Moral of the UPL story: stay away, when it’s unclear

MUMBAI: UPL Ltd’s whistleblower saga is making investors a little wary of its prospects. Its shares have fallen about 12% in the past two days after The Economic Times reported allegations based on a whistleblower account. In fact, the stock has not rallied much even after management issued a clarification. Some brokers like CLSA reiterated their buy rating after management comments, but the stock has remained weak.

“UPL’s frequent governance problems, the third time in a year, are worrisome. UPL management has clarified its position in each case, although it appears to provide less comfort to investors for now, “the Kotak Institutional Equities analyst said in a note to the client. The report added that investors should” stay away, when not be clear. “

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These governance factors have weighed in on the stock’s valuations, which have fallen a significant 40% from their five-year average, analysts say. In fact, UPL lost about 23% of its market capitalization in the last year.

On the other hand, the smaller agrochemical player PI Industries Ltd has been moving forward. The company recently overtook UPL to become the largest agribusiness company on the exchanges. PI Industries’ one-year term valuation stands at about 44 times FY 22 earnings compared to a low 8.3 times for UPL, according to Bloomberg data. Indeed, UPL is a much larger pair with companies in Latin America and Europe. UPL’s performance has been affected by the pandemic, but analysts see a recovery in business in the second half.

Another concern for the company remains its high debt levels. “Debt continues to be a key concern, as net debt increased by Rs 1,780 crore in the first half compared to fiscal 2020. Overall, its balance sheet has not shown a significant improvement in the first half of fiscal 21. In 2HFY21, the company aims to pay off $ 700 million in debt , which would be a key factor to take into account, “said Motilal analyst Oswal Financial Services Ltd in a note to the client.

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

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