Worries over UPL’s bulging debt fail to enthuse investors despite big-bang private equity placement

The restructuring exercise has given UPL net proceeds of $259 million, which brokerage firm Prabhudas Lilladher believes will be used towards paring down its debt levels going ahead.

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UPL’s surprise move to undertake a wholesale restructuring of its business and induct private equity investors has failed to enthuse investors due to heightened concerns over the company’s heavy debt burden.

UPL, on October 21, announced that it will be breaking up its business into four separate units of global crop protection, India agriculture tech and crop protection, global seeds, and specialty chemicals.

The restructuring was effected as a way to help UPL unlock value in its global seeds business and the Indian crop protection business by bringing in marquee private equity investors at rich valuations. But investors were underwhelmed by the deal, and the stock price has not seen any fireworks, in line with the eye-popping valuations assigned by the private equity investors for the deal.

UPL sold 9.09 percent stake in the Indian agriculture solutions business to private equity giants Abu Dhabi Investment Authority and Brookefield for $200 million, which values the unit at $2.2 billion.

At the same time, it sold a 13.33 percent stake to KKR in the newly formed Advanta Enterprises (global seeds business) for $300 million at a valuation of $2.25 billion.

The restructuring exercise has given UPL net proceeds of $259 million, which brokerage firm Prabhudas Lilladher believes will be used towards paring down its debt levels going ahead.

In 2021-22, UPL failed to deliver on its guidance of bringing down net debt by $200 million as rising global interest rates and surging raw material prices played havoc with its financial planning. In the June quarter, UPL, in effect, reported a near $400 million rise in gross debt making investors wary if the company had enough means to raise funding to pare its net debt to acceptable levels.

UPL, following its earnings on November 1, promised investors it will bring down its net debt by $650 million in 2022-23, which currently sits at $3.5 billion.

Shares of the company have risen 5 percent since the company’s guidance on net debt reduction, while they barely rose a percent after the announcement of the restructuring of the company.

New Levers

UPL created UPL Sustainable Agri Solutions to house its domestic crop protection and agriculture solutions platform, and Advanta Enterprises to contain its global seeds business – the only two assets lucrative enough to unlock value, said analysts.

“With this deal, UPL has showed investors that it has enough levers to pull in the future when it requires capital to bring down its net debt,” said a sell-side analyst with a foreign brokerage firm tracking the company for over nine years on condition of anonymity citing internal regulations.

Analysts believe that the company will be able to bring in significant capital by paring down its stake in UPL Sustainable Agri Solutions if the need arises to raise new capital in the future.

But, there is a big caveat.  The eventual unlocking will happen only and only if the company is able to sell down stakes in the future at valuations higher than those considered for the last round of private equity placements, which analysts unanimously feel are overstreched.

UPL has sold minor stake in the India business to KKR at more than 27 times enterprise value-to-operating profit, the highest valuation among all the entities demerged by UPL.

There is no quarrel over the quality of business UPL houses though. Analysts said UPL’s domestic biosolutions platform has seen increased adoption among educated farmers with the platform having the potential of transforming the company in the coming years. Similarly, analysts said that the global seeds business is perhaps one of the best barring that of Bayer Ag’s following its acquisition of Monsanto in 2016.

Investors are concerned by the rich valuations for the seed and India business. Some of the institutional investors of the company are worried over valuations for the verticals, the analyst with the foreign brokerage firm said.

Execution Key

While the new levers in terms of the Indian agriculture tech solutions company and global seeds business provide lucrative assets to monetise, UPL will need to accelerate its efforts to pare net debt. UPL has emphasized its focus on cash generation from the business and said that current high level of working capital requirements are unsustainable.

UPL is looking to generate around $750-800 million in cash in the second half of 2022-23 through reduction of inventories, which had increased in anticipation of strong demand.

Brokerage firm Kotak Institutional Equities said that it would monitor the execution of the company on reducing its net debt in the coming quarters to consider a more positive stance on the stock.

“We believe, UPL, does offer value if balance sheet concerns are successfully addressed,” Kotak Institutional Equities said. Analysts’ outlook on the stock has remained unchanged following the transaction with nearly 93 percent of the brokerages tracking the company retaining their buy rating.

That said, consensus price target for the stock has risen to Rs 1,024.7 as on November 7 from Rs 1,018 on October 19, indicating return potential of 36 percent over the next 12 months.

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