UPL eyes ₹5600 mn of synergies from Arysta deal

Update on the Indian Equity Market:On Thursday, Sensex ended higher led by gains in financial services and IT sectors, Sensex gained 170 pts and Nifty ended at 11,872. Retail inflation jumped to 4.62% in October from 3.99% in September. Vodafone Idea fell 20.27% after the department of telecommunications (DoT) asked operators to conduct a self-assessment of pending dues after last month’s Supreme Court verdict that upheld the government’s definition of adjusted gross revenue.
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Among stocks, ICICI Bank Ltd, Bajaj Finance Ltd, HDFC twins—HDFC Bank Ltd and HDFC Ltd, Axis Bank Ltd, and Yes Bank were the biggest gainers in the financial services sector. In the tech sector, Infosys Ltd, Tata Consultancy Services Ltd, and Tech Mahindra Ltd gained the most.

UPL eyes ₹5600 mn of synergies from Arysta deal
Key takeaways from the interview of Mr Anand Vora, Chief Financial Officer, UPL; dated 11th November 2019:

• When asked about the Arysta acquisition and synergies, Mr Vora mentioned that UPL has already achieved Rs 3200 mn of synergies and targets ~ Rs 5600 mn of total synergies benefit to reflect in Profit and Loss Account for FY20.
• Mr Vora said that the EBITDA margins will improve to about 16-20% due to the merger.
• He commented on the tough external environment factors like the trade war and swine flu, not letting UPL take any price increase to push the volumes.
• Mr Vora added that the debt increase is due to the seasonality of the business and high working capital which will decrease significantly after December as cash inflows start against the receivables and this has been the trend for the last three years.
• He stated that the receivables have decreased as compared to last year and UPL is working in that direction. On average the net working capital of Arysta is higher than UPL but they are working on it and expect the working capital to trend closer to that of UPL.  
• When asked about the pressure on demand globally, he commented that they are in crop protection chemical business and farmers rarely keep their land vacant. In fact, once they have invested in seeds and spent on fertilizers, they are left with no choice but to use the crop protection chemical to protect their crops.

Consensus Estimate (Source: market screener website)

• The closing price of UPL was ₹ 535/- as of 14-November-19 and traded at 17.5x /11.5x /9.8x the consensus EPS for FY20E / 21E / 22E of Rs 31/47/55 respectively.
• Consensus target price of ₹ 704/- implies a PE multiple of 12.8x on FY22E EPS ₹ 55/-.