| UPL Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of UPL Limited (UPL).
In October 2022, UPL announced realignment of its 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. This was done to unlock value and increase focus on each of the segment and the corporate realignment was approved by the shareholders recently. UPL will continue to hold majority shareholding in all the entities. As part of the corporate realignment strategy, UPL received net equity infusion of USD 259 million.
The four verticals include: 1) UPL Sustainable Agri Solutions Ltd (UPL SAS), which will be marketing and selling crop protection and farm solutions in India 2) UPL Corporation Limited, Cayman, which will be the holding company for UPL’s overseas crop protection business 3) Advanta enterprises Ltd (Advanta) – which will hold the UPL group’ domestic and global seed business and 4) UPL Ltd (UPL) which retained the specialty chemicals business, manufacturing operations of Indian crop protection business, investments and R&D.
ADIA, Brookfield and TPG invested USD 200 million (Rs.1580 crores) in UPL SAS for 9.09% stake. The remaining 91.91% stake is held by UPL. Earlier, ADIA & TPG also held 22.2% stake in UPL Corporation Ltd, Mauritius which housed global seed business, global crop protection business under UPL Cayman and other global businesses. ADIA and TPG exited the global seed business and other global businesses for which they received a consideration of USD 241 million and the shareholding moved to UPL Corporation Limited, Cayman such that they held 22.2% stake in global crop protection business. The global seed business and Indian seed business was transferred to Advanta and KKR invested USD 300 million (Rs.2460 crores) for 13.33% stake in Advanta.
Accordingly, UPL SAS acquired India crop protection business in December 2022. Further, in June 2023, UPL announced that its board of directors have approved hive off the specialty chemical business (including active ingredients manufacturing) to a 100% owned entity, UPL Specialty Chemicals Limited (USCL) for a consideration of Rs.3572 crores. This re-arrangement, which will be subject to approval of shareholders (and expected to be completed in 3-4 months). Post this realignment of business, UPL (standalone) will hold majority of the manufacturing operations of UPL SAS, supply active ingredients to UPL SAS and global crop protection business (UPL Corporation Ltd, Cayman Islands) that will be procured from USCL. UPL will also hold investments in the associates and will continue to be responsible for research and development (R&D). The entire transaction is on a debt neutral basis. At the end of these transactions and realignment, the standalone UPL will continue to be long term debt free.
CRISIL Ratings will continue to assess UPL on a consolidated basis, given continuing strong business and financial linkages with its subsidiaries.
UPL on a consolidated basis registered a decline in performance in the first quarter of fiscal 2024 due to decline in volumes and price realisations. The volume decline was driven by delayed sowing in India and channel destocking by the dealers across geographies due to high inventory levels. Realisations declined due to pressure on prices exerted by cheap Chinese imports. This resulted in revenue decline of 17% YoY in Q1 FY2024. Decline in operating margins was limited to 350 bps due to increase in share of differentiated products, cost optimisation measures taken by the company and better performance of AEL which recorded 35% operating margins in Q1FY24.
Recovery is expected in H2FY24 with improved offtake from dealers closer to the season in overseas markets. Majority of the sales (60-65% of sales) is recorded in second half of fiscal, hence with the expected recovery in volumes, UPL at a consolidated level is expected to grow by 1-2% in FY24. Revenue growth will be supported by the company’s healthy business risk profile, strong R&D pipeline, and healthy presence in large markets like Latin America (LATAM). Introduction of differentiated solutions and focus on BioSolutions are also expected to support revenue growth. UPL’s operating profitability is expected at 17-18% in fiscal 2024, lower than 20-22% registered in earlier fiscals, due to price on realisations and muted performance in Q1FY24. However, increasing share of differentiated solutions and offtake in bio-solutions will support profitability.
Net debt increased to Rs.26194 crores in Q1FY24 from Rs.18906 crores in Q4-FY23. Generally, Q1 & Q2, the debt will be higher because majority of the sales are from emerging economies where the factoring is lower. Hence the debt will be on the higher side due to higher working capital requirement. In the second half, the sales will come from developed economies where the factoring is higher. Hence the debt will come down by the end of fiscal 2024 with increase in factoring in the second half. UPL is also expected to pare down the capex in FY24 to conserve cash. Hence the capex will be lower that previous expected amount of Rs.3000 crores per annum.Healthy cash generation and progressive repayment of debt will ensure steady improvement in debt protection metrics.
The ratings continue to reflect UPL group’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. |
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:
UPL’s management is committed to reducing debt levels further over the medium term, with progressive repayments. Along with strong operating performance and continuing healthy cash flow generating ability, net debt to EBITDA is expected to reduce below 1.5 times by fiscal 2025. 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:
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Liquidity: Strong Cash and cash equivalents stood at Rs 6,097 crores as on March 31,2023. Utilization of domestic fund-based working capital limits was moderate at about 54% (of drawing power) for the 12 months ending May 2023. The company is expected to reduce its debt over the medium term, supported by healthy cash generation (in excess of Rs. 6500 crore annually), notwithstanding large working capital requirements. Annual capital expenditure (capex) of over Rs.2500-3000 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. Further, UPL prepaid loan of USD 200 million in FY 2022-23. UPL had substantial repayment commitments during the fourth quarter of fiscal 2024, amounting to Rs.12500 crores, which it refinanced in the global markets UPL has much lower repayment of ~Rs 1600 crores until fiscal 2025, followed by sizeable repayment of Rs.6,200 crores during fiscal 2026. CRISIL Ratings expects UPL will be able to refinance the required portion of their obligations in fiscal 2026, as well, 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:
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: 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 18-20% 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
Downward Factors
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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
^CRISIL Ratings-adjusted numbers for treatment of goodwill |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#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. |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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*Fully interchangeable with Non-fund based facilities
** It can be converted into non-fund-based facilities.
Criteria Details
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