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Emkay Global
UPL (Buy)
CMP: ₹354.7
Target: ₹500
We initiate coverage on UPL (formerly United Phosphorus Ltd) with a ‘Buy’ rating and a target price of ₹500 (38 per cent upside) with ‘overweight’ stance in sector EAP. Market share gains, merger synergies and deleveraging should drive re-rating. Key takeaways:
a) UPL has been gaining market share over the last five years despite flat industry growth, driven by new products and geographic launches. With the acquisition of Arysta, UPL has been able to fill portfolio gaps in major geographies and is poised to gain market share.
b) EBITDA margins started to improve from Q3FY20 (466 bps y-o-y) as merger synergies kicked in. With better margins, reduction in working capital days, UPL’s net debt/EBITDA should improve to 2.2x in FY22E from 3.5x in FY20E.
c) UPL is trading at around 5.4x/8.7x FY22E EV/EBITDA and a P/E which is 48 per cent/47 per cent lower than its last five-year one-year forward average of 10.4x EV/EBITDA and 16.4x P/E. We value UPL at 7.0x FY22E EV/EBITDA (five-year average one-year forward multiple — 10.4x) and arrive at our target price of ₹500.
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