Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating on the bank facilities of UPL Sustainable Agri Solutions Limited (UPL SAS). CRISIL Ratings has also reaffirmed its rating on UPL SAS’s Commercial Paper programme at ‘CRISIL A1+’.

 

The ratings factors UPL SAS’s healthy business risk profile supported by strong market position in domestic crop protection segment, diverse product portfolio, increase in contribution from differentiated and sustainable solutions and established dealer and distribution network. The ratings are also supported by the company’s healthy financial risk profile, which is supported by absence of long-term debt and steady cash generating ability. Besides, the rating also factors in the strong parentage of UPL Limited (UPL, rated CRISIL AA+/Stable/CRISIL A1+). These strengths are partially offset by the 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. Besides, the performance of UPL SAS wholly owned subsidiary nurture.farm (Nurture)”, which is the agrochemical technology platform, is weak due to initial stage of operations and sizeable investments made for setting up the platform.

 

At a consolidated level, UPL SAS’s revenues registered a healthy compounded annual growth rate of 18% over the past three fiscals supported by healthy demand for agrochemicals benefitting offtake in volumes, and also higher realisations, in keeping with rise in price of inputs. While revenues grew by 11% year-on-year in fiscal 2023, consolidated operating profitability (EBIDTA) was average at ~13%, mainly due to losses incurred by its Ag Tech platform that is in initial stage of operations.

 

Revenues declined by 14% YoY in Q1FY24 driven by moderation in realisations and delayed sowing in the Kharif season. Since majority of the revenues (60-65% of revenues) accrue in the first half , overall revenues are expected to  moderate by 3-5% for the full fiscal. Operating profitability for the current year is expected to remain rangebound at 12-13%, due to continuing investment in it Ag Tech platform, and competitive business scenario.

 

In October 2022, the parent, UPL’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. This was done to unlock value and increase focus on each of the segments and the corporate realignment was approved by the shareholders recently. UPL will continue to hold majority shareholding in all the entities. 

 

In December 2022, UPL SAS acquired UPL India’s marketing and distribution business of  agrochemicals while all the major manufacturing operations continue with UPL. UPL SAS has a one manufacturing unit at Jammu. As per a recent business realignment announced in June 2023, the manufacture of active ingredients currently being undertaken at UPL will be transferred to a new subsidiary, UPL Specialty Chemicals Limited (USCL), and products will be sold to UPL SAS through UPL.

 

As part of the business realignment, UPL SAS received equity infusion of USD 200 million (Rs.1580 crores) from ADIA, TPG and Brookfield for an equity stake of 9.09%. This has enhanced the net worth of UPL SAS, which stood at Rs. 1475 crores at March 31, 2023, compared with 481 crores at March 31, 2022. The equity infusion proceeds received were utilized for paying UPL towards business purchase consideration and to fund its own working capital needs. As on March 31,2023, UPL SAS does not have any significant debt. The working capital bank lines are sanctioned, UPL SAS will draw down from its own bank lines to fund its working capital requirements. Despite the addition of working capital debt, the capital structure and debt metrics are expected to remain healthy.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of UPL SAS and its subsidiaries. This is because all these companies are under a common management and have close operational linkages and fungible cash flows.

 

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

 

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:

• Healthy market position in crop protection segment in India: UPL is the market leader in domestic crop protection segment with 13% market share. This is further augment by 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 the revenues of UPL SAS. These solutions are high-margin value-added solutions that help improve yield, plant health & nutrition, crop quality and lowering residue.

 

Crop protection solutions added in last few years including post-harvest and sustainable solutions contributed ~18% of revenues in fiscal 2023. Nurture platform, which directly connects the retailers and customer with manufacturers. Healthy contribution from bio solutions space which is expected to grow at a higher rate compared to other molecules augurs well for UPL SAS. Besides, UPL at a group level has targeted to increase the share of differentiated and sustainable solutions to 50% by fiscal 2027. This is expected to improve the profitability as these solutions command premium realizations compared to post patent molecules. Further, the backward integration wherein the active ingredients are available captively from the group enhances the efficiency and profitability.

 

• Above average operating profitability: While UPL SAS and its subsidiary, SWAL, enjoy healthy double digit operating profitability in excess of 18-20% due to UPL’s established position in the domestic agrochemical sector, overall operating profitability is tempered by initial set up costs and scaling its digital platform, Nurture. This has resulted in overall operating profitability of ~13%. While losses from the platform are expected to reduce gradually, pricing pressures from Chinese imports in the domestic markets, will limit material improvement in overall margins for the crop-protection business, leading to overall operating profitability remaining range-bound at 12-13% over the medium term.

 

• Healthy financial risk profile: UPL SAS received equity infusion of USD 200 million (Rs.1580 crores) from ADIA, TPG and Brookfield for an equity stake of 9.09%, which enabled a material improvement in net worth to Rs. 1475 crores in fiscal 2023. As on March 31,2023, UPL SAS does not have any significant working capital debt. UPL SAS has obtained certain working capital bank lines from lenders, for its working capital requirements. UPL SAS will utilize the same to fund the working capital requirements, which will result in its short-term debt rising during its peak season (June-September).

 

UPL SAS does not have any significant capex plans but expected to incur maintenance as well as product development costs which will be met by internal accruals. Therefore, no incremental long-term debt expected over the medium term. Debt protection metrics will continue to remain healthy over the medium term.

 

• Support from the parent, UPL: UPL, the parent entity, hold 90.91% stake in UPL SAS and UPL SAS does marketing & distribution of crop protection solutions in India. UPL SAS will sell the formulations manufactured by its Jammu plant and purchase products from UPL.

 

At consolidated level, UPL  is among the top 5 players in the global agrochemicals industry with well diversified revenue base and derive ~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 and UPL, UPL is expected to continue being the largest shareholder in UPL SAS and ensure the financial health of UPL SAS, by providing timely support, when required.

 

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 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. Change 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 level of farm income. Hence, timing and distribution of rainfall during a year plays a crucial role.

 

Further, UPL SAS derives almost 100% of its revenues from India which will lead to revenue concentration risks as any adverse weather conditions in India or regulatory changes by the government will impact the performance of UPL SAS.

 

• Weak performance of Nurture, it being the technology platform: The group’s digital platform, under Nurture, has reported significant losses (with initial set up and other costs, and low revenues). Nurture is a digital platform which provides agrosolutions and services to farmers and also connect famers and retailers directly with UPL.

 

With more products expected to be introduced under the platform and cost control measures being implemented, losses are expected to decline gradually. However, unless operations break-even, material overall improvement in UPL SAS’s operating profitability is unlikely.  

Liquidity: Strong

UPL SAS’s liquidity is strong and as on 31st March 2023, it has cash balance of Rs. 161 Crore, no term debt, net current assets of Rs 948 Crore and further its parent, UPL has consolidated cash surpluses of over Rs.6000 crores. UPL will provide support for UPL SAS’s working capital needs if required. Going forward, UPL SAS’s liquidity is expected to be supported by cash accruals of over Rs. 400 crores per annum against nil repayment obligations. UPL SAS’ bank lines of about Rs.400 crores are sanctioned and is in process of getting sanction of certain additional bank lines which is expected to be sufficient to meet its working capital requirements.

Outlook: Stable

CRISIL Ratings believes the UPL SAS’s business risk profile will continue to remain healthy driven by established market position in India . Better scale and business synergies, as well as a favourable product mix will help sustain operating profitability at 12-13% over the medium term, benefitting cash generation. Strong parentage of UPL will also augment the healthy financial risk profile and liquidity of UPL SAS

Rating Sensitivity factors

Upward factors

• Better than expected growth in revenues of UPL, with operating profitability in excess of 21-22%, ensuring strong cash generation
• Net Debt/EBITDA of UPL 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

• Material deterioration in the credit profile of UPL
• Sharp decline in revenue growth and fall in operating profitability (EBITDA) of UPL SAS to below 10% on sustained basis materially impacting cash generation.
• Significant increase in debt levels of UPL SAS on a sustained basis, due to lower cash generation, large capex, material acquisitions, or elongation in working capital cycle.

About the Company

In December 2022, UPL SAS acquired the India crop protection business of UPL Limited (UPL). Further, Nurture which is the digital platform and crop protection business, and SWAL were made 100% wholly owned subsidiaries of UPL SAS. A significant portion of the manufacturing operations pertaining to crop protection business were retained with UPL while UPL SAS will be marketing and distributing farm solutions in India.

 

UPL SAS has wide range of crop protection chemicals with over 300+ products covering >90% of the crops grown in India. UPL SAS has about 25000+ dealers with over 3 Lakhs indirect retailers.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31		2023**	2022**
Revenue	Rs Crore	4336	3891
Profit after tax	Rs Crore	476	400
PAT Margins	%	11.0	10.3
Adjusted Debt/Adjusted Net worth	Times	0.00	0.27
Interest Coverage	Times	17.94	27.81

** FY 2022 and 9 months ended FY 2023 consist of UPL SAS proforma business before transfer of UPL India sales and distribution business to UPL SAS.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Commercial Paper	NA	NA	7-365 days	700	Simple	CRISIL A1+
NA	Cash Credit#	NA	NA	NA	400	NA	CRISIL AA+/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	200	NA	CRISIL AA+/Stable

#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 any non-fund-based facilities including letter of credit and bank guarantees.