UPL’s shift of focus from revenue growth to profitability, emphasis on organic
growth, higher return ratios and distribution of free cash to shareholders
underpin its new growth strategy. The shift addresses key investor concerns. The
improvement in operating performance has also been driven by successful
integration of DVA Brazil, and strong growth in India and RoW. We expect 17%
CAGR in UPL’s EPS over FY13-16E with ~500bp expansion in RoCE to 20% and
net gearing of 0.3x by FY16E. We introduce our FY16 estimates and roll forward
our target multiple to FY15. Reiterate Outperformer with a revised price target of
Rs282 (12x FY15E EPS). UPL is one of our top mid-cap picks.
Shifting growth gears: Having acquired critical scale (US$1.8bn revenues by
FY14E), UPL now seeks to transition from a generics entity to more of a branded
player by leveraging its R&D capabilities and distribution reach. This should lead
to higher gross and operating margins. The management aims to improve EBITDA
margins by 100bp pa over the next 2-3 years (our estimate at 170bp by FY16).
Balance sheet repair – the new imperative: Free cash generation (limiting net
working capital to 100-110 days and prioritizing organic growth), and distribution
through higher dividends and buybacks are the new mantra at UPL. This, along
with planned lowering of cash levels towards reducing gross debt, should drive a
marked improvement in return ratios over the next few years.
A re-rating candidate; Outperformer: With global scale and diversified presence,
UPL is a play on global agricultural cycle. Volatile earnings and >600bp dip in RoE
over FY08-12 led to de-rating, but we see a turnaround ahead with improving
profitability and free cash distribution. At 8.8x FY15E earnings, valuations are
compelling. Disappointment on margins and free cash generation are key risks.
��
growth, higher return ratios and distribution of free cash to shareholders
underpin its new growth strategy. The shift addresses key investor concerns. The
improvement in operating performance has also been driven by successful
integration of DVA Brazil, and strong growth in India and RoW. We expect 17%
CAGR in UPL’s EPS over FY13-16E with ~500bp expansion in RoCE to 20% and
net gearing of 0.3x by FY16E. We introduce our FY16 estimates and roll forward
our target multiple to FY15. Reiterate Outperformer with a revised price target of
Rs282 (12x FY15E EPS). UPL is one of our top mid-cap picks.
Shifting growth gears: Having acquired critical scale (US$1.8bn revenues by
FY14E), UPL now seeks to transition from a generics entity to more of a branded
player by leveraging its R&D capabilities and distribution reach. This should lead
to higher gross and operating margins. The management aims to improve EBITDA
margins by 100bp pa over the next 2-3 years (our estimate at 170bp by FY16).
Balance sheet repair – the new imperative: Free cash generation (limiting net
working capital to 100-110 days and prioritizing organic growth), and distribution
through higher dividends and buybacks are the new mantra at UPL. This, along
with planned lowering of cash levels towards reducing gross debt, should drive a
marked improvement in return ratios over the next few years.
A re-rating candidate; Outperformer: With global scale and diversified presence,
UPL is a play on global agricultural cycle. Volatile earnings and >600bp dip in RoE
over FY08-12 led to de-rating, but we see a turnaround ahead with improving
profitability and free cash distribution. At 8.8x FY15E earnings, valuations are
compelling. Disappointment on margins and free cash generation are key risks.
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