Detailed Rationale

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

 

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.

 

UPL registered a strong operating performance in fiscal 2022, supported by healthy growth across geographies; revenue grew by a healthy 21% year-on-year. Operating margins was maintained at 22% in fiscal 2022, despite the increase in raw material costs and commodity inflation, driven by favorable product mix and cost optimization measures. Gross debt increased moderately to ~Rs 26700 crore as on March 31, 2022 from Rs 24140 crore as on March 31, 2021, primarily on account of increase in working capital requirements in line with higher revenues especially from Brazil where the credit period is higher, as well as due to inflationary impact on raw material stock. However, due to materially higher cash surpluses of almost Rs.6960 crores,  net debt was flattish at Rs.20,301 crore at March 31, 2022 (almost similar to previous fiscal).With increase in operating profits, the ratio of net debt to EBITDA (earnings before interest, depreciation, interest and tax) however reduced to 2.15 times in fiscal 2022 compared to 2.46 times in fiscal 2021.

 

UPL continued to report healthy growth in revenues and profits in the first half of fiscal 2023 as well. The company’s revenue grew by over 22% year-on-year on the back of sustained demand for their products and global economic recovery after the pandemic till date. Business in all the regions have witnessed reasonable growth except for Europe where the revenues remained flat. Operating margins improved marginally to 22.3% in the first half of fiscal 2023 (22% in corresponding period of last f.iscal). However, net debt stood at Rs. 28,512 crore as on September 30, 2022, an increase of over Rs. 8000 crores from March 31,2022, mainly on the account of higher working capital needs to secure raw material due to geo-political issues and lower factoring of receivables in the LATAM due to higher cost.

 

In October 2022, the company’s management announced realignment of their existing business into 4 pure play business platforms and investments from private equity investors Abu Dhabi Investment Authority (ADIA), Brookfield, KKR and TPG Capital Asia (TPG) into the realigned businesses. Company has realigned their existing businesses into (1) India agrochemical business (UPL Sustainable Agri Solutions Ltd ,UPL SAS), (2)Global Corp protection business (UPL Ltd, Cayman), (3) global seed business (Advanta Enterprises Ltd) and (4) manufacturing, speciality chemicals and other global businesses. This was done to unlock value and increase focus on each of the segment  and the corporate realignment was approved by the shareholders recently. CRISIL Ratings will continue to assess UPL Ltd on a consolidated basis. 

 

As part of the above corporate realignment strategy, a net equity infusion of USD 259 mn is expected from the following transactions:

                   equity infusion of USD 300 mn (~Rs.2460 cr) from KKR for an equity stake of 13.33% in Advanta Enterprises

                   equity infusion of USD 200 mn (~Rs.1580 cr) from Abu Dhabi Investment Authority (ADIA), TPG and Brookfield for an equity stake of 9.09% in UPL SAS Limited.

                   Payout of USD 241 Mn shall be made to ADIA/TPG for their holding of 22.2% to exit the International Seeds and other global business.

 

CRISIL Ratings is of the view that the expected cash flow from the stake sale, moderation in inventory levels and hence working capital borrowings, along with expected increase in factoring in the second half of fiscal 2023 will help UPL reduce net debt gradually. CRISIL Ratings expects UPL’s net debt/EBITDA at ~2 times by March 2023.

 

Supported by the 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)  are also expected to support revenue growth. Operating profitability should benefit from rising share of higher margin bio-solutions as well as improving cost efficiencies, and remain at 20-22%.

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 the North America in fiscal 2022. 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 healthy. CRISIL Ratings expects UPL will continue to maintain healthy operating profitability of over 20% over the medium term, supported by its strong efficiencies.

 

Adequate 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 until fiscal 2021, which led to gradual improvement in financial risk profile. For instance, in fiscal 2021, UPL reduced its gross debt by ~Rs. 4800 crore in fiscal 2021 supported by strong operational cash generation and partial pre-payment of debt, but in fiscal 2022, debt levels increased by ~Rs 2500 crore mainly on account of increased working capital requirements. UPL’s financial risk profile is however supported by sizeable adjusted net worth of Rs 26,630 crore as on March 31, 2022.

 

UPL’s management is committed to reducing debt levels further over the medium term, including through streamlining of inventory, recent receipt of equity proceeds and enhancing factoring of receivables. Along with strong operating performance and continuing healthy cash flow generating ability, net debt to EBITDA is expected to reduce to ~2  times in fiscal 2023 (from 2.15 times in fiscal 2022, and 2.46 times in fiscal 2021). Any sizeable debt funded acquisition or continuing high debt levels will remain a credit monitorable.

 

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 4,038 crores as on September 30, 2022. Utilization of domestic fund-based working capital limits was moderate at about 53% (of drawing power) for the 12 months ending October 2022. The company is expected to reduce its debt over the medium term, supported by healthy cash generation (in excess of Rs. 6000 crore annually), 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 had modest annual repayments of Rs 144 crore during fiscal 2023, which was serviced from internal accruals. Company had substantial repayment commitments during Q4 FY24 to the tune of Rs.12500 crores which the company was able to refinance, post which the company currently has a moderate repayment of Rs 1500 crores until fiscal 2025 and has a sizeable repayment of Rs.7800 crores during fiscal 2026. 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 2026.

 

Environment, social and governance (ESG) Profile:

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:

• During FY21, UPL reduced 15% carbon emission intensity, 22% water consumption intensity and 31% waste disposal intensity. UPL is also the first agrochemical company to make technical manufacturing facility Zero Liquid Discharge (ZLD).
• Consistent increase in using renewable power over the years with 19% of electricity from renewable sources for two of its largest manufacturing plants during fiscal 2021
• Company has been ranked as no 1 global agrochemical company by Sustainalytics in ESG risk rating and also included in the Dow Jones Sustainability index 2021.
• UPL has also raised sustainability linked loan of $1.45 billion in fiscal 2022.
• UPL’s governance structure is characterized by majority of its board comprising independent directors, and extensive disclosures.
• The company has been in the news for plant accidents, chemical spills, whistleblower complaint and change in auditor of a subsidiary. 

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

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 favourable product mix help 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

• Better than expected growth in revenues, with operating profitability in excess of 21-22%, ensuring strong cash generation
• 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 management or equity infusion.

 

Downward Factors

• Sharp decline in revenue growth and fall in operating profitability to below 16-17%, materially impacting cash generation
• Increase in net debt/EBITDA levels beyond 2.5 times on a sustained basis, 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 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	2022	2021
Revenue	Rs crore	46,240	38,656
Adjusted profit after tax (PAT)^	Rs crore	3,327	2,385
PAT margin^	%	7.2	6.2
Adjusted debt/Adjusted net worth ^	Times	0.99	1.12
Adjusted interest coverage	Times	4.33	4.15

^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+/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	597	NA	CRISIL A1+
NA	Fund-Based Facilities*	NA	NA	NA	1666	NA	CRISIL AA+/Stable
NA	Proposed Working Capital Facility**	NA	NA	NA	3108	NA	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	1500	Simple	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	300	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.