Technical & Macro Analysis Of Indian & Global Market----: UPL: After Advanta Merger Induced Correction, 430-420 May Be A Good Buying Zone

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.