Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long term bank facilities of SWAL Corporation Ltd (SWAL) at ‘CRISIL AA-/Negative’. Further, CRISIL Ratings has withdrawn Rs 75 crores of bank facilities upon receipt of no due certificate from the lenders and as per client’s request. This is in line with CRISIL Ratings’ criteria for withdrawal of ratings.

 

SWAL’s revenues increased by 3% on-year in the first half of fiscal 2025 supported by improvement in volumes with above average monsoons while the realisations continued to be under pressure. Operating profitability improved to 12.7% in the first half of fiscal 2025 (5.1% in the first half of fiscal 2024) supported by operating leverage with better volumes and lower input costs.

 

Steep decline in product realisations and lower sale volumes on account of lower acreage in cotton and pulses resulted in 43% year-on-year decline in SWAL’s revenues in fiscal 2024. The company recorded operational losses in fiscal 2024 owing to the high cost of inventory  and higher rebates offered. CRISIL Ratings expects a low-mid single digit growth in SWAL’s revenues in fiscal 2025, while operating profitability  is expected to range between 8 -10% and gradually improve over the medium term.

 

Financial risk profile , at a standalone level, remains adequate with no long term debt and moderate short term debt of Rs.60 crores as on September 30,2024. Owing to the losses in fiscal 2024, networth in sub-par, however expected to improve to Rs. 25 – 30 crore by end of fiscal 2025. The company provided one time dividend of Rs.325 crores in fiscal 2023 which was done as part of restructuring and investments by UPL, UPL SAS and SWAL, before the investments made by investors, ADIA and TPG in UPL SAS. 

 

Due to SWAL’s modest networth, gearing is at moderate levels. UPL SAS has lent Rs.595 crores as ICDs to SWAL to meet its working capital requirements and for infusion in Nurture, a wholly owned subsidiary of UPL SAS, and associate of SWAL.

 

Overall debt levels are expected to remain stable. SWAL does not have any significant capex plans and most of the investment would be towards product registration costs, which is expected to be around Rs.10 - 20 crores per annum and funded from internal accruals. No long term debt addition is expected for capex over the medium term.

 

The ratings factors in the strong parentage of SWAL’s immediate parent, UPL SAS, which in turn factors strong support from its parent, UPL. The ratings also factor in SWAL’s adequate business risk profile supported by healthy market position in the agrochemicals segment in India, key market share in brands like ‘Starthene’, ‘Patela’, ‘Panama’, established dealer and distribution network, and company’s average financial risk profile. These strengths are partially offset by relatively lower operating profitability,  highly working capital-intensive nature of the company’s operations, and susceptibility of its performance to volatile monsoons, as well as regulations governing the crop protection sector.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SWAL.

 

CRISIL Ratings has applied its parent notch-up framework to factor in support to SWAL, from its parent, UPL SAS.

Key Rating Drivers & Detailed Description

Strengths:

• Support from the parent, UPL SAS: UPL SAS is one of the leading players in the domestic crop protection segment with wide geographic presence across India with about 25000+ dealers and over 3 lakh indirect retailers with access to ~90% of Indian districts with significant agri-presence. UPL SAS has about 300+ products across categories which covers about >90% of crops cultivated in India. Differentiated/sustainable solutions contribute about 35% of UPL SAS’s revenues. These solutions are high-margin value-added solutions that help improve yield, plant health & nutrition, crop quality and lowering residue. SWAL is a wholly owned subsidiary of UPL SAS and it will remain critical to UPL SAS as it is one of the go-to-market (GTM) for UPL SAS and is positioned as a value brand.

 

UPL, the ultimate parent entity, hold 90.91% stake in UPL SAS and UPL SAS is involved in  marketing & distribution of crop protection solutions in India. UPL SAS sells the formulations manufactured by its Jammu plant and purchase products from UPL. SWAL also purchases products from UPL and sells them in the domestic market.

 

At consolidated level, UPL is among the top 5 players in the global agrochemicals industry with well diversified revenue base and derives ~70% of its revenues from LATAM, Europe, and the North America. UPL is present across the crop lifecycle, from seeds, seed-treatment products, pre- and post-harvest products, to storage-treatment products. UPL’s robust business risk profile is 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.

 

Given strong business linkages between UPL SAS, UPL and SWAL, UPL SAS, and UPL, if required, will ensure the financial health of SWAL, by providing timely support.

 

• Adequate business risk profile: SWAL enjoys a leadership position in brands like Starthene, Patela and Panama. Distribution network of 2000 wholesalers and 40,000 retailers spanning all over India. SWAL has started to launch new products along with UPL SAS, albeit at a lower pricing which will further improve the market position of SWAL.

 

• Average financial risk profile: Financial risk profile, at a standalone level, remain adequate with no long term debt and moderate short term debt of Rs.60 crores as on September 30,2024. Networth is subpar as the company recorded net losses in fiscal 2024 and provided one time dividend of Rs.325 crores in fiscal 2023 which was done as part of restructuring and investments by UPL, UPL SAS and SWAL, before the investments made by ADIA and TPG in UPL SAS.

 

Due to SWAL’s modest networth, gearing is at moderate levels. UPL SAS has lent Rs.595 crores as ICDs to SWAL to meet its working capital requirements and for infusion in Nurture, a wholly owned subsidiary of UPL SAS, and associate of SWAL. Loans given to Nurture are expected to continue. Interest cover is expected to improve to over 5 times in fiscal 2025 compared to less than 0.5 times in the previous fiscal.

 

SWAL does not have significant capex plans and is expected to incur only product development costs which will be funded by internal accruals. Hence, overall debt levels are expected to remain stable. Debt metrics will register a gradual improvement over the medium term with sustained improvement in performance.

 

Weaknesses:

• Relatively lower operating profitability: SWAL’s profitability ranged between 1-6% between fiscals 2018 and 2022. This is primarily due to low gross margin for SWAL due to its positioning as a value brand and delayed launch of products in the market leading to high product discounts. However, from fiscal 2023, SWAL started to launch new products in the market along with UPL SAS which has improved the gross margins to 29% in fiscal 2023 from 17-22% earlier which has resulted in operating profitability to 11.4%. However, the operating profitability is relatively lower than that of UPL SAS whose crop protection business records profitability of 16-18% on a steady state basis. Owing to steep moderation in realisations, high cost of inventory  and rebates, SWAL recorded operating losses in fiscal 2024.

 

Operating profitability in fiscal 2025 is expected to be improve to 8-10% for SWAL with improvement in volumes supported by steady demand, above average monsoons and low input costs.

 

• 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 a long receivable 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 also leads to a stretch in working capital cycle.

 

• 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 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.

 

Further, SWAL derives nearly 100% of its revenues from India which exposes the company to revenue concentration risks as any adverse weather conditions in India or regulatory changes by the government will impact the performance of SWAL.

Liquidity: Strong

SWAL’s liquidity is strong due to the expectation of support from the immediate parent, UPL SAS and the ultimate parent, UPL. Cash accruals expected to remain healthy at over Rs. 25 - 30 crores per annum versus nil repayment obligations supporting liquidity. Working capital requirement is expected to be met by bank lines of Rs.135 crores(reduced from Rs 210 crores in September 2024), which were utilized to extent of ~52%, over the past 10 months ended November 2024. However, UPL and UPL SAS are expected to continue to  support SWAL, if required

Outlook: Negative

CRISIL Ratings believes SWAL's credit risk profile will benefit from strong operational and financial support from its parent, UPL SAS. SWAL’s business risk profile to improve with improvement in scale over the medium term and launch of new products which will result in improvement in profitability. The financial risk profile is expected to improve over the medium term, supported by steady cash generation, and no major capital spending plans

Rating sensitivity factors

Upward factors:

• Material improvement in the credit profile of UPL an in turn, UPL SAS
• Better than expected growth in revenues of SWAL, and operating profitability improving to over 11-12%, resulting in higher cash generation.
• Sustained improvement in the financial risk profile of SWAL, either through equity infusion or better working capital management.
   

Downward factors:

• Material deterioration in the credit profile of UPL by one or more notch and in turn, UPL SAS, or change in stance of support
• Sharp decline in revenue growth and fall in operating profitability (EBITDA margin) to below 5-7% on sustained basis materially impacting cash generation
• Significant increase in debt levels on a sustained basis, due to lower cash generation, large capex, material acquisitions, or elongation in working capital cycle

About the Company

SWAL (formerly known as Shaw Wallace Agrochemicals Ltd) was acquired by UPL Ltd (UPL) in 2005 for a consideration of Rs.24 crores from Dubai based Jumbo group. SWAL has been in existence for over  nine decades in the agrochemical space and hold key market share in brands like Starthene, Patela and Panama. SWAL provides complete innovative crop solutions catering to retailers and farmers.

 

SWAL has a distribution network of about 2000 wholesalers and 40,000 retailers spanning ensuring the availability of products across geographies.

Key Financial Indicators (Standalone)

As on/for the period ended March 31		2024	2023**
Revenue	Rs.Crore	710	1246
Profit after tax**	Rs.Crore	(31)	213
PAT Margins	%	(5.4)	17.1
Adjusted Debt/Adjusted Networth	Times	(900.0)	12.10
Interest Coverage	Times	0.09	10.52

**For FY 2023, PAT contains dividend and other income of Rs. 142 Crore

Any other information: Not Applicable