Detailed Rationale

CRISIL ratings has revised its outlook on the long term bank facilities of UPL Limited (UPL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA+’. Rating on the short term bank facilities and commercial paper programme have also been reaffirmed at ‘CRISIL A1+’.

 

The rating revision follows the continued sluggishness in demand for agrochemicals in India and in the LatAm and US markets, following industry wide de-stocking, which has resulted in a more than anticipated moderation in UPL’s business and financial risk profile.

 

Steep decline in product realisations across geographies and lower sale volumes, majorly in Brazil ,India, and US, have resulted in an on-year 22% decline in UPL’s revenues between April-December 2023. Operating profitability declined to below 10% in the same period from ~20% in the corresponding period last fiscal driven by increase in rebates and sizeable revaluation of inventory. While a moderate recovery in performance is expected from the fourth quarter of fiscal 2024, the improvement will be gradual, resulting in continued pressure on cash flows in the near to medium term. Overall CRISIL Ratings expects a low-mid single digit growth in UPL’s revenues in fiscal 2025, while operating profitability is expected to range between 13-15%, much lower than 18-20% registered by UPL upto fiscal 2022. An improvement to earlier growth trajectory in terms of revenues and operating profitability is envisaged only from fiscal 2026. 

 

Due to lower revenues and moderation in operating profitability, cash flow generation has been impacted. Besides, the working capital cycle has also elongated, resulting in a sharp increase in short term debt levels. UPL’s adjusted debt levels rose to ~Rs. Rs.36173 crores as on December 31,2024 from ~Rs.23,000 crore at March 31, 2023 due to reduced factoring of receivables on account of lower sales in Brazil and North America. Debt levels are expected to settle at ~28,000-30,000 crores by end of fiscal 2024, supported by factoring of some of its receivables, and stretching of creditors, resulting in release of working capital debt. Yet, debt metrics will remain moderate compared to expectations; for instance net debt/EBITDA is likely at over 5 times in fiscal 2024. The company is also proposing to raise equity via a rights issue of USD 500 million, mainly to lower debt. This, if fructifies, will result in a modest improvement in key debt metrics. UPL has tempered down its capex plans to ~Rs. 2000-2500 crore for the next fiscal, given the moderation in cash flows. This will also support a gradual improvement in debt metrics over the medium term, and will remain a monitorable.

 

UPL does not have principal repayment obligations before September 2025. However, UPL has sizeable repayment obligations of Rs 6229 crore in fiscal 2026 and Rs 7474 crore in fiscal 2027 which will require part refinancing. Timely refinancing of debt obligations including through raising of new debt with extended maturity will remain critical.

 

The ratings continue to reflect UPL group’s strong business risk profile supported by a strong market position, geographical diversification in revenue, and adequate operating efficiencies. Financial risk has moderated from its strong position but is expected to gradually improve over 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 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 amortized 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.

 

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 5 players in the global agrochemicals industry. 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. Business risk profile remains healthy, aided by a portfolio of ~14326 registrations, 1552 product formulations and 1,500 patents. The group is present in 138 countries with 42 manufacturing locations, employing more than 13000+ 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 the 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 impacting 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 ~9-10% expected in fiscal 2024. Further improvement in operating profitability is expected over the medium term, due to better demand, 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 adequate and supported by its sizeable net worth of ~Rs.24,000 crore (estimated at 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.29000 crores at March 31, 2019, and resulted in moderation in debt metrics. Debt peaked at ~Rs.30200 crores at March 31, 2020, and thereafter reduced by ~Rs.5000 crores in fiscal 2021, supported by strong operational cash generation and partial pre-payment. Gross debt levels then increased by ~Rs 2500 crore in fiscal 2022, mainly on account of higher working capital requirements and then declined by Rs.2,880 crores to Rs.24,379 crores at end fiscal 2023, supported by cash flow from stake sale in some of its businesses, and increase in factoring. While debt levels were expected to further reduce, gross debt is expected to be higher than expected in fiscal 2024 at Rs.27000-28000 crores, due to modest cash generation, elongation of working capital cycle and reduced factoring, and despite lower capex. Due to modest performance in fiscal 2024, net debt/EBITDA and interest cover is expected at over 5 times and below 2 times, compared to below 2 times and 3.6 times respectively in fiscal 2023. With the company likely to continue to moderate its capex in fiscal 2025, and lower debt levels with improved cash generation, the net debt/EBITDA ratio is likely to range between 3-3.5 times. The company’s management is committed to improving the debt metrics over the near to medium term, and debt reduction through proposed rights issue in March/April 2024, can aid in this respect.

 

UPL Corp’s minority investors, ADIA and TPG, 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. These stakes have now moved to UPL Ltd, Cayman under the recent restructuring. While the stake sale is unlikely in 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 also be a key 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 realized 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 utilize securitization 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. This is somewhat mitigated by the geographically diverse base of UPL.

Liquidity: Strong

Cash and cash equivalents stood at Rs 4,832 crores as on December 31,2023. Utilization of domestic fund-based working capital limits was moderate at about 73% (of total drawing power) for the 6 months ended January 2024. Annual capex of Rs.2000 crore is expected to funded by internal accruals and no long term debt addition is expected. Cash accruals will temporarily moderate to below Rs 2000 crore in fiscal 2024 before improving to above Rs 4000-5000 crore per annum over the medium term.

 

UPL had repayment obligation of USD 200 million ( ~Rs. 1660 crore) in January 2024 which has been repaid, and there are no material long term debt servicing obligations till September 2025. However, the company has repayment obligations of Rs 6000 – 7000 crore in fiscals 2026 and 2027, which will necessitate partial refinancing. CRISIL Ratings expects UPL will be able to refinance the required portion of their obligations, given past instances of successfully arranging for similar refinancing, ahead of actual repayment.

 

ESG Profile of UPL Limited

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 the 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 wellbeing of its workers and local community on account of its nature of operations.

UPL Ltd 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 tonnes per year.
• UPL has reduced its water consumption in its plants by 40% over the past 3 years driven by active investments by UPL to reduce its water footprint. UPL became the first agrochemical company to make 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 MW, comprising 33 MW of wind and 28 MW of solar which will be setup 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 characterized by the 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 UPL group’s performance will improve gradually in the medium term, with revival in demand for agrochemicals, in the domestic and international markets, benefitting operating profitability and cash generation, which though will remain below earlier expectations. Progressive debt reduction, including through proposed rights issue of equity will be critical to improvement in debt metrics, which are currently at elevated levels.

Rating Sensitivity factors

Upward Factors

• Better than expected growth in revenues, with operating profitability in excess of 21-22% , ensuring strong cash generation
• Net Debt/EBITDA sustaining below 1-1.25 time, due to strong cash generation and lower debt levels due to prudent working capital management and/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/EBITDA remaining in excess of 2.25-2.50 times on  sustained basis, and interest cover remaining sub-par, due to lower cash generation or higher debt levels, resulting from more than anticipated capex, material acquisitions and elongation in working capital cycle, or to increase stake in UPL Ltd, Cayman

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 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 net worth ^	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 level	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	3889	NA	CRISIL AA+/Negative
NA	Proposed Working Capital Facility**	NA	NA	NA	885	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.