-------- Forwarded Message --------
Subject: UPL: After Advanta Merger Induced Correction, 430-420 May Be A
Good Buying Zone
Date: Thu, 26 Nov 2015 08:32:22 +0530
From: Asis Ghosh <asis...@gmail.com>
Reply-To: asis...@gmail.com
*Near term target might be 490-525*
Though the Advanta merger may be an overhang in the short term,
it is good (EPS accretive) over medium to long term
*CMP: 437*
*
*
*Buy on dips around: 430-420*
*
*
*TGT: 465-476-490-525 (1-6M)*
*
*
*TGT: 551-575-610-640 (12-24M)*
*
*
*TSL< 415*
Note: Consecutive closing below 415 for any reason. UPL can fall up to
397-372, followed by 344-320 & 300-270 zone. But considering the time &
price action on the technical chart, 397-372 might be a major demand
zone for the stock and one may again accumulate there for better
investment buying average.
Market was expecting UPL-Advanta merger ratio of 1:1, but the 30/- extra
sweetener (in the form of three convertible preference share for every
one Advanta share) surprised the street and consequently the stock
corrected by around 8% post merger announcement high.
Basically, both these two companies are like sister (associate) concerns
and belong to the same promoter group (Shroff Family) and the merger
was expected for a long time. The merger process is expected to be
complete by the next 6-8 months.
As par the management, the merger ratio was worked out with great care
(DCF method) keeping in mind the potential growth & synergy benefit of
both the companies. UPL will benefit from Advanta's international
presence and Advanta will also benefit from UPL's rich customer base.
The merged entity will grow modestly by around 10-15% amid hopes of
better export from India and the full synergy benefit will be visible in
the next 2-3 years.
UPL has strong customer base in Brazil, US, EU & Mexico, where as
Advanta has stronghold in Australia & Thailand. UPL will also benefit
because of having complete value chain, right from seeds to plant
protection technology and post harvest, where UPL is one of the world
leader in post harvest technology to reduce corp losses.
As par the company, all the major agri players are looking for a
complete value chain and post merger UPL will bring tremendous values to
its partners and customers. The management has also indicated some cost
& synergetic benefit of around Rs.90 cr annually (tax & loan interest
benefit) and another Rs.240 cr (Advanta's expected profit by FY:16-17)
respectively.
In the process, UPL has also guided to reduce net combined debt to
Rs.3400 cr from current level of around Rs.4530 cr by FY-16.
Thus the motto of this UPL-Advanta merger is to provide all-agri
solutions through one single entity and enhance share holder value.
Analysts are bullish on the stock in the mid to long term as the synergy
benefit may take couple of years for reflection in earnings, operational
efficiency, improvement in growth prospects, cash flow and return ratios
etc.
In the near term, analysts are some how skeptical as due to expansion in
equity by around 19% after merger, there may be dilution of EPS in UPL
by around 6-10%.
For the deal valuations & merger ratio to be justified, the net profit
of Advanta division is expected to be nearly treble from the FY-14 level
of Rs.86 cr to around Rs.240 cr (excluding the Rs.90 cr in savings). The
UPL management expects that for Advanta (NP to Rs.240 cr by FY-17) on
the back of margin expansion and restructuring benefits.
In the last five years, UPL registered an average net profit growth of
around 16.8%, while Advanta clocked it as 25.29%.
The street seems to be less confident about Advanta's sharp
profitability projection in the near term and that will be an overhang
on the UPL's earnings and thus this merger may be EPS dilutive in the
short term.
But, globally the seeds business (Advanta) got a higher PE than agri
chemical (UPL) and thus there is some hope.
Q2FY16 consolidated PAT of UPL was at around Rs.166 cr, up by 11% (YOY)
against expectation of Rs.241 cr. The below estimate result may be due
to cross currency headwinds, Brazil market factor and erratic &
deficient monsoon in India.
Q2 EPS of UPL was at 4.50 against consensus of 5.45.
*As par BG metrics & current market parameters:*
(On consolidated UPL only TTM & FWD EPS)
Present median valuation of UPL may be around: 570 (FY:15/TTM)
Projected fair valuations of UPL might be around: 600-660-720 (FY:16-18/FWD)
*Thus 585 may be a near term median valuation of UPL and if we deduct
even 10% EPS for Advanta merger factor as short term headwind, then the
fair value of the combined entity might come to around 500-525.*
SCRIP EPS(TTM) BV(Act) P/E(AVG) Low High Median
200-DEMA 10-DEMA
UPL 27.97 136.73 25 570.24 560.43 565.33 465.03 449.17
UPL 31 324.25 25 600.33 590.01 595.17 465.03 449.17
UPL 37.45 426.75 25 659.84 648.49 654.16 465.03 449.17
UPL 45.25 561.55 25 725.30 712.83 719.07 465.03 449.17
FY-14 PAT of Advanta was at Rs.83.54 cr with an EPS of 9.90 on
consolidated basis.
*Analytical Charts:*
<http://3.bp.blogspot.com/-pluNh11g8IQ/VlZxdUmze3I/AAAAAAAAFAY/RDH8cyQ7Nzg/s1600/UPL-24-11-2015.png>
<http://2.bp.blogspot.com/-6UiBedrNiFU/VlZxffvRZEI/AAAAAAAAFAg/wJY4nLFwjI8/s1600/UPL-FIBB-24-11-2015.png>
<http://2.bp.blogspot.com/-K4aDxsMyqT8/VlZxiiLcITI/AAAAAAAAFAo/ghUM0_KXoNc/s1600/UPL-WK-24-11-2015.png>
<http://2.bp.blogspot.com/-ub4ifzQESr4/VlZxophZ_CI/AAAAAAAAFAw/ERBtnLC7fB0/s1600/UPL-TL-24-11-2015.png>
<http://4.bp.blogspot.com/-8VFE_93ZAmw/VlZxtEZXnGI/AAAAAAAAFA4/wOYTKvAfGzk/s1600/UPL-PATTERN-24-11-2015.png>
<http://2.bp.blogspot.com/-4TEsFBAKgVA/VlZxwfZRX7I/AAAAAAAAFBA/V-rGGof9we4/s1600/UPL-PATTERN-LT-24-11-2015.png>
--
Thanks & Regards,
Asis Ghosh
(asisghosh.blogspot.in)
NCFM-TA Certified
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