Moral of UPL story: steer clear, when unclear


MUMBAI: UPL Ltd’s whistleblower saga is making investors a bit wary about its prospects. Its stock has slipped about 12% in the last two days after The Economic Times reported allegations based on a whistleblower account. In fact, the stock has not made much of a recovery even after the management issued a clarification. Some brokers such as CLSA reiterated their buy rating after the management’s comments, but the stock has stayed weak.

“Frequent governance issues for UPL, third time within a year, are worrying. UPL management has clarified their position on each instance, albeit it seems to provide lesser comfort to investors for now,” said analyst at Kotak Institutional Equities in a client note. The report added that investors should “steer clear, when unclear.”

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These governance factors have weighed on the stock’s valuations which have dropped a considerable about 40% against its five-year average, point out analysts. In fact, UPL lost about 23% of its market capitalisation in the past one year.

On the other hand, the smaller agro-chemicals player PI Industries Ltd has been pulling ahead. The company recently pipped UPL to become the largest agri-business company on the bourses. PI Industries’ one-year forward valuation stands at about 44 times FY22 earnings as compared to the lowly 8.3 times for UPL, per data from Bloomberg. Sure enough, UPL is a much larger peer with businesses in Latin America and Europe. UPL’s performance has been hit by the pandemic, but analysts see a second-half recovery in business.

Another worry for the company remains its high debt levels. “Debt remains a key concern as net debt increased by 1780 crore in the first half compared to FY20. Overall, its balance sheet has not shown a significant improvement in the first half FY21. In 2HFY21, the company is targeting to repay $700 million in debt, which would be a key trigger to watch out for,” said analyst at Motilal Oswal Financial Services Ltd in a client note.

And investor sentiment may remain bogged due to low cash flow generation. “Recurring downgrades on consensus estimates amid limited conviction on optimistic guidance-led-forecasts, low free cash flow generation, high effective leverage and a few other issues have kept us cautious on the stock,” Kotak analysts say.

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