Rating Rationale

Strengths:
* Large scale with diverse geographical presence and wide product portfolio: UPL is among the top 5 players in the global agrochemicals industry by fiscal 2020. Revenue base is well diversified, with ~70% generated from Latin America, Europe, and the US in fiscal 2020. 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 will remain healthy, aided by a combined portfolio of 12,400+ 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 at 17-20% over the five fiscals through March 2020. Profitability was impacted in the fourth quarter of fiscal 2019 and the first half of fiscal 2020 due to PPA adjustment on Arysta's inventory upon acquisition. Since this adjustment is non-recurring, profitability is not expected to be impacted adversely from fiscal 2021 onwards.

Synergistic cost savings of about USD 200 million are expected in fiscal 2021 on account of acquisition due to better backward integration, personnel and non-personnel cost savings, and various other geographical and logistical cost benefits. These benefits will also result in significant cost saving for the combined entity, leading to operating profitability of over 21% over the medium term, against 19.9% in fiscal 2020.

* Adequate financial risk profile: UPL's financial risk profile is adequate and supported by material annual operational cash flows and sizeable adjusted net worth of Rs 20, 570 crore estimated as on March 31, 2020. The acquisition of Arysta in fiscal 2019 was funded through substantial debt (~USD 3 billion), resulting in moderation in credit metrics. Interest coverage, net cash accrual to total debt and net debt to EBITDA ratios remained moderate at 3.98 times, 0.12 time and 3.39 time, respectively, in fiscal 2020.

UPL's management is, however, committed to reducing debt levels over the medium term. Along with strong operating performance and continuing healthy cash flow generating ability, net debt to EBITDA is expected to reduce to below 3.20 times in fiscal 2021 and below 2.70 times in fiscal 2022. Any additional material acquisition will remain a credit 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 realised 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 Latin American 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 utilise securitisation benefits wherever available, thereby mitigating the impact of a stretched cycle on the overall credit profile. Also, UPL is expected to benefit from the smaller inventory of Arysta.

* 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.