UPL Ltd has announced a massive restructuring exercise aimed at simplifying its complex holding structure. In reaction, the Street dragged down its shares by a whopping 15% on Monday. What explains the tumble?
First, let’s evaluate UPL’s existing structure and the proposed one. Currently, UPL holds its Indian and global crop protection businesses in separate entities. Other businesses include 70% subsidiary Advanta for seeds, and wholly owned subsidiary Superform Chemistries for specialty chemicals.
UPL now proposes to list an integrated crop chemicals company by merging Indian and global crop chemicals into UPL Global. It will issue one share of UPL Global for one share held in UPL.
The global seeds business, Advanta, is anyway in the process of getting listed separately, having filed papers for its initial public offering (IPO). Superform could get a private equity investor and then be listed later.
Some brokerages have expressed concerns over UPL’s high debt, but that’s not something the proposed restructuring aims to address anyway.
The management may address the debt issue separately through the sale proceeds from the offer for sale of its stake in Advanta, wherein it plans to sell about 8% stake.
UPL’s net debt remains high at ₹23,317 crore as of December-end with net-debt-to-Ebitda at 2.5x. Post the restructuring, UPL Global is likely to have nearly 80% of the net debt and holding company UPL will have the rest. Advanta is a net debt-free company.
Notwithstanding the debt burden, the moot question for investors is whether there is any upside from the restructuring exercise. As subsidiaries are listed separately, it is likely that, while valuing UPL on a sum-of-the-parts basis, analysts might apply a discount to the market value of its stake in UPL Global and Advanta. Naturally, this is making investors nervous.
A holding company discount is applied when a subsidiary carries out the main business, while the parent company merely holds an investment in it. Here, for instance, UPL will become a holding company, while subsidiaries will operate the crop protection and seeds businesses. In such cases, a holding company’s valuation is derived by applying a discount to the subsidiary’s valuation.
Nuvama Institutional Equities has assigned an EV/Ebitda multiple of 7x to UPL Global based on FY28 Ebitda estimate of ₹5,537 crore for UPL’s 66% stake in it. Similarly, an EV/Ebitda multiple of 25x has been assigned to Advanta based on its FY28 Ebitda estimate of ₹1,203 crore for UPL’s 70% stake in it.
The broking firm has applied a 20% discount to the combined valuation of these two businesses, as UPL will become a holding company. UPL’s 100% stake in Superform has been valued at 15x Ebitda of ₹1,882 crore. Collectively, this fetches a value per share of ₹816, which is far higher than UPL’s current market price of ₹642. What is the catch then?
Interestingly, Nuvama’s Ebitda estimates don’t appear to be on the higher side compared to Antique Stock Broking and Motilal Oswal Financial Services. Even the valuation multiples assigned are in sync with those of global peers for each business.
Simply put, UPL’s current market price indicates the Street is assuming a holding company discount as high as 40%. To be sure, this does not seem excessive as Motilal Oswal’s valuation discount for Grasim Industries’ stake in UltraTech Cement is 35%.
