Maintain ‘buy on UPL with target price of Rs 560 based on 15x FY17e EPS. Our positive stance on UPL stems from its diversified agricultural business model and sharpened focus on organic growth along with strengthening balance sheet. We have not considered the impact of the merger in our estimates currently. UPL has been trading in the 6-15x P/E range over the past five years. At current price, the stock trades around 15x FY16e and 12x FY17e EPS.
UPL announced the merger of Advanta India (Advanta; associate company in which UPL owns 48.4% stake) with itself. The company will issue equity shares in the 1:1 ratio along with preference shares of 3:1 to Advanta’s shareholders. The merger will lead to equity dilution of 19% for UPL. Further, holders of 100 GDRs will be issued 106 GDRs of UPL and 100 FCCBs of UPL will be issued for 100 FCCBs held in Advanta. The company will issue 77.5 million fresh equity shares and 181.8 million preference shares to Advanta’s shareholders.
Management anticipates the merger to yield benefits like incremental geographical reach, synergies in production, logistics & distribution and annual savings of R900 million. It will also enable UPL to have presence throughout the entire agri-input value chain (from seeds to post harvest agrochemicals).
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