By: ICN Bureau
Last updated : December 15, 2020 9:19 am
Most analysts have retained their buy calls on UPL even after significant media coverage of the complaint triggered a steep fall in share price last week
"You have the lowest P/E multiple among your competitors in the agchem world," one analyst told UPL management during the conference call to discuss the whistleblower complaint against the company. "This is a big distraction, and these allegations have really caused damage to your shareholders."
According to Trendlyne, the observation on PE explains why most analysts have retained their buy calls on UPL even after significant media coverage of the complaint triggered a steep fall in share price last week. "Business outlook for the company remains upbeat," CLSA noted, "and debt reduction is on track."
UPL management clarified that this is an old complaint from 2017 - first made by CEO Jai Shroff's estranged wife Poonam Bhagat. "We went through the complaint in 2017," Hardeep Singh, Independent Director of UPL said, "and also hired an independent agency to investigate it. After that we documented that the complaint had no merit and closed it in 2018."
The whistleblower allegations were in two areas, regarding a shell company Sadafuli Finvest and a Pali Hill apartment. The allegation said that UPL entered into a leave-and-licence agreement from Oct 2002 with Sadafuli for Salisbury House, a Mumbai apartment allegedly owned by CEO Jai Shroff and located in Pali Hill, which is famous for celebrity residents that include Aamir Khan and Katrina Kaif.
UPL, according to the accusation, rented Salisbury House back to Shroff (with a rent of Rs 6 crore paid over 66 months). The complaint stated that overall Rs 24.9 crore in rent was paid over several years until FY19.
UPL however, says that Salisbury House is not owned by Shroff.
The second allegation was that Sadafuli where Shroff held a 97.8% stake, has been receiving secured and unsecured loans from multiple shell entities related to Shroff. In FY13, Shroff transferred his entire holding to Teknomic Concultants.
UPL says that transactions under Teknomic were part of regular business, and the news reporter was invited to examine UPL accounts in this regard (the reporter did not take up the offer). The company also says that Samir Mehta, who owns Teknomic, had a lease agreement with UPL that expired in Mar’19.
The management said that it is looking at "taking very strong action" against what it called malafide accusations aimed at "perhaps shorting the market."
According to reports, Kotak says UPL has witnessed its third governance related issue in CY2020, as an unauthenticated media article pointed out a whistleblower complaint suggesting siphoning of funds by the promoters, which was filed in June 2017 but not disclosed earlier by the company. Earlier in January 2020, there was a search conducted by the income tax department in the company’s premises and recently it was asked to file IT returns for the past six years. Subsequently in October 2020, the statutory auditor of UPL Corp., a material subsidiary based out of Mauritius for overseas business, tendered resignation. In each of these instances, Kotak acknowledges that the UPL management has been forthcoming in issuing clarifications to allay investor concerns; however, uncertainty around such issues remains as overhang on the UPL stock.
Kotak says UPL may find it difficult to reduce its ‘reported’ net debt to 2X EBITDA by end-FY2021, without issuance of perpetual bonds or receivables factoring given unlikely material upside to Kotak’s below consensus estimates and limited scope of cash flow release from working capital, which was substantially below peer group, in terms of days as of endFY2020. In the conference call organized to allay investor concerns on recent issue, UPL management indicated that business momentum is fairly robust amid healthy end-market demand environment and favourable agri-commodity prices; however, we will await actual delivery and watch out for sustainability of strong earnings, if at all, to review their estimates.