This stock spiked a whopping 15% today; why you should take a slice of it

UPL share price spiked a whopping 15 per cent on Monday after the agrochemical firm entered into one of the largest overseas deals by India Inc in recent years. The chemicals producer UPL (formerly United Phosphates) teamed up with Abu Dhabi Investment Authority and TPG to snap up Florida-based Arysta Life Science Inc for $4.2 billion in an all-cash deal.

The transaction will enhance the position of UPL as a global leader in the agriculture solutions market and make it a $5 billion entity in combined sales offering it a $200 million savings through operational synergies.

Reacting to the news, the stock surged as much as 14.73 per cent to Rs 631.35 on the BSE. 

After the announcement, rating agency Standard & Poor upgraded the outlook on UPL from positive to stable, while Motilal Oswal Securities and UPL maintained 'buy' rating on the stock. 

"UPL Corp has announced the acquisition of Arysta for $4.2 bn,valuing the deal at 10x EV/Ebitda as on March 18. UPL becomes the fifth-largest player in the global agrochem market with combined revenue of ~US$5bn. Financing includes US3bn debt by UPL Corp, taking net leverage to 3-3.5x. It gets access to new markets and strengthens footprint in existing markets," said global brokerage CLSA in a research note.  

"Wider product basket, stronger negotiation power with farmers/distributors and cost savings should drive synergy gains of $200m from year two onwards. With 3 per cent revenue growth for Arysta in FY20 and no synergy benefits, we believe the acquisition will still be EPS accretive. The acquisition will enable itto move up the product value chain with differentiated R&D and discovery capabilities," CLSA added.

CLSA retained 'buy' rating on UPL with a target price of Rs 940.

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MOSL although noted that the acquisition of Arysta would drive significant synergistic benefits (product portfolio expansion, strengthened presence in Europe and cost synergies on backward integration and efficiencies), it would also result in a highly leveraged balance sheet for UPL. 

"We note that UPPL trades at 8.9x FY18E EV/EBITDA, and the acquisition has taken place at 9.9x FY18 EV/EBITDA of Arysta (at an 11 per cent premium to UPL’s current valuation). Post-acquisition, not only FY20
EPS would shrink by ~8% (v/s our previous estimates), but also FY20 RoE would come down from 23.1% to 21.2%," said MOSL in a research note dated July 20.

The brokerage cut its FY20 PAT estimate by 8 per cent due to higher interest cost on increased debt. Consequently, it cut valuation multiple from 17x to 13x FY20E EPS and arrive at a target price of Rs 664.