Why UPL stock price is falling? Corporate Governance Issues in UPL

Reasons behind recent fall in UPL stock price

Introduction

UPL is principally engaged in the business of agro-chemicals, industrial chemicals, chemical intermediaries and specialty chemicals. Recently there were allegations by a whistle-blower about fund diversion by promoters. Let us take a look at this corporate governance issue and its impact on UPL’s stock price.

Why UPL stock price is falling?

Recent stock price movement

• Corporate governance issues stated by the whistle-blower allegations impacted the stock price of UPL leading to a correction of ~4% in one week.
• The whistle-blower alleged that company entered into rent deals with a shell company owned by its employees and paid rent for properties held by them.

Stock performance with peers

• Company operates in agro-chemical sector which performed exceptionally well this year mainly due to good monsoon and good Rabi harvest auguring well for agriculture sector.
• However despite being in such lucrative sector,company has largely under-performed as compared to its peers.

Shareholding Pattern (%) of UPL Ltd as on Sept’20

• Here, promoter holding is low ~28%, whereas company has strong institutional holding of FIIs and DIIs. However, this is mainly because company is a part of NIFTY 50 Index.
• Thus, high inflow of passive investment in index leads to higher shareholding of institutional investors in the company.
• However, in case of such corporate governance issues, usually active investors become cautious about the stock and might undertake selling if the issue aggravates.

UPL Ltd – Profitability vs Stock Performance

• Here, as we can see company has healthy net profit growth. However this growth is not analogous to stock’s return over the years.

Conclusion

Although the whistle blower allegations are yet to proved, it is better for retail investors to stay away from the stock for now as corporate governance issues can hamper the stock performance to a great extent. If these allegations are proved correct, it is quite a possibility that the stock will get removed from NIFTY 50.