Why Some Brokerages Raised Target Price On UPL's Stock Post Q1 Earnings

Most analysts expect UPL Ltd. to continue benefiting from its merger with Arysta LifeSciences as they maintained their bullish investment recommendation on the fertiliser and pesticides maker after its margin beat estimates in a quarter marred by the coronavirus pandemic.

UPL’s margin widened to 21.8% in the April-June period from 16.7% a year ago. That’s higher than the estimated 20%. While a low base and improved performance in India led to a twofold jump in net profit of the company, its revenue fell over the year ago.

Of the 35 analysts tracking the stock, 32 have a ‘buy’ rating, while two suggest a ‘hold’. Only one analyst has a ‘sell’ recommendation. The average of Bloomberg consensus 12-month target prices implies an upside of 18.5%.

Here’s what brokerages have to say about UPL’s first-quarter performance:

CLSA

• Maintains ‘buy’ and hikes price target to Rs 620 from Rs 500 apiece
• Surprise on growth and margin drives big beat in first quarter
• Strong performance in India but Latin America hit by adverse forex
• Good agronomic conditions suggest strong quarters ahead
• Market share gains to continue in FY21; leverage manageable
• Raises FY21-22CL EPS estimates by 7%-16%

Morgan Stanley

• Maintains ‘equal-weight’ with target price at Rs 426 apiece
• First quarter operationally in line with estimates
• Revenue and Ebitda guidance of 6-8% and 10-12% for FY21
• Net debt/Ebitda target of 2 times by FY21-end
• Cumulative revenue and cost synergy of $247 million and $120 million since Arysta acquisition
• Assumes CAGR of Ebitda at 9% for FY20-23, cost of equity at 15.4%, and long-term PAT at 10%

Investec

• Reiterates ‘buy’ and raises price target to Rs 665 from Rs 530 apiece
• Revenue miss offset by better margins led by favourable geographic and product mix and cost cuts
• UPL is very well placed on the back of its diverse geographical spread, expanding product portfolio and synergy benefits from Arysta
• Management geared to reduce net debt
• Valuation of 5.7 times estimated FY22 EV/Ebitda (versus five-year average of 9.3 times) offers favourable risk-reward

Emkay Global

• Maintains ‘buy’ and hikes price target to Rs 560 from Rs 500 apiece
• Revenue declined due to pre-buying in North America and deferral in Latin America
• Merger synergies led to margin beat
• Cash from operations increased 85% year-on-year due to higher payable days and lower receivable days
• Maintains net debt/Ebitda target of 2.0 times by March-21
• Believes UPL is on path to re-rate as valuations remain below its five-year average of 10.5 times EV/Ebitda

Motilal Oswal

• Maintains ‘neutral’ with a price target of Rs 527 apiece
• Revenue and PAT below estimates; Ebitda in line
• Muted show in Latin America / North America, but India outshines
• Reduces earnings estimates by 8%/6% for FY21/FY22 factoring lower-than-expected earnings and moderation in growth in Latin America and North America
• High debt remains a key concern on the stock