UPL shares dive 15% on restructuring plan; more downside ahead?

Shares of UPL Ltd witnessed a sharp drop in Monday's trading session following the company's restructuring announcement. At last check, the stock was trading 14.69 per cent lower at Rs 641.30.

Nuvama Institutional Equities has reduced its rating on the stock to 'HOLD', citing "unresolved leverage concerns and post-restructuring dilution."

"UPL announced a restructuring to create a unified crop protection entity by merging UPL SAS and UPL Corp, which would be listed as UPL Global, while UPL Ltd shall stay the holding company for the formulation business, R&D, SUPERFORM and Advanta. The demerger aims to drive synergies and enable value unlocking. The transaction is cash and tax neutral, protects minority interests and does not alter the capital structure, with no material impact on current leverage overhang," Nuvama stated.

The domestic brokerage added, "Given the recent stock run-up, unresolved leverage concerns and post-restructuring dilution, we downgrade the stock to 'HOLD' with a revised TP (target price) of Rs 816/share. We also shift to an SotP valuation by platform, based on EV/EBITDA multiples."

Market expert Avinash Gorakshakar told Business Today, "Clearly, the demerger is targeted to add value to the shareholders. Once the subsidy gets listed, I think you're going to see a good value upside. But I think in the near term, there are some doubts whether this subsidiary is going to actually be profitable, what kind of value monetisation would happen and what could be the swap ratio. So, the market is a little uncertain and that's the reason it has given it a thumbs down. But I think as more clarity comes in, we have the management commentary discussing the pros and cons of this demerger. I think clarity will come in. Investors who want to take a slightly longer-term call can use the weakness to actually accumulate the stock. Our sense is that this year, with a good monsoon, numbers are going forward should be better. And I think the demerger, which is expected to add value, but it will take some time, maybe a couple of quarters, before you see some clarity."

From a technical perspective, Osho Krishan, Senior Analyst – Technical & Derivative Research at Angel One, said, "UPL plummeted sharply on the back of robust volumes, suggesting a breakdown that has disrupted the short-term outlook. The immediate potential support is placed around Rs 610-600 subzone, while on the flip side, the 200 DSMA placed around Rs 700 is likely to provide an obstacle for any pullback in the near period."