Rating Rationale

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% 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 2.3 times in fiscal 2022 and below 2.00 times in fiscal 2023. Any sizeable debt funded acquisition will remain a credit monitorable.

The lock-in period for 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, expires in July 2021. These investors have the option to sell their stakes to UPL, which has right of first refusal, or to any other external parties. 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.