Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Negative/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of UPL Ltd (UPL).

 

Earlier on March 6, 2024, CRISIL Ratings had revised the outlook to ‘Negative’ from ‘Stable’ following sluggishness in demand for agrochemicals in India, LatAm and the US markets for an extended period of time, driven by industry-wide de-stocking resulting in more-than-anticipated moderation in UPL’s business and financial risk profiles.

 

Steep decline in product realisations across geographies and lower sale volumes, majorly in Brazil, India and US, have resulted in 20% decline on-year in UPL’s revenue in fiscal 2024. Operating profitability declined to 10.5% during the same period from 19% in the corresponding period last fiscal, driven by increase in rebates and sizeable revaluation of inventory. UPL registered quarter-on-quarter improvement in the fourth quarter of fiscal 2024, with operating margin recovering to 13.1% compared to 1% in the previous quarter. UPL’s revenue is expected to witness modest recovery growing in low-to-mid single digits in fiscal 2025, supported largely by higher sales volumes, even as realisations are expected to remain flattish, due to continued pressure from Chinese imports. Rationalization of channel stock in the previous fiscal in LatAm and US markets, benefits of cost saving measures taken in the previous fiscal and new product launches (primarily differentiated products) will support the recovery in performance. Operating profitability is expected to range between 13% and 15% in fiscal 2025, much lower than 18-20% registered by UPL up to fiscal 2022. An improvement to the earlier growth trajectory, in terms of revenue and operating profitability, is expected only from fiscal 2026. 

 

Due to lower revenue and moderation in operating profitability, UPL’s cash flow was impacted in fiscal 2024. The working capital cycle was also stretched, resulting in a sharp increase in short-term debt levels. UPL’s adjusted debt levels rose to Rs 29,931 crore as on March 31, 2024, from Rs 23,379 crore as on March 31, 2023, primarily due to increase in short-term debt levels, driven by lower factoring of receivables, especially in Brazil and North America. However, UPL reduced debt by ~Rs 8,000 crore in the fourth quarter of fiscal 2024 with adjusted debt declining from Rs 37,666 crore on December 31, 2023. The debt reduction was aided by better collections and sales in the fourth quarter of fiscal 2024, and further debt reduction would have been possible had the company raised funds of USD 500 million through a rights issue, as was proposed. This is now expected to be completed in fiscal 2025. Therefore, the debt protection metrics are expected to remain moderate compared to the previous fiscal. For instance, net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio was 5.2 times in fiscal 2024, compared to 1.8 times in fiscal 2023.

 

UPL will be realigning its strategy to place the products closer to season, which will reduce the company’s working capital requirement. Along with better performance expected in fiscal 2025, this will lead to debt reduction with net debt to EBITDA ratio expected to decline below 3.5 times in fiscal 2025. The capital expenditure (capex) remains moderate at Rs 2,000 crore per annum, over the medium term, which will be met by cash accrual. The company proposes to raise equity via a rights issue of USD 500 million, mainly to lower debt. UPL is awaiting regulatory clearance for the rights issue, which is expected to be completed by the third quarter of fiscal 2025. If it fructifies, it will result in further improvement in key debt protection metrics with net debt/EBITDA ratio declining to 2.6 times in fiscal 2025. Delay in recovery of operating performance, further delay in raising funds through a rights issue or stretch in the working capital cycle will remain monitorable.

 

UPL does not have principal repayment obligations before September 2025. However, it has sizeable repayment obligation of Rs 6,255 crore in fiscal 2026 and Rs 7,506 crore in fiscal 2027 which will require part refinancing. Besides, the company’s perpetual bonds will also come up for repricing at prevalent market rates in May 2025. Refinancing of these bonds will push up interest costs, as current rates are much higher than interest rates prevalent about five years ago, when these bonds were raised. Overall, timely refinancing of debt obligation including raising new debt with extended maturity will remain critical.

 

The ratings continue to reflect the UPL group’s strong business risk profile supported by robust market position, geographical diversification in revenue and adequate operating efficiencies. Financial risk has moderated from its strong position but is expected to gradually improve in the near to 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 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 factored 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, networth and ratio computations are adjusted.

 

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

 

Non-recourse factoring of receivables has not been treated as debt.

 

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 five players in the global agrochemicals industry. The revenue base is well diversified, with ~70% generated from LatAm, Europe and North America. 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. The business risk profile remains healthy, aided by a portfolio of ~14,326 registrations, 1,552 product formulations and 1,500 patents. The group is present in 138 countries with 42 manufacturing locations, employing more than 13,000 people across the globe.

 

• Adequate operating efficiencies, supporting profitability: Backward integration and supply-chain management have strengthened operating efficiencies, which along with steady revenue growth translated into healthy operating profitability of 19-21% between fiscals 2018-23. As a sizeable portion of raw material and power requirement is met in-house, the group is assured a steady supply, with less price volatility. Flexible and multi-product manufacturing facilities, and robust supply chain and distribution network support its profitability.

 

However, sluggish offtake and pricing pressure exacerbated by cheap Chinese supplies, have forced most industry players, including UPL to offer rebates, impacting realisations and operating profitability in fiscal 2024. With write-down of inventories undertaken, and demand expected to pick up gradually, operating profitability is expected to improve to 13-15% in fiscal 2025, from 10.5% in fiscal 2024. Further improvement in operating profitability is expected over the medium term, due to better demand, the intrinsic strength of UPL’s established product capabilities and range, as well as distribution network.

 

• Adequate financial risk profile: UPL’s financial risk profile is supported by sizeable networth of ~Rs 24,000 crore as on March 31, 2024. The acquisition of Arysta in fiscal 2019 was funded through substantial debt (~USD 3 billion), which led to gross debt of ~Rs 29,000 crore as on March 31, 2019, and resulted in moderation in the debt protection metrics. Debt peaked at ~Rs 30,200 crore as on March 31, 2020, and thereafter reduced by ~Rs 5,000 crore in fiscal 2021, supported by strong operational cash generation and partial pre-payment. Gross debt levels then increased by ~Rs 2,500 crore in fiscal 2022, mainly on account of higher working capital requirement and then declined by Rs 2,880 crore to Rs 24,379 crore at the end of fiscal 2023, supported by cash flow from stake sale in some of its businesses, and increase in factoring.

 

While debt levels are expected to reduce further, gross debt increased to Rs 29,331 crore at end of fiscal 2024 due to modest cash generation, stretched working capital cycle and reduced factoring despite lower capex. Due to modest performance in fiscal 2024, net debt to EBITDA and interest coverage ratios were 5.2 times and 1.3 times, respectively, compared to below 2 times and 3.6 times, respectively, in fiscal 2023. With improved cash generation due to better performance and improvement in the working capital cycle, the net debt to EBITDA ratio is likely to be 3-3.5 times.

 

The company’s management is committed to further improving the debt protection metrics over the near to medium term, and debt reduction through proposed rights issue of upto USD 500 million in fiscal 2025.

 

UPL Corp’s minority investors, ADIA and TPG, each with ~11% stake, 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. These stakes have now moved to UPL Ltd, Cayman under the recent restructuring. While the stake sale is unlikely in the next 1-2 years, any material debt addition by UPL to buy back these stakes in UPL Ltd, Cayman from these investors, and consequent increase in its leverage will be 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 receivables cycle. Furthermore, as goods are manufactured at one place and distributed to other locations, a 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 the 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. Changes 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 the level of farm income. Hence, timing and distribution of rainfall during a year plays a crucial role. This is somewhat mitigated by the geographically diverse base of UPL.

Liquidity: Strong

Cash and cash equivalent were Rs 6,264 crore as on March 31, 2024. Utilisation of domestic fund-based working capital limits was moderate at 77% (of total drawing power) on average for the six months through April 2024. Annual capex of Rs 2,000 crore is expected to be funded by internal accrual and no long-term debt addition is expected. Cash accrual will be Rs 3,500-4,000 crore in fiscal 2025 and improve to Rs 4,000-5,000 crore per annum over the medium term.

 

UPL does not have any material long-term debt obligation till September 2025. However, the company has debt obligation of Rs 6,000 – 7,000 crore in fiscals 2026 and 2027, which will necessitate partial refinancing. Besides, the company’s perpetual bonds will come up for repricing at prevalent market rates in May 2025, which are much higher at present, and can result in slightly higher interest outgo on these bonds. CRISIL Ratings expects UPL will be able to refinance the required portion of their obligation, given past instances of successfully arranging for similar refinancing, ahead of actual repayment.

 

ESG profile of UPL

CRISIL Ratings believes that UPL’s ESG profile supports its already strong credit risk profile.

 

The agro-chemical sector has a high impact on the environment because of high greenhouse gas (GHG) emissions, water use and high hazardous waste generation by its core operations. The sector has a social impact because of its large workforce, impact on health and well-being of its workers and local community on account of the nature of operations.

 

UPL has undertaken various initiatives and efforts towards mitigating its environmental and social impact and strengthening its ESG profile. 

 

Key ESG highlights:

• UPL has consistently invested in reducing green house gases (GHG) with focus on reducing carbon footprint in manufacturing and decarbonizing through sustainable products. Investing in renewable energy is helping UPL to reduce the CO2 equivalent emissions by 1.25 lakh tonne per year.
• UPL has reduced its water consumption in its plants by 40% over the past three years, driven by active investments to reduce its water footprint. UPL became the first agrochemical company to make its technical manufacturing facility Zero Liquid Discharge (ZLD). Now about ~60% of UPL’s plants have achieved ZLD.
• UPL has significantly increased their renewable energy usage, accounting for 30% of total global power consumption. The solar-wind hybrid farm has an impressive capacity of 61 megawatt (MW), comprising 33 MW of wind and 28 MW of solar which will be set up in collaboration with CleanMax.
• UPL targets to achieve at least 60% of sustainable sourcing by 2025 compared to 30% at present.
• UPL’s governance structure is characterised by majority of its board comprising independent directors, and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of UPL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Negative

CRISIL Ratings believes that the UPL group’s performance will improve gradually over the medium term, with revival in demand for agrochemicals in the domestic and international markets, benefitting operating profitability and cash generation, which will remain below earlier expectations. Progressive debt reduction, including through proposed rights issue of equity will be critical to improvement in debt protection metrics, which are currently at elevated levels.

Rating Sensitivity factors

Upward factors

• Better-than-expected growth in revenue, with operating profitability in excess of 21-22%, ensuring strong cash generation
• Net debt to EBITDA ratio sustaining below 1-1.25 times, due to strong cash generation and lower debt levels due to prudent working capital management or equity infusion

 

Downward factors

• Continued demand sluggishness, due to delay in revival of demand for agrochemicals and operating profitability remaining below 15%, further impacting cash generation
• Net debt to EBITDA ratio remaining in excess of 2.35-2.60 times on sustained basis and interest coverage ratio remaining sub-par, due to lower cash generation or higher debt protection metrics, resulting from more-than-anticipated capex, material acquisitions and stretched working capital cycle, or to increase stake in UPL Ltd, Cayman or delay in equity fund raising

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 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 UPL NA Inc (US), UPL Europe Ltd (UK), UPL Agro SA DE CV (Mexico), UPL Argentina SA (Argentina), UPL France, UPL Italia SRL, UPL South Africa PTY Ltd and UPL do Brasil Industria e Comercio de SA (Brazil). The company has manufacturing units in India, France, Argentina, the UK, Vietnam, Turkey, Brazil, the USA, China, Thailand, Italy, Australia and Columbia.

Key Financial Indicators

Particulars for year ending March 31	Unit	2023	2022
Revenue	Rs crore	53,520	46,240
Adjusted profit after tax (PAT)^	Rs crore	3304	3,327
PAT margin^	%	6.2	7.2
Adjusted debt/Adjusted networth^	Times	0.93	0.99
Adjusted interest coverage	Times	3.61	4.33

^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 Levels	Rating assigned with outlook
NA	Cash Credit#	NA	NA	NA	1029	NA	CRISIL AA+/Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	597	NA	CRISIL A1+
NA	Fund-Based Facilities*	NA	NA	NA	3939	NA	CRISIL AA+/Negative
NA	Proposed Working Capital Facility**	NA	NA	NA	835	NA	CRISIL AA+/Negative
NA	Commercial paper	NA	NA	7-365 days	1100	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 interchangeable with Non-fund based facilities

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