, Unipro, Dimpo,

Lancer,Umet

Samar, Pinnacle

Cotton (Global Opportunity $1.6Bn)

Pre-emergence Post emergence-Gt Cotton Grey Mildew Alternaria Whitterfly Lepidoptera

Products

Dost,Super Satellite

Interline Inter MOC

Glory Glory Lancer Gold,Phoskill,

Battus,Perito Spolit,Invade,

Atabron,Uniron

Potato (Global Opportunity $1.5Bn)

Black Scurf Pre-emergence Post emergence Late Blight Early Blight Lepidopteran Sucking pest

Products

Pulsar Dost,Super

Satellite Unimark,Tricor, Avert,Shagun

Pulsar,Elixir Saaf,Glory Atabron

Vine (Global Opportunity $1.6Bn)

Pre-emergence Post-emergence Mites Lepidopteran

Angular Leaf Spot/Downy Mildew/Anthracnose

Sucking pest

Products

Satellite, Devrinol

Lifeline Banter Atabron Saaf,Uthane -

Sugarcane (Global Opportunity $1.3Bn)

Pre-emergence Post-emergence Soil Pest Sucking pest - -

Products

Upstage, Unipik

Asulox Imida Gold Renova,Imida

Gold - -

Source: Company Annual Report 2018, Nirmal Bang Institutional Equities Research


UPL

Key drivers of crop protection chemicals

India business drivers

India’s crop protection market is expected to increase from US$2.3bn in FY15 to US$3.1bn in FY20E, while exports are likely to increase from US$2.1bn to US$3.2bn in the same period, according to industry data. This implies a CAGR of 6.2% for the Indian market and 8.8% for CPC exports from India vs. global CPC market CAGR of 5.1%.

Exhibit 8: Indian pesticides industry prospects

(US$bn) 2015 2020E CAGR FY15-FY20E

Market size 2.3 3.1 6.2%

Exports 2.1 3.2 8.8%

Source: Industry, Nirmal Bang Institutional Equities Research

The prospects for raising food production, productivity and reducing crop losses from infestation as well as from storage are key factors that influence the demand for CPC in all key CPC markets across the world including India. The catalysts for the future growth in Indian CPC market are as follows:

Potential for increasing usage of categories other than insecticide in Indian CPC market.

Potential to reduce crop losses from infestation and storage, which is currently estimated at 15% of total Indian crop output

The need to increase food production from the current 284mt/year in FY18, in line with the 1.1% annual growth in the country’s 1.3bn population.

India crop productivity is also below that of other countries at an average cereal yield of 2992.33 average kg/ha as compared to the global average of 3967 kg/ha (2016 World Bank data).

Potential to boost the overall of application of CPC in India, which is very low at 0.6kg/ha vs. Brazil’s 4.57 kg/ha, Japan’s 11.85 kg/ha and 13.06 kg/ha in China.

Potential increase in share of herbicides is positive for India growth and margins

Indian herbicides market has the potential to increase its share in overall CPC consumption from the current 16%, which is significantly lower than the global average of more than 40% share in this category (Exhibit: 2,4 and 9)

Indian CPC market has been dominated by insecticides, which account for more than 50% share of pesticide usage. In terms of crops, paddy accounts for 26%-28% of India’s CPC consumption and cotton 18%-20%. The prospects for herbicides, which offer higher margins, are likely to improve in India as a result of the rising cost of labour currently used to remove weeds, according to available industry reports. Herbicides enjoy higher margins than insecticides and also, the growth in herbicides could be at a faster pace than insecticides given the low base. This is also corroborated by the company reporting more than a 50% surge in new herbicide brand sales over YTD FY19. The outlook on fungicides is also headed for better times based on higher demand for a key user segment - fruits and vegetables - as a result of rising income and export prospects.


UPL

Exhibit 9: Contribution of herbicides to UPLL’s revenues


Rising crop infestation and products going off-patent The rising infestation of crops is a matter of concern as estimates put the loss of yield from these incidents at over 15%, worth billions of dollars. This implies that there is potential for increasing CPC consumption in India from the current level to protect crops from infestation (Exhibit 10).

Exhibit 10: Rising incidence of pests hurting farm produce in India

Since 1940 At present

total pests Serious pests total pests Serious pests

Rice 35 10 240 17

Wheat 20 2 100 19

Sugarcane 28 2 240 43

Groundnut 10 4 100 12

Mustard 10 4 38 12

Pulses 35 6 250 34

Source: Company reports, Tata Strategic Management Partner, Nirmal Bang Institutional Equities Research

Indian pesticides (technical grade) production is currently at close to 215,000tn/annum with the overall size of Indian CPC market estimated at US$2.75bn against the global market worth US$60.5bn.

If we assume 6.2% growth, in line with the current trend (past five-year average across drought and good weather cycles), Indian CPC market could touch an estimated US$4.2bn versus global market estimated to touch US$85.8bn by 2025E

UPLL‘s India business worth Rs31.9bn (FY18) in terms of sales enjoyed a CAGR of 9.2% in FY14-FY18. UPLL‘s focus crops are rice, cotton, corn, sugarcane, soya, fruits and vegetables with several brands including, the Rs1bn (US$14m) plus names - Ullala, Saaf, and Phoskill.

The company has launched 101 products in FY18 (Exhibit: 11). The key brands are listed in Exhibit 12.

Exhibit 11: Product launches across regions in FY18 (nos.)

India Latin America Europe ROW North America Category total

Herbicide 4 6 4 9 6 29

Fungicide - 13 9 3 2 27

Insecticide 4 7 2 8 3 24

Seed treatment - 2 - - 1 3

Adjacent tech. 3 1 3 7 4 18

Total launched 11 29 18 27 16 101


29,435

36,273 37,930

47,305 50,396

-

10,000

20,000

30,000

40,000

50,000

60,000


(Rs mn)

Herbicide


UPL

Exhibit 12: UPLL’s key brands across categories for target geographies

Category Geography Key brands

Insecticide

India Ulala, Phoskill, LancerGold, Atabron, Starthene

LatAm Lancer Gold, Imida Gold,Lancer

North America Banter

Europe

RoW Kinalux

Herbicide

India Saathi, Iris,Patela,Lagam

LatAm Zartan, Danado,clorim

North America Interline,UltraBlazer,Satellite,Tricor, Surflan

Europe Devrinol, Metafol, BeetUp

RoW Asulox

Fungicide

India Saaf,Avancer Glow,Disect, Cuprofix

LatAm Manzate,UnizebGold,Glory,Unizeb, Vondozeb

North America Cuprofix,Manzate,Microthial, SuperTin

Europe Cuprofix,Microthial, Penncozeb

RoW Penncozeb

Crop nutrition/ fumigants & storage

India Wuxal

LatAm Quickphos

North America Weevilcide

Europe

RoW Quickphos

Seeds Advanta,Alta,Pacific,Golden,Nutrism


The Indian business also includes non-agro activities covering industrial chemicals. The revenues from this segment including domestic and overseas sales was reported at Rs7.6bn for FY18 (4.3% of UPLL’s gross revenues) and under 2% of the company’s EBIT (including other income).

International business drivers Every US$1bn worth of CPC going off-patent implies 3%-6% upside to UPLL’s revenues

The value of CPC going off-patent over the next few years offers a significant growth opportunity that an established generics company like UPLL can capitalize on to sustain future growth. Products worth close to US$2.8bn have already gone off patent over 2016-17. We understand from industry sources and a Chinese website (https://agrochemical.chemlinked.com) that 34 active ingredients will be going off-patent over 2017-22. This list includes 15 herbicides, 7 insecticides, 11 fungicides and 1 safener.

The value of products going off-patent over FY17-FY20 is estimated at US$2.9bn, according to an Indian think tank (Exhibit 13). We estimate that every US$1bn worth of CPC going off-patent implies a 3%-6% upside to UPLL’s revenues, assuming it gets 10%-20% share of this opportunity. Over the long run, the value of products going off-patent could be much higher, implying sustained growth prospects in new generic CPCs for UPLL.

https://agrochemical.chemlinked.com/


UPL

Exhibit 13: CPC active ingredients going off-patent

Source: Company reports, Tata Strategic Management Partner, Nirmal Bang Institutional Equities Research

International business generates 79% of UPLL’s revenues

International markets bring in 79% of UPLL’s revenues with more than 30% coming from LatAm that accounts for 16% of global exports, and 4% of global imports of food and agricultural products (Exhibit: 3 and 14)

Exhibit 14: UPLL’s geographical revenue mix - YTD FY19


The planting and harvesting cycle across different regions is spread out over the calendar year, which helps partly mitigate the impact of seasonality in UPLL’s earnings. To illustrate this, we are giving the cropping cycle of corn in Exhibit 15.

1.2

1.6

0.4

0.7

0.20

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2016 2017 2018 2019 2020

(US$bn)

21%

37%

15%

11%

16%

INDIA LatAm NorthAm EUROPE ROW


UPL

Exhibit 15: Cropping cycle of corn across regions

Geography Planting Harvesting

US Planting begins in April and continues through June Harvesting commences in October and

finishes by the end of November

Europe Mid-April through early June Mid-August through late October

LatAm Corn planting begins in central and southern Brazil between September

– November, which is also the monsoon season for Brazil February through May

India Corn is a rain-fed kharif crop where sowing is primarily done in June-

July. Other sowing months are September-October and January-February

China Planting begins in mid-March through early June Harvesting takes place August to

October

Source: Nirmal Bang Institutional Equities Research

Turnaround in loss-making seed businesses implies 2%-17% upside to our base-case earnings

The company has seeds business across various crop segments and regions following its acquisition of the franchise from Advanta in FY16 (Exhibit 16). Exhibit 16: Global portfolio of Advanta Seeds

Segments Presence

Sorghum USA, Mexico, Australia, Argentina, Asia, Africa, Europe and Thailand

Corn Thailand, SE Asia, Brazil, India

Sunflower Argentina , Europe

Canola Australia,South America, South Africa

Soybeans Brazil

Forages USA, India, LatAm

Wheat Australia

Vegetables India, South Asia and North Africa


The share of seeds (not disclosed as a separate segment) is estimated at 10% of UPLL’s revenues, according to the management.

The 11 entities disclosed under UPLL’s subsidiaries operating seeds business had combined revenues of Rs18.8bn and marginal PBT of Rs60mnin FY18 (UPLL annual report FY18).

This includes a profit-making set of four companies in Mauritius, Indonesia, Thailand and Australia with combined revenues of Rs13.9bn and PBT of Rs2.24bn (PBT margin 16.2%). The most successful among them are Advanta Seeds International, Mauritius (FY18 revenues of Rs6.97bn and PBT of Rs750mn) and Pacific Seeds (Thai) (revenues of Rs3.6bn and PBT of Rs1.1bn).

The other set of six companies suffered combined losses worth Rs2.28bn on revenues of Rs4.86bn (the remaining one has nil revenue/ profit).

We estimate the PBT break-even sales for loss-making entities at Rs7.14bn based on figures for revenues and PBT published by the company for its subsidiaries (revenues plus the loss = Pre-tax costs).

Given the healthy growth and margins enjoyed by seed companies across the world ( higher margin vs. CPC), we believe the seeds business should make a meaningful addition to consolidated earnings of UPLL- Arysta over the next three to five years.


UPL

Potential turnaround in UPLL seeds business implies 2%-17% upside in earnings

Our quick estimates show that a turnaround in the loss-making seed subsidiaries - assuming doubling of revenues to Rs10bn - should result in the loss-making entities turning into the black, from losses amounting to Rs2.18bn. Such a ramp-up in revenues is possible, in our view, given that three of the five loss-making firms are delivering revenues of under Rs1bn each as compared to more than Rs2.5bn in revenues each, achieved by three of the four profitable seeds entities.

Assuming 10%-15% CAGR in overall revenues from seed business, we expect earnings upside of 2%-7% over three years and 3.8%-17% over a five-year period. This is based on the following scenario analysis:

o If we assume 15% CAGR in revenues over five years, we expect the revenues and PBT to rise to Rs37.5bn, and Rs12.6bn, respectively.

o Assuming 10% CAGR over three years, we see the revenues and PBT rising to Rs24.8bn and Rs1.4bn, respectively (Exhibit 17).

We view such a swing in the fortunes of UPLL’s seeds business could be a re-rating catalyst for the stock over the next two to three years.

Exhibit 17: Seed business turnaround crystal ball

CASE- I FY18 figures Revenues Pre-tax costs PBT PBT margin

Profit-making seed Subsidiaries – Ps1 13,800 11,560 2,240 16.2%

Loss-making -Ls1 4,850 7,030 (2,180) (44.9%)

Total -Ps1+Ls1 18,650 18,590 60 0.3%

Case II -Turnaround case three-year rev. growth 10%

Profit-making Ps-2 18,368 14,562 3,806 20.7%

Loss-making post-turnaround Ls-2 6,455 8,856 (2,400) (37.2%)

Total -Ps2+Ls2 24,823 23,418 1,405 5.7%

Case III Turnaround case five-year rev. growth 15%

Profit-making Ps-3 27,757 15,470 12,287 44.3%

Loss-making post -turnaround Ls-3 9,755 9,408 347 3.6%

Total –Ps3+Ls3 37,512 24,878 12,634 33.7%


Growth drivers

We also expect the company’s launch of new brands over the past few years, including more than 100 products in FY18, to drive growth in revenues and earnings over the medium to long term (refer to Exhibits 11 and Exhibit 12).

Brands account for 85% of UPLL’s total revenues. This is driven by the company’s LatAm market, with 95% of revenues from brands followed by NA at 94% and EU at 90% (Exhibit 18).


UPL

Exhibit 18: Branded products versus generic across markets


UPLL has a sales and marketing presence across geographies to sustain new launches and grow its international business (Exhibit 19).

Exhibit 19: UPLL’s sales and marketing workforce across markets


UPLL-Arysta deal unraveled UPLL has leapfrogged into the global league with the closure ofUS$4.2bn buyout of near-similar sized crop protection chemical firm Arysta Life Sciences from Platform Solutions USA (Exhibit 20). After this global scale M&A deal, UPLL’s management has indicated:

Combined sales worth US$4.6bn and EBITDA at US$967mn as compared to UPLL-ex Arysta‘s US$2.71bn in revenues and US$543mn of EBITDA in FY18.

UPLL will also rank fifth in size among global CPC majors after Bayer-Monsanto, Syngenta-Adama, Dow-Dupont, and BASF, according to the company.

94 90 95

78 7585

6 10 5

22 2515

North America Europe Latin America India ROW Overall

Branded Generic

31 46 57124

20

480

505

126

43

3

72

18

North America

Europe Latin America Brazil AME India Asia

Sales Marketing

(%)

(%)


UPL

Exhibit 20: UPLL and Arysta – key numbers

UPLL Arysta Combination

Revenues (US$mm) 2,714 1,956 4,670

EBITDA (US$mm) 543 424 967

Product registration 6,150 6,850 13,000+

Total employees

10,500+

Product mix (%)

Herbicide (%) 29 34 31

Fungicide (%) 26 17 23

Insecticide (%) 25 30 27

BioSolutions (%) - 8 3

Others (%) 20 11 16

Geographical presence (%)

LatAm 33 36 34

Europe 13 39 24

North America 18 13 16

RoW 36 12 26


The rationale for the deal, according to UPLL’s management, is that Arysta gives an asset-light platform, which is strong in certain geographies and wheat and corn crop segments, and complements the former’s strength in other crop segments like rice and soya, backward integration in technical grade CPCs, distribution and cost management.

Prima-facie, we believe that the deal does offer UPLL a larger footprint, with a broad range of products and entry into crop segments in which it is relatively weak.

Financing the deal

Arysta is an asset-light business with focus on intangible assets (6,850 registrations of products and a few patents).

The acquisition is financed through UPLL’s step-down subsidiary UPL Corporation Ltd.(UPL Corp.), which takes care of UPLL’s international businesses. UPL Corp. has financed the US$4.2bn Arysta buyout with:

1) A 5-year bullet loan of US$3bn from MUFG and Rabo Bank at a floating rate of interest.

2) Equity stake sale of 11% each to two PE firms - ADIA and TPG - worth a combined US$1.2bn.

The loan is expected to entail a blended interest cost at 2% per annum following a currency swap for US$1.8bn –US $1.5bn into euro at a fixed coupon and US$300m into Japanese yen or JPY at a floating rate (details not disclosed). There is also a prepayment option every six months along with interest payment.

The equity stake sale implies that UPLL’s consolidated results from FY20E will capture 78% of UPL Corp.’s financials that will include:

a) UPLL’s present international business routed through UPL Corp.

b) Arysta’s earnings.

Prior to the Arysta deal, UPL Corp. had reported assets worth US$2.4bn and a net profit of US$1bn for the nine months ended December 2018. Its net worth is US$.6bn including FX translation deficit of US$83mn and capital employed of US$1.6bn.


UPL

Analysis of Arysta acquisition Our analysis shows that the deal is prima facie marginally NPV positive

Our DCF model on Arysta’s CY17 cash flow (at 1%-3% terminal growth excluding any synergy benefits) shows that the deal is NPV positive at a WACC of 11%. The deal offers an IRR of 15%, if we assume the CY17 cash

flow sustains. According to our DCF model, we estimate the PV of Arysta’s cash flow at US$5.1bn vs. UPLL’s acquisition cost of US$4.2bn.

The consideration of US$4.2bn paid by UPLL for Arysta implies EV/E multiple of 9.9x on CY18

Arysta EBITDA of US$424mn, as indicated by UPLL’s management (Exhibit 21).

Arysta’s performance in terms of growth in top-line and EBITDA has been very modest at CAGR of 4.4%, and 6.3%, respectively, during the period CY15-CY17 (based on Platform filings for agrochemical business). We are still awaiting the official filing of Arysta’s CY18 performance, as the details for the discontinued business (Arysta) filed by Platform for the six months ended September 2018 are still showing only muted growth in revenues.

An added concern is that the Post-tax RoCE post Arysta will dip to 13% in FY21E from an average of

17.9% over the past three years (refer Exhibit 34).

On the positive side, our model for UPLL-Arysta shows the combine delivering revenue CAGR of

41% and earnings CAGR of 40.9% over FY20E-FY21E on FY19E.

Also, EBITDA margin is expected to improve from 20.2% in FY18 to 22.8%-23.7% over FY20E-FY21E, according to our estimate. This is after taking pro-rata annual credit for the full potential synergy benefits of US$350mn in revenues and US$200mn in cost savings under the combined entity, as estimated by UPLL’s management.

The five-year bullet bank loan of US$3bn availed by UPLL’s 100% subsidiary, UPL Corporation (which holds all international businesses) to finance the Arysta purchase will come up for repayment in five years i.e. in February 2024. Our estimates show that the company’s cash flow can support this repayment. Net debt/EBITDA is likely to soften to 2.4x by FY21E from the post-deal high of 5.9 x for FY19E. This is still almost 2x the average for this ratio over FY16-FY19E.

The risk is that if the company’s margins fall below expectations or inventories and receivables are higher, free cash flow may fall short of the company’s requirement to repay the above debt. A 5% fall in revenues or a similar increase in raw material expenses can compress FCF by 15%-18% in FY21E. Assuming this situation persists until FY24E when Arysta debt will be due for repayment, it implies a potential shortfall of around Rs54bn-Rs69bn in free cash. As a result, the company may have to raise fresh debt or equity to fund this deficit.

Admittedly, Arysta acquisition will transform UPLL into a much bigger global crop protection chemicals company with combined revenues of Rs388bn (US$5.3bn) and EBITDA of Rs88.5bn (US$1.2bn) based on our FY20E earnings. The management is banking on blended revenue growth of 7-8%, and EBITDA margin of 23-24% for UPLL-Arysta, assuming synergy benefits on higher revenues and cost savings over the next two to three years. Higher revenues are predicted on better pricing power in UPLL’s markets for Arysta products and the additional suite of crop and seed protection offerings across a wider range of crop categories including wheat, corn, sugar cane and certain specialty crops, in which Arysta has a stronger presence than the former.

The cost synergies are based on eliminating overlaps in sale and distribution and shared costs for new product development and registration.


UPL

The company also estimates integration expenses at around US$60mn-US$70mn over 10-12 months, of which around 33%, and 67%, respectively, will go towards transaction fees (lawyers, regulators and bankers), and business cum synergy-related costs. Under favourable demand outlook in all key geographies of interest, the synergy and scale benefits post-integration with Arysta could be a long-term valuation driver. In addition, it also offsets near-term concerns over the uncertainty in weather and crop pricing that could impact the earnings over the next two quarters, and the time to consolidate the acquisition, deliver synergy benefits and growth in the UPLL-Arysta’s combined portfolio.

Long-term benefits offset concerns In our view, the management’s subdued growth guidance for UPLL post Arysta deal - though arguably conservative – appears to be a tacit admission that UPLL’s existing business was slowing down relative to the performance in the past three-five years. Also, in our view, the growth UPLL has delivered by significantly outperforming subdued or contracting markets across LatAm (including Brazil), NA and EU, in FY18 and YTD FY19 is not sustainable given the many headwinds looming large. These include disruptive weather pattern, lower infestation level and currency volatility coupled with shortage of ingredients following the closure of many chemical facilities in China as a result of tighter environmental regulations. In our view, UPLL was staring at subdued growth prospects from its existing business model based on the above headwinds. In an industry, with modest overall growth (under 2-3% in key markets and even contraction in some) there is a limit to the extent to which even an established and competent company like UPLL with the best-in-class domain expertise and complex chemicals manufacturing capability can sustain growth by increasing market share. Consider this – the company has gained market share in the past three years in all its key markets under highly adverse industry conditions, which are likely to persist in the near future. The decline in pest infestation, resistance to key pesticides across categories and GM seeds, along with unpredictable weather pattern and farm income level are likely to make the going tough for the industry. It is equally daunting for analysts and investors to make estimates as this is not a predictable business in terms of demand and inventory shift. The reasons why the valuation is still healthy and the stock attracts attention are:

a) The margins are healthy.

b) Entry barriers remain a challenge for new entrants, especially in terms of registration and distribution.

c) The concentrated nature of the industry with the top five firms (including UPLL) controlling 84% market share. So the Arysta buyout, in our view, was a compulsion and necessary for UPLL’s future growth. Hence, the company has perhaps accepted the deal at what we believe is at a rich valuation given the modest track record of Arysta in the past few years and the lackluster growth prospects for crop protection chemicals globally. To UPLL’s credit, it must be said that the deal valuation compares with other mergers in the industry including Bayer-Monsanto ChemChina-Sygenta, and Dow-Dupont among others. UPLL-Arysta transaction multiple at 9.9x trailing EV/EBITA multiple compares with the multi-billion dollar global M&A transactions done at 10x-17x (Exhibit 21).

Exhibit 21: Recent Global M&A deals in CPC industry

Deal announced Deal EV (US$bn) EV/EBITDA (X)

September 2016 Bayer AG acquired Monsanto India 62 17

December 2015 Dow and Dupont merger 130 10

February 2016 ChemChina acquired Syngenta 43 16

October 2014 Adama acquired Sanonda 5 7.7

Source: Bloomberg

After the full impact of the potential integration synergies being realized, the EV/EBITDA multiple looks reasonable at 7.6x FY20E earnings and 6x FY21E earnings for Arysta.


UPL

The deal is in line with global consolidation The UPLL management’s rationale for this purchase is, in our view, based on the immediate synergy in top line (read margins) and the savings in costs in supply chain and distribution on a wider base, and more efficient management of trade terms and working capital. Also, the industry has been getting increasingly concentrated with a spate of large M&A deals among the global CPC majors over the past few years. This trend shall continue, given the complexities in the agrochemical space in terms of critical success factors including regulations and costs, and subdued growth. In our view, UPLL is pursuing this industry trend, which makes strategic sense. We believe that size and diversity - in terms of products, geography, categories/crops, customers, registration capabilities, distribution and relationships with the farming community – matter for a mature company like UPLL (refer Annexure – Global CPC industry structure). UPLL –Arysta combined entity could deliver higher margins and earnings growth, which in turn should boost free cash flow and sustainable Post-tax RoCE and RoE under favourable market conditions across key geographies, categories and seasons for the global CPC business.

The dilution of 22% stake in UPL Corp. to fund the Arysta deal offers interesting possibilities. Two private equity funds - ADIA and TPG - have pumped in US$1.2bn to fund the deal in return for a 22% stake in UPL Corp. which will hold all the international businesses of UPLL, including Arysta. The funds have indicated that they are on board with the management on the value proposition of the transaction. We understand that PE investors are open to various exit options, including a buyback by UPLL, listing of UPL Corp. or a stake in the combined entity UPLL-Arysta.


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Crop chemicals business outlook Global CPC market

Brazil dominates the CPC market with close to 20% share (refer Exhibit 22). Internal consultants estimate that Brazil’s CPC market value can increase from US$9.7bn to US$11.5bn vs. global CPC market rising from US$49.9 to US$56.7bn over 2016-2021E. Exhibit 22: Global agrochemical market size - top 10

US$bn

Brazil 10

US 7.3

China 4.8

Japan 3.3

France 2.8

India 2.75

Germany 2.1

Canada 1.9

Argentina 1.7

Italy 1.3

Source: agropages.com, Nirmal Bang Institutional Equities Research

LatAm is largest and fastest-growing geography for UPLL The share of LatAm in UPLL’s revenue mix has risen from 27% to 37% in five years with FY18 revenues at Rs56.9bn/US$869mn. UPLL’s LatAm business covers Brazil, Argentina, Columbia and Mexico. UPLL sells CPC aimed at crops including soya, oil crops, corn, cotton, coffee, sugar cane, fruits and vegetables. LatAm’s share of UPLL’s revenues ranged between 28%-32% over FY14-FY18 and 36.7% for nine months ended December 2018 (YTDFY19). This South American region has delivered revenue growth of 24.5% in YTDFY19 (vs. 19.1% on an average over FY15-FY18). The company has 6% market share in LatAm vs. 4.2% market share globally (refer Exhibit 23).

Exhibit 23: Rising trend in LatAm share in UPLL’s revenue mix


28,5

50

34,0

60

42,7

30

53,9

60

56,9

20

48,9

00

107,

693

120,

890

140,

480

163,

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173,

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133,

120

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FY14 FY15 FY16 FY17 FY18 YTD19

LATAM COMPANY Contribution

(Rsmn)


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Brazil accounts for close to 70% of LatAm CPC market

Brazil is also like India an agrarian economy and is among the world’s leading producers of many crops including, sugarcane, soyabean and corn, among others. This is also the largest CPC market in the world and accounts for 70% of LatAm. Brazil business poses 50% exposure to local currency risk

The Brazilian market in the north conducts CPC trades denominated in Brazilian real (BRL), which is pegged to the US dollar or USD. This region is largely an exporter and hence the risk is more through USD exposure. The southern part, on the other hand, is exposed to the BRL as it depends on imports. UPLL’s Brazil business is equally split between the north and the south and hence 50% of its Brazil business is exposed to movement in the Brazilian currency’s exchange rate (BRL) vs. the USD. The USD is up more than 20% YoY vs. the BRL. Fungicide cross-sales alliance with Bayer Monsanto

UPLL has an alliance with Bayer Monsanto for a brand called Fox, a fungicide used to fight Asia rust in crops. UPLL will sell fox, in return for Bayer marketing the latter’s Unizeb (also a fungicide). In the near term, we expect the healthy trend in planting of cotton crop and the launch of insecticide brand Sperto to offset concerns over modest outlook for corn, wheat and soya bean-focused chemicals. Over the medium term of 6 to 12 months, the headwinds faced by the US on wheat, corn and soyabean could work in favour of exports from LatAm countries, including Brazil. As a result, this could improve prospects for pesticide sales in Brazil and other markets in that region. North America and Europe prospects Europe: FY18 revenues of Rs23bn (US$352mn). UPLL’s Europe business covers the markets in countries like Spain, Italy (vines, vegetables), Germany, France, Netherlands and the UK among others. The prospects for UPLL’s EU market look promising based on the vastly improving trend. The region’s YTDFY19 revenues are up 15.4% YoY vs. 3.6% on an average over FY15-FY18 (11.4% share in the company’s revenue pie). Key drivers for Europe

The abolition of quotas in sugar beet augurs well for this crop and hence demand for fungicide sales in this crop segment. Please note that the fall in sugar beet crop and acreage under the quota system was hampering UPLL’s sales of sugar-focused fungicides in this region during FY17-FY18. North America

FY18 revenues of Rs 30.8bn (US$470mn).

The US is the key region for UPLL in North America, even as it is building the footprint in Canada. The US has proved to be resilient in the past, despite bad weather. This is based on the company’s strength in its rice portfolio and the success of its new launches in herbicides and fungicides. The company’s presence in the aqua treatment market for fungicides and fumigants, which in our view fetches higher margins, is also an added strength in UPLL’s US portfolio. This is also a segment less likely to be affected by weather and other crop-related problems. UPLL has recently launched Lifeline herbicide in Canada. The region’s YTDFY19 revenues are up 12.3%YoY vs. 9.9% on an average over FY15-FY18 (17.7% share in the company’s revenue pie). We have listed UPLL’s key brands under each category for each region in Exhibit 24.


UPL

Exhibit 24: UPLL - Key brands and geographies under each category

Category Geography Key brands

Insecticide

India Ulala, Phoskill, LancerGold, Atabron,Starthene

LatAm Lancer Gold, Imida Gold, Lancer

North America Banter

Europe

RoW Kinalux

Herbicide

India Saathi, Iris,Patela,Lagam

LatAm Zartan, Danado,clorim

North America Interline,UltraBlazer,Satellite,Tricor, Surflan

Europe Devrinol, Metafol, BeetUp

RoW Asulox

Fungicide

India Saaf,Avancer Glow,Disect, Cuprofix

LatAm Manzate,UnizebGold,Glory,Unizeb, Vondozeb

North America Cuprofix,Manzate,Microthial, SuperTin

Europe Cuprofix,Microthial, Penncozeb

RoW Penncozeb

Crop nutrition/ fumigants & storage

India Wuxal

LatAm Quickphos

North America Weevilcide

Europe

RoW Quickphos

Seeds Advanta,Alta,Pacific,Golden,Nutrism


UPLL’s business model and outlook

Our analysis of UPLL’s performance over the past 23 quarters (1QFY14-3QFY19) reveals that the company’s business model is fairly robust considering that it has delivered EBITDA margin of 17%-20% and RoE of 19%-24% over the past three years FY16-FY18 (Exhibit 25).

Exhibit 25: Quarterly revenue and EBITDA trend

Source:Company, Nirmal Bang Institutional Equities Research

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(Rsmn)(Rsmn)


UPL

This performance was despite the following adverse developments:

a) The worst drought in FY16 (Exhibit 26–Trend in Indian monsoon rains).

b) Below average rains and inconsistent spread of rainfall across key cropping regions during FY16, FY17 and FY18.

c) Impact of demonetization of higher denomination notes in November 2016 which impacted UPLL’s India business in 4QFY17 and FY18.

d) The dislocation in the trade and supply chain in anticipation of and post introduction of Goods and Services Tax or GST in July 2017 also hurt UPLL’s India business in FY18.

Exhibit 26: Trend in Indian monsoon rains

Year SW - % of LPA Remarks NE - % of LPA Remarks

2018 91 Below normal 56 Deficient


2016 97 Normal 55 Deficient

2015 86 Deficient 77 Deficient

2014 88 Deficient 67 Deficient

2013 106 Above normal 118 Excess




2009 77 Deficient 108 Above normal

Source: IMD, Ministry of Agriculture, Department of Fertilisers

Note: Rainfall between 96% to 104% of the long-period average (LPA) is considered to be normal.

UPLL – Seed business

UPLL operates its seed business across several subsidiaries, as discussed earlier. This covers seed development, coating, GM seed distribution and extension services to farmers (refer Exhibit 16 for crop categories in seeds).

The company has access to proprietary seed technology following the acquisition of Advanta’s seed business. The gross assets under seed business include germplasm (under intangible assets) worth Rs2.65bn as of March 2018-end. The net value after amortisation is Rs120mn.

UPLL revenue and EBITDA outlook post-Arysta We have factored in the consolidation of Arysta financials from February 2019, as confirmed by the company (two months in FY19). Our FY19E and 4QFY19E are proforma financials including 78% consolidation of Arysta financials for the last two months in 4QFY19E. Exhibit 27: Operating assumptions - UPLL pre-Arysta

UPLL pre-Arysta

Revenue growth assumptions FY17 FY18 FY19E FY20E FY21E

India 10% 8% 3% 8% 10%

LatAm 26% 5% 22% 15% 15%

NA 11% 7% 11% 10% 10%

Europe 12% 7% 13% 13% 13%

RoW 15% 7% 8% 10% 10%

P&L assumptions

Raw material/sales 48% 47% 45% 45% 45%

Employee cost change (Chg. YoY) 13% 5% 13% 13% 13%

Other expenditure (Ch. YoY) 13% 11% 19% 15% 15%

Effective tax rate 18% - 18%



UPL

We have followed the same basis of consolidation of Arysta financials (78%) for FY20E and FY21E. This is after taking the aggregate upside post-integration with Arysta (synergy benefits) from the following: (Exhibits 27-30).

a) Incremental revenues of Rs7.6bn (30% of potential revenue upside), and Rs18.2bn (70%), over FY20E, and FY21E.

b) Cost savings of Rs7.2bn (50% of potential cost savings), and Rs14.9bn (100%), over FY20E, and FY21E, respectively. This is boosting our EBITDA margin by 180bps to 340bps over FY20E and FY21E.

Exhibit 28: Operating assumptions - Arysta

FY19E FY20E FY21E

Revenue growth 11% 3% 3%

Integration cost US$mn 25 40 10

Revenue synergy progression US$mn –Gross US$350mn, 30% year-1, 70% year- 2, 100% year-3

- 105 245

Revenue upside from synergies Rs.mn - 7,571 18,253

Synergy cost savings US$mn (US$200mn- 50% year-1, 100% year-2). - 100 200

Synergy cost savings (Rs.mn) - 7,210 14,900

FX - INR/USD 70 72.1 74.5

Effective tax rate 15% 18% 18%


Note: We have also provided for Arysta integration costs of US$75mn over FY19E, FY20E and FY21E. This is charged as exceptional expense in P&L account. We have provided Rs1.8bn in FY19E, Rs2.9bn in FY20E and Rs745mn in FY21E. Our estimates are higher than the company’s guidance of US$60mn-US$70mn to provide for potential cost escalation.

Exhibit 29: Summary financial (Rs.mn) – UPLL pre-Arysta

FY17 FY18 FY19E FY20E FY21E

Revenues 1,63,120 1,73,780 1,96,182 2,24,895 2,53,074

EBITDA 29,850 35,050 39,477 48,613 51,812

EBITDA margin% 18 20 20 22 20

PAT before exceptional item 18,330 21,070 23,815 28,493 30,714

Exceptional item 810 630 2,170*

PAT after exceptional item 17,520 21,230 21,645 28,493 30,714

Source: Nirmal Bang Institutional Equities Research Exhibit 30: Summary financial (Rs.mn) UPLL post-Arysta


Revenues 1,63,120 1,73,780 2,20,682 3,88,418 4,37,304

EBITDA 29,850 35,050 44,377 88,527 1,03,558

EBITDA margin% 18 20 20 23 24

PAT reported 17,520 20,440 23,865 41,802 55,109

Exceptional expense/(income) 810 630 2,170* 2,884* 745*

PAT excluding exceptional items 18,330 21,070 26,035 44,686 55,854

Consolidated profit adjusted 18,080 20,060 25,146 40,724 49,923

Source: Nirmal Bang Institutional Equities Research, Company

Note: *Exceptional item includes Arysta integration cost; Arysta impact – in full for FY20E,FY21E; for two months in FY19E, our EPS estimates based on Consolidated PAT before exceptional items.


UPL

Earnings and returns

We expect UPLL to deliver consolidated PAT (excluding exceptionals-merger costs) at Rs40.7bn and Rs49.9bn in FY20E and FY21E, respectively. This includes the impact of the increase in interest expenses on the US$3bn loan used to finance the Arysta buyout, and additional depreciation charges on Arysta assets (mostly intangibles according to UPLL’s management) and addition to UPLL’s tangible and intangible assets.

We are providing for aggregate integration costs of US$75mn as exceptional item over FY19E (US$25mn) and FY20E (US$40mn). This is not recurring and hence our adjusted consolidated PAT is estimated excluding these costs, although we have considered these as outflows for our cash flow estimates.

Earnings growth and returns

Based on our forecasts, we expect UPLL to deliver the following (Exhibits 31 and 32):

Earnings growth: 61.9% in FY20E and 22.6% in FY21E vs. 25.4% in FY19E and 12.6% CAGR in EPS over FY14-FY18.

RoE: The company’s RoE is expected to rise to 32.5% and 30.9% over FY20E-FY21E vs. the past three-year average of 23.5%.

Exhibit 31: Trend in EPS growth and returns

Y/E March FY17 FY18 FY19E FY20E FY21E 3-yr. avg.

(FY16-FY18)

EPS growth (%) 43.0 10.5 25.4 61.9 22.6 15.4

Pre-tax RoCE (%) 20.9 19.7 11.4 14.4 15.8 20.4

Post-tax RoCE (%) 18.9 16.9 9.8 11.8 13.0 17.9

RoE (%) 27.2 24.2 25.1 32.5 30.9 23.5


Exhibit 32: Impact of Arysta on RoE and RoCE

Y/E March FY17 FY18 FY19E FY20E FY21E

UPLL pre-Arysta post-tax Post tax RoCE (%) RoE (%)

18.9 27.2

16.9 24.2

17.0 23.6

18.0 23.7

17.0 21.5

UPLL post Arysta Post-tax RoCE (%)

18.9 16.9 9.8 11.8 13.0

RoE (%) 27.2 24.2 25.1 32.5 30.9


Note: The RoE post Arysta is computed on net worth excluding minority interest. Any adjustment to net worth before minority interest in audited FY19 accounts including Arsyta could result in changes to our ROE estimates.

Free cash flow

Our cash flow model shows that UPLL will earn free cash flow of Rs23bn in 2020E and Rs42bn in 2021E vs. the three-year average of Rs3.7bn over FY16-FY18.

Valuation – 24.2% upside to valuation - BUY

We have valued UPLL stock at Rs1,134 based on:

Rs893 for UPLL (pre-Arysta) at 15x P/E on FY21E earnings at 10% premium to five-year median and at 22% discount to SD+1 P/E (19.3x).

Rs241 for Arysta at 6.8x EV/EBITDA multiple (based on global peer group average) on FY21E earnings including synergies post-integration, The integration benefits in our target price amounts to Rs216.

Our target price implies a P/E of 11.6xon consolidated FY21E EPS for UPLL post-Arysta including synergies, which is at 8% premium to global peer group average P/E of 10.8x.


UPL

Exhibit 33: UPLL summary valuation- target price at Rs1,134

UPLL Pre-Arysta

FY21E EPS (Rs)

59.52

Target P/E (x) 10% premium to five-year median P/E 15.0

UPLL Pre-Arysta equity value (Rs/share)

893

Arysta

FY21E EBITDA in Rsmn (incl. synergy benefits)

51,746

EV/E (global peers CY20E)

6.8

EV Rsmn

35,1873

Arysta net debt (Rsmn)

19,4474

Arysta equity value- Gross (Rsmn)

15,7399

Less: minority interest (Rsmn) 22% 34,628

Arysta equity value to UPLL (Rsmn)

12,2772

Arysta equity value - Rs/share of UPLL

241

UPLL target price (Rs)

1,134

Return to target price (%) 24.2


FCFF yield: Works out to 5.8% for FY21E vs. last three-year average of 0.7% (FY16-FY18) We have also done a sensitivity analysis giving the downside risk to our estimates and target price (Exhibit 34).

Exhibit 34: Sensitivity analysis on earnings and valuation

Sensitivity analysis UPLL pre-Arysta UPLL post-Arysta Arysta Impact

Change Revenue

chg.% EBITDA

chg.% EPS

chg.% Revenue

chg.% EBITDA

chg.% EPS ch%

Revenue chg%

EBITDA chg.%

EPS chg.%

Target Price (Rs)

Revenue change % (5) (5) (14) (20) (5) (9) (14) (5) (4) - 944

RM cost change % 5 - (11) (15) - (9) (14) - (8) - 953

Employee +other expenditure %

5 - (9) (12) - (8) (12) - (6) - 986

FX appreciation INR/USD fall %

(5) (4) (15) (14) (7) (12) (1) (10) (10) - 975

Synergy savings down % (10) - - - - (2) (2) (1) (4) - 1,113



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P/E band chart

Exhibit 35: UPLL’s five-year forward P/E


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Risks

Weather failures or excesses

The key risk to CPC business is the uncertainty of weather pattern across seasons which impacts the planting, fertilizer and pesticide application and also harvesting of crops in all key geographies of interest to Arysta. This has been particularly acute in the past three years - with weak rains, drought, floods and warmer winters wreaking havoc across LatAm, US, Europe and India and impacting summer and winter crops.

India

India’s major monsoon season falls between the months of June and September (four months) each year. This is called the South-West monsoon which leads to kharif crop sowing during August. The monsoon enters the country from its east coast (Bay of Bengal) and progresses towards the north (Rajasthan), effectively covering the whole country. LPA for South-West monsoon is 89cm or 887mm.

Another rainfall season in India is North-East monsoon which falls between October and December (three months) each year. This season is typically constrained to the coastal states of Telangana, Andhra Pradesh, Tamil Naidu and sometimes also extends to Karnataka’s border areas. Rainfall between 89% to 111% of the LPA is considered normal. LPA for South-West monsoon is 33cm or 332mm.

Joker in the pack: El Niño

El Niño means ‘the boy’ in Spanish and refers to a weather phenomenon that leads to deficit rainfall across the world, including India. The counter-weather pattern called La Niña or ‘the girl’ in Spanish generally leads to normal or even higher rainfall. Between 2013 and 2015, the impact of El Niño was especially severe, resulting in the worst drought in FY16 and below-average rainfall in key cropping regions over FY17 and FY18. This has adversely impacted the planting and output of food grains and other crops, and hit farm income. As a result, UPLL’s India revenues have grown at a slower pace vs. the normal trend.

El Niño positive for US soya and corn, negative for Australian wheat

The US National Oceanic and Atmospheric Administration (NOAA) had confirmed the onset of a weak El Niño in February this year. The NOAA believes that it can confirm whether this extends for the rest of the year only after May/June. According to weather experts, there is a 55% chance of El Niño extending to April– June this year resulting in wetter weather in the US and warmer temperatures in the equatorial Pacific region.

Mr. Bree Knorr- Senior market analyst at farming magazine website farmprogress.com believes that this could result in above average yields in US soya and corn crops, but negative for wheat output because of the warmer weather expected in the Pacific. The El Niño-Southern Oscillationp (ENSO) phenomenon is particularly bad for wheat crop in Australia this winter (May-July).

Pest and crop resistance to CPC

The industry is grappling with the declining effectiveness of existing CPCs on pests and a new genre of seeds that are resistant to pesticides. UPLL is working on management of fungicide and herbicide resistance through innovative products eg: Mancozeb-based formulations being developed for multi-site applications and herbicide brands including Lifeline, which has enjoyed encouraging growth in the US in resistant crop segments (including crops resistant to Monsanto’s 1967 vintage herbicide Dicamba, according to the company).

There are also some infestations that are becoming more and more resistant to CPCs, which will entail lower off take in the near term and a rise in costs to develop more effective chemicals for the CPC industry. This is being addressed by the industry by developing chemicals that act at specific sites and infestations without contaminating the crop. UPLL is also developing resistance management tools and products across all categories.

Other risks for UPLL

Integration of UPLL and Arysta could take longer and entail higher costs than expected, resulting in delay in achieving the synergy benefits.

Volatility in currencies could impact the international business (79% of UPLL revenues).

Regulatory intervention in restricting or banning certain CPCs (technical grades and formulations) could hurt revenues. Mancozeb is under observation in Europe for any side effects, but there is no ban on its sales.


UPL

ANNEXURE -1 Global and Indian CPC industry Global industry structure (Exhibits 36-41) Global CPC market is highly concentrated. Exhibit 36: Market share before consolidation


Exhibit 37: Market share after consolidation


20%

20%

13% 10%

8%

6%

4%

19%

Syngenta Bayer BASF Dow Monsanto Dupont UPL Others

25%

26%

13%

16%

4%

16%

Syngenta-Adama Bayer-Monsanto BASF Dow Dupont UPL Others


UPL

Exhibit: 38 Top firms in global CPC market

Source: Phillips McDougall; Figures CY17, *UPLL includes Arysta and Bayer includes Monsanto

Exhibit 39: Rising trend in post patent revenue share in global CPC market


12.9

9.7

6.4 6.1

4.2 4.7

3.3 2.5

1.3

Bayer Syngenta BASF Dow Dupont FMC UPL Adama Nufarm Albaugh

Innovators Post-Patent (US$bn)

30 37.2

51.5 51.7 59.3 57.8 60.5

65.7

35 29.9

23.6 23 22.7 21.3 19.9

17.8

35 32.9 24.9 25.3

18 20.9 19.6 16.5

2000 2005 2010 2011 2013 2014 2015 2016

Post patent Patent Proprietary off-patent

(%)


UPL

Exhibit 40: Critical success factors in CPC business

Barriers to entry

Domain expertise in synthesis of complex chemicals

Navigating the registration path and regulations

Supply chain of raw materials and AIs(technical grades), backward integration

Knowledge of agronomy and farming practices/crop cycle

Distribution

Growth drivers

Crops – planting/output, & prices, farm income

Weather

Product registration and launches

Regulations and government policy

Consolidation of market

Strategic shift to bigger molecules

Integration of crop protection, seeds and traits

Geographic spread

Filling gaps in categories for specific crops/infestations

Access to R&D and product pipeline

Access to distribution network Leveraging existing relationships for geographical expansion, as

distributors are powerful

Post patent market

Billion dollar-worth products going off-patent

Presence in generic market to take advantage of this

Branded generics


Regulations Exhibit 41: Registration process in key geographies

US Approval is required at federal level followed by individual state approvals Registration takes around 3-3.5 years where federal approval alone takes 1.5 years.

Europe

AI is evaluated by EFSA (European Food Safety Authority) and voted by European Commission to be added to the positive list. Registration takes around 4-4.5 years where it takes 1-2 years for the approval to be granted by national authorities of individual member states.

Japan

The process is regulated by agricultural chemicals regulation law and evaluated by Food and Agricultural Materials Inspection for efficacy, phytotoxicity, safety, and quality of agrochem. Registration takes around 8-9 years.

Brazil

Formal registration process is under development. Stringent cut-off criteria. Registration takes around 2-5 years. Registered off-patent products cannot be sold until patent expiry.

India Dossier of scientific data is compiled on various parameters under Indian conditions and submitted to Central Insecticide Board (CIB) and Registration Committee (RC) for approval. Registration takes around 1-2 years.



UPL

Indian Industry overview Exhibit 42: Indian pesticides industry - past trends

FY13 FY17 CAGR FY13-FY17

Capacity (tn) 283,000 319,000 3.0%

Production (tn) 155,000 214,000 8.4%

Capacity utilisation (%) 54.8 67.1

Value export (Rsmn) 79,460 #131,500 13.4%

Volume of exports (tn) 180,000 342,000 17.4%

Avg. realisation -Exports (Rs/kg) 441 385 (3.4%)

Value of imports (Rsmn) 26,360 49,760 17.2%

Volume of imports (tn) 30,000 43,000 9.4%

Avg. realisation -Exports (Rs/kg) 879 1,157 7.1%

Note: #According to company report, industry exports in FY18 was reported at Rs413bn; this is 3x FY17 exports as per govt. data.

Source: Govt. of India data, Nirmal Bang Institutional Equities Research

Exhibit 43: Production of key pesticides

Source: Ministry of Agriculture & Farmers Welfare, Nirmal Bang Institutional Equities Research

79,356 73,658 69,178 80,112 86,770 77,324

28,732 46,438 47,729

61,124 65,920

70,261 22,005

22,972 26,266

33,028 27,460 32,689

133,772

147,097 147,938

179,380 186,490 187,524

0

50,000

100,000

150,000

200,000

250,000

FY11 FY12 FY13 FY14 FY15 FY16

Insecticide Fungicide Herbicide Others Total Pesticide Production

(tn)


UPL

Annexure - 2: Company information

Exhibit 44: UPLL interim results – 3QFY19 and YTD FY19

(Rsmn) 3QFY18 3QFY19 Chg. % 9M FY18 9M FY19 Chg. %

Total revenues (net of excise duty/GST) 41,940 49,210 17.3 1,16,870 1,33,120 13.9

Raw material costs incl. inv. Ch. 19,070 22,230 16.6 52,100 59,380 14.0

Employee costs 4,250 5,040 18.6 12,830 14,250 11.1

Other expenditure 10,330 11,780 14.0 28,960 32,470 12.1

Net FX loss/(gain) on trade receivable/payable 1,130 780 (31.0) 2,140 1,800 (15.9)

Total expenses 34,780 39,830 - 96,030 1,07,900 -

EBITDA 7,160 9,380 31.0 20,840 25,220 21.0

Other Income 1,190 370 (68.9) 2,960 1,920 (35.1)

Depreciation 1,690 1,820 7.7 4,910 5,380 9.6

Finance costs 1,730 1,980 14.5 4,630 5,800 25.3

FX loss/(gain) on loans, MTM +derivative (620) 40 (106.5) (900) (220) (75.6)

PBT 5,550 5,910 6.5 15,160 16,180 6.7

Current tax 60 430 616.7 1,330 2,490 87.2

Def. tax/(credit) (200) (150) (25.0) (240) (530) 120.8

Total tax (140) 280 (300.0) 1,090 1,960 79.8

PAT 5,690 5,630 (1.1) 14,070 14,220 1.1

Income from Associates 170 (40) (123.5) (570) (140) (75.4)

Minority interest 50 70 40.0 70 150 114.3

Cons. PAT before exceptional items 5,810 5,520 (5.0) 13,430 13,930 3.7

Exceptional expenses/(inc)+/(-) 70 910 1,200.0 570 1,520 166.7

Prior period write-back tax/(provision) - - - - - -

Cons. PAT - Reported 5,740 4,610 (19.7) 12,860 12,410 (3.5)


Exhibit 45: Major shareholders in UPLL

Name %

Blackrock Inc. 4.32

Government Pension fund - Global 2.9

Norges Bank 2.9

SBI Funds Management 2.64

Mawer Investment Management 1.93

Source: Bloomberg

Exhibit 46: UPLL’s management team

Name

Mr. Rajnikant Shroff CMD

Mrs. Sandra Shroff Vice-chairman

Mr. Jaidev Shroff Global CEO

Mr. Arun Ashar Director – Finance



UPL

Financials

Exhibit 47: Income statement


Revenues 163,120 173,780 220,682 388,418 437,304

y/y (%) 16% 7% 27% 76% 13%

Raw materials expenses 78,160 81,120 98,783 171,721 193,029

Raw material/sales (%) 48% 47% 45% 44% 44%

Employee cost 16,270 17,130 22,970 46,640 53,026

0ther expenditure 36,460 40,370 52,752 81,529 87,691

Fx (gain)/loss 2,380 110 1,800 - -

EBITDA 29,850 35,050 44,377 88,527 103,558

EBITDA Margin 18% 20% 20% 23% 24%

Depreciation & Amortisation 6,720 6,750 9,094 17,997 18,779

EBIT 23,130 28,300 35,284 70,530 84,779

Finance cost 6,260 6,470 8,480 11,305 11,365

FX +MTM (gain)(loss incl in Reported Finance cost

1,090 1,360 (220) 7,850 8,920

Other income 4,440 4,140 3,120 3,120 3,620

Exceptional Income/(Expense) (810) (630) (2,170) (2,884) (745)

PBT reported 19,410 23,980 27,974 51,612 67,370

Income tax (current+deferred tax) 1,890 3,540 4,109 9,809 12,261

PAT reported 17,520 20,440 23,865 41,802 55,109

PAT excluding exceptional item 18,330 21,070 26,035 44,686 55,854

Share of profits/(loss) in associates (190) (930) (180) (180) (180)

Less Minority Interest 60 80 708 3,783 5,751

Consolidated profit adjusted 18,080 20,060 25,146 40,724 49,923

y/y (%) 69% 11% 25% 62% 23%

Diluted EPS 35.66 39.39 49.37 79.96 98.00


Exhibit 49: Balance sheet


Equity 1,830 1,020 1,020 1,020 1,020

Reserves 72,140 90,670 107,793 140,633 180,717

Net worth 73,970 91,690 108,813 141,653 181,737

Accounts payables 48,750 56,750 54,415 95,774 107,828

Other ST liabilities 14,450 13,330 13,830 14,830 14,830

Short-term loans 7,080 6,340 18,560 15,560 15,560

Total current liabilities 70,280 76,420 86,805 126,164 138,218

Long-term loans 53,500 58,730 270,917 277,827 285,020

Other LT liabilities 5,730 3,400 2,870 1,975 1,011

Minority interest 330 190 84,898 88,681 94,432

Total Equity & Liabilities 203,810 230,430 554,303 636,300 700,418

Net block 40,710 44,370 288,928 298,756 306,496

Other LT assets + WIP 22,340 25,480 26,385 28,150 29,470

Long-term investments 3,780 10,270 10,270 10,270 10,270

Inventories 41,560 45,380 97,873 133,020 149,762

Debtors 56,560 60,560 89,811 122,378 137,781

Cash & ST Investments 30,140 30,480 27,146 29,836 52,749

Other current assets 8,720 13,890 13,890 13,890 13,890

Total assets 203,810 230,430 554,303 636,300 700,418


Exhibit 48: Cash flow


EBIT 23,130 28,300 35,284 70,530 84,779

Depreciation & Amortization 6,720 6,750 9,094 17,997 18,779

Changes in working Capital 1,120 6,590 83,579 25,355 20,090

Income tax 3,410 2,320 4,639 10,704 13,225

Opg cashflow post tax and w/c ch 25,320 26,140 (43,841) 52,469 70,243

Capital expenditure 12,200 15,680 254,557 29,589 27,839

Investment in equity method (10) 2,120 - - -

Long term investments 440 4,370 - - -

Long term loan & Advances 390 (740) - - -

Other Non Current Assets 1,020 (160) - - -

Opg Free cash 11,280 4,870 (298,397) 22,879 42,404

Ch in ST debt (17,970) (740) 12,220 (3,000) -

Ch in LT debt 30,840 5,230 212,187 6,910 7,193

Ch in equity - - 84,000 - -

Dividends (2,140) (3,690) (5,854) (5,000) (9,094)

Interest expense (6,260) (6,470) (8,480) (11,305) (11,365)

Other income 4,440 4,140 3,120 3,120 3,620

FX adjustments (1,320) (1,360) 220 (7,850) (8,920)

Share of profits/loss in associates (190) (930) (180) (180) (180)

Others(including exceptionals) (1,650) (1,130) (2,170) (2,884) (745)

Net Changes in Cash 17,030 (80) (3,334) 2,690 22,913


Exhibit 50: Key ratios

Y/E March FY17 FY18 FY19E FY20E FY21E

Profitability & return ratios

EBITDA margin (%) 18.3 20.2 20.1 22.8 23.7

EBIT margin (%) 14.2 16.3 16.0 18.2 19.4

Adj Net profit margin (%) 10.6 11.6 10.4 9.7 11.2

RoE (%) 27.2 24.2 25.1 32.5 30.9

RoCE (%) 18.9 16.9 9.8 11.8 13.0

RoIC (%) 21.9 23.4 11.1 12.7 14.3

Working capital ratios

Receivables (days) 126.6 127.2 148.5 115.0 115.0

Inventory (days) 93.0 95.3 161.9 125.0 125.0

Payables (days) 109.1 119.2 90.0 90.0 90.0

Cash conversion cycle 110.5 103.3 220.4 150.0 150.0

Leverage ratios

Net debt (Rsmn) 31,630 36,060 263,801 265,021 249,301

Net Debt (cash)/Equity (x) 0.43 0.39 1.36 1.15 0.90

Valuation ratios

EV/sales (x) 3.0 2.9 3.3 1.9 1.6

EV/EBITDA (x) 16.6 14.3 16.4 8.2 6.9

EV/FCF 44 103 -2 32 17

P/E (x) 25.6 23.2 18.5 11.4 9.3

P/BV (x) 6.3 5.1 4.3 3.3 2.6



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