Detailed Rationale

CRISIL Ratings on the bank facilities of UPL Ltd (UPL) continue to reflect the improvement in UPL’s debt metrics over the medium term, supported by sizeable cash generation from operations, moderate capital spending and prudent working capital management.

 

UPL registered a strong operating performance in fiscal 2021, supported by healthy growth across geographies; revenue grew by a healthy 8% year on year. Favorable product mix, cost synergies and cost-optimization measures benefitted operating margins, which improved 220 basis points to 22.1%. During 1H fiscal 2022, the company continued to report healthy growth of 14% Y-o-Y against corresponding period of previous year, supported by steady offtake across geographies. Further, company has been able to maintain its healthy operating margins during the first half despite inflationary environment, due to favorable region mix and price increases.

 

Supported by company’s healthy business risk profile, strong R&D pipeline, and healthy presence in large markets like Latin America (LATAM), revenue growth should remain in high single digits over the medium term. Further, investments in digital platform (Nurture farm and Natural Plant protection, NPP) is also expected to support revenue growth. Profitability should benefit from rising share of higher margin bio-solutions as well as improving cost efficiencies. Operating margin should remain healthy at ~over 20-22%.

 

The ratings continue to reflect UPL’s strong business risk profile supported by a strong market position, geographical diversification in revenue, and healthy profitability backed by sound operating efficiencies, leading to sizeable annual cash generation. Financial risk profile is expected to remain adequate and debt metrics improve gradually over the medium term. These strengths are partially offset by large working capital requirement and susceptibility to risks inherent in the agrochemical sector.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of UPL Ltd and its subsidiaries, collectively known as UPL. This is because all these companies are under a common management and have close operational linkages and fungible cash flows. CRISIL Ratings follows a moderate integration approach for investment in associates and joint ventures in which UPL has significant influence but not a controlling interest—specifically, CRISIL Ratings factors in UPL's share in the profit of these entities and any incremental investment required.

 

Goodwill on the acquisition of Arysta is being amortised over a period of 15 years commencing from fiscal 2019. Consequently, reported PAT, net worth, and ratio computations are adjusted.

 

USD denominated Perpetual Subordinated Capital Securities (Bonds) of USD 400 Million (interest coupon rate of 5.25% p.a.) raised by UPL Corporation Ltd (subsidiary of UPL) has been treated as 50% debt and 50% equity

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Large scale with diverse geographical presence and wide product portfolio: UPL is among the top 5 players in the global agrochemicals industry. Revenue base is well diversified, with ~70% generated from LATAM, Europe, and the US in fiscal 2021. Wider geographical reach reduces susceptibility to cyclicality in demand from any one region. The company is also present across the crop lifecycle, from seeds, seed-treatment products, pre- and post-harvest products, to storage-treatment products. Business risk profile remains healthy, aided by a portfolio of 13,000+ registrations, over 200 active ingredients, and 1,023 patents. The group is present in 138 countries with 48 manufacturing locations, employing more than 10,400 people across the globe.

 

Sound operating efficiencies, supporting healthy profitability: Backward integration and supply-chain management have strengthened operating efficiencies. As a sizeable portion of raw material and power requirement is met in-house, the group is assured a steady supply, with lesser price volatility. Flexible and multi-product manufacturing facilities, and the robust supply chain and distribution network have kept operating margin.

 

Synergistic cost savings of about USD 200 million in fiscal 2021 on account of acquisition due to better backward integration, personnel and non-personnel cost savings, and various other geographical and logistical cost benefit also resulted in significant cost saving for the combined entity, leading to operating profitability of over 22% in fiscal 2021 against 19.9% in fiscal 2020. CRISIL Ratings expects UPL will continue to maintain healthy operating profitability of over 20-22% over the medium term, supported by its strong efficiencies, and as it aims to enhance the share of high margin differentiated products from ~30% in fiscal 2021.

 

Improving financial risk profile: The acquisition of Arysta in fiscal 2019 was funded through substantial debt (~USD 3 billion), which resulted in moderation in debt metrics. However, the company has been reducing its debt over the last 2 years which has led to gradual improvement in financial risk profile. In fiscal 2021, the company reduced its gross debt by ~Rs. 4800 crore supported by strong operational cash generation and partial pre-payment of debt. UPL’s financial risk profile is also supported by sizeable adjusted net worth of Rs 22,500 crore estimated as on March 31, 2021.

 

UPL’s management is committed to reducing debt levels further over the medium term. Along with strong operating performance and continuing healthy cash flow generating ability, net debt to EBITDA is expected to reduce to below 2.4 times in fiscal 2022 and below 2.00 times in fiscal 2023. Any sizeable debt funded acquisition will remain a credit monitorable.

 

UPL Corp's minority investors, Abu Dhabi Investment Authority and TPG Capital Asia, each with ~11% stake, and who had invested in UPL Corp to support the acquisition of Arysta have the option to sell their stakes, to which UPL has right of first refusal. While the stake sale is unlikely in next 1-2 years, any material debt addition by UPL to buy back these stakes in UPL Corp from these investors, and consequent increase in its leverage will be another key credit monitorable.

 

Weaknesses

Large working capital requirement: The crop protection business is seasonal in nature. Sales occur at the start of the season, but payment is realised post-harvest, resulting in long receivable cycle. Furthermore, as goods are manufactured at one place and distributed to other locations, sizeable stock of finished goods needs to be maintained. The large credit required by customers in key LATAM markets also leads to a stretch in working capital cycle. However, the group will contain the exposure to markets with long credit cycle to less than one-third of its revenue and utilise securitisation benefits (without recourse) wherever available, thereby mitigating the impact of a stretched cycle on the overall credit profile.

 

Susceptibility to risks inherent in the agrochemicals sector: The crop-protection sector remains susceptible to specific and separate registration processes in different countries, and various environmental rules and regulations. Change in regulatory requirements, such as export and import policies and environmental and safety requirements in countries where the company has significant exposure, could weaken growth prospects. Furthermore, the sector is highly dependent on monsoon and level of farm income. Hence, timing and distribution of rainfall during a year plays a crucial role.

Liquidity: Strong

Cash and cash equivalents stood at Rs 2868 crore as on September 30, 2021 (Rs 4,853 crore as on March 31, 2021). Utilisation of domestic fund-based working capital limits was moderate at about 44% (of drawing power) for the 12 months ending October 2021. While the company is expected to reduce its cash surpluses and pay down debt over a period of time, liquidity is still expected to remain strong over the medium term, supported by healthy cash generation (in excess of Rs. 5000 crore annually), and notwithstanding large working capital requirements. Annual capital expenditure (capex) of about Rs 2,500 crore is also expected to be funded largely from internal accruals.

 

The company has modest annual repayments of Rs 110 crore and Rs 135 crore in fiscal 2022 and 2023, which can be serviced from annual accruals. However, the debt repayments are sizeable at almost Rs 11000 crore in the fourth quarter of fiscal 2024, and will require part refinancing. Given that the company has been able to arrange large funding in timely manner in the past, CRISIL Ratings expects the company will also be able to refinance required portion of their obligations in fiscal 2024.

Outlook Stable

CRISIL Ratings believes the UPL group’s business risk profile has improved significantly by the acquisition of Arysta, propelling it to the position of the fifth-largest player in the global agrochemical space and the fourth-largest seed manufacturer. Better scale and business synergies, as well as product mix in favour of higher margin products, are expected to also help improve sustain operating profitability at over 20-22% over the medium term, benefitting cash generation. This along with progressive debt reduction, will help keep debt metrics at comfortable levels over the medium term.

Rating Sensitivity factors

Upward Factors

• Sustained healthy growth in revenues, with operating profitability in excess of 20-22%
• Net Debt/EBITDA remaining below 1-1.25 time on a sustained basis, due to better than anticipated cash generation and lower debt levels due to prudent working capital or equity infusion.

 

Downward Factors

• Sharp decline in revenue growth and fall in operating profitability to below 16-17%, materially impacting cash generation
• Further increase in net debt/EBITDA levels beyond 3.0 times in fiscal 2022 and above 2.5 times in fiscal 2023, due to lower cash generation or higher debt levels, due to more than anticipated capex, material acquisitions and elongation in working capital cycle, or to increase stake in UPL Corp.

About the Company

Incorporated in 1969 and promoted by Mr Rajnikant Shroff, UPL manufactures, markets, and distributes crop protection products, intermediates, speciality chemicals, and other industrial chemicals; and undertakes research in these segments. Over time, UPL has made several acquisitions and entered into strategic alliances to diversify product profile and increase geographical reach. The group now includes over 200 entities. Apart from UPL, the other key operating companies in the group are United Phosphorus Inc (US), United Phosphorus Ltd (UK), Cerexagri SAS, Icona SA (Argentina), Decco US Post Harvest Inc, and UPL do Brasil Industria e Comercio de SA (Brazil). The company has manufacturing units in India, France, the Netherlands, Argentina, the UK, Vietnam, Turkey, Brazil, the USA, China, Thailand, Italy, Australia, and Columbia.

Key Financial Indicators

^CRISIL Ratings-adjusted numbers for treatment of goodwill

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
N.A.	Cash credit#	N.A.	N.A.	N.A.	1029	NA	CRISIL AA+/Stable
N.A.	Letter of credit & bank guarantee	N.A.	N.A.	N.A.	597	NA	CRISIL A1+
N.A	Fund-Based Facilities*	N.A.	N.A.	N.A.	1666	NA	CRISIL AA+/Stable
N.A.	Proposed Working capital facility**	N.A.	N.A.	N.A.	3108	NA	CRISIL AA+/Stable
N.A.	Commercial paper	N.A.	N.A.	7-365 days	1500	Simple	CRISIL A1+

# Fully interchangeable between cash credit, working capital demand loan, foreign currency non-resident (Bank) loans, packing credit in INR, packing credit in foreign currency, export bill discounting in INR and foreign currency, buyer's credit for imports and domestic purchases, and domestic sales bill discounting. It can also be converted into non-fund-based facilities.

* Fully interchangebale with Non-fund based facilities

** It can be converted into non-fund-based facilities.