Rating Rationale
July 24, 2018 | Mumbai
UPL Limited
Long-term rating placed on 'Watch negative'; short-term rating reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.2500 Crore
Long Term Rating CRISIL AA+ (Placed on on 'Rating Watch with Negative Implications') 
Short Term Rating CRISIL A1+ (Reaffirmed) 
Rs.500 Crore Non Convertible Debentures CRISIL AA+ (Placed on on 'Rating Watch with Negative Implications') 
Rs.900 Crore Commercial Paper CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its 'CRISIL AA+' rating on the long-term bank facilities and non-convertible debentures of UPL Ltd (UPL; part of the UPL group) on 'Rating Watch with Negative Implications', and reaffirmed its 'CRISIL A1+' rating on the company's short-term bank facility and commercial paper programme.

The rating action follows the recent announcement by UPL to acquire Arysta Lifesciences Inc (Arysta) through its wholly owned subsidiary, UPL Corporation Ltd (UPL Corp), for USD 4.2 billion. The acquisition is proposed to be funded through an equity investment of USD 1.2 billion in UPL Corp by a wholly owned subsidiary of Abu Dhabi Investment Authority and private equity firm, TPG Capital, and through debt of USD 3 billion, which will have a bullet repayment at the end of five years. The acquisition, which is subject to regulatory and other approvals, is expected to be completed by the end of 2018 or early 2019.

The proposed acquisition is expected to propel UPL among the top 5 agrochemical players globally, make it the largest generic player globally in the agrochemicals space, and enhance its presence in global markets. The acquisition will provide UPL a strong foothold in geographies such as Africa, the Middle East, and Eastern Europe, and in key crop segments where Arysta has a dominant position. Besides, operating profitability is expected to improve gradually to over 20% (from 19-20% at present) and witness more stability, once synergies are realized.

However, the consolidated entity's currently healthy credit metrics will weaken in the near term due to the large debt for the acquisition. For instance, UPL's gross debt to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is expected to exceed 4 times over the medium term, before gradually improving, as business synergies are realized.

Nevertheless, well-spaced debt obligations should mitigate any liquidity pressure over the medium term.

CRISIL will remain in discussion with UPL's management to understand the integration plan, growth strategy for the business being acquired, and any capital expenditure (capex) plan. CRISIL will remove the ratings from watch and take a final rating action once there is sufficient clarity on these factors and after key relevant approvals for the deal are in place.

The ratings continue to reflect the UPL group's healthy market position in the agrochemicals sector, sound operating efficiency, and adequate financial risk profile. These strengths are partially offset by working capital-intensive operations and susceptibility to risks inherent in the agrochemicals sector.

Analytical Approach

CRISIL has combined the business and financial risk profiles of UPL and its subsidiaries, as all the companies, collectively referred to as the UPL group, are under a common management and have close operational linkages and fungible cash flow. CRISIL 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 factors in UPL's share in the profit of these entities and any incremental investment required. 

Key Rating Drivers & Detailed Description
* Large scale with diverse geographical presence and wide product portfolio
The UPL group is one of the top players in the global agrochemicals industry. The revenue base is well diversified, with 80% generated from markets such as Latin America, Europe, and the US, in fiscal 2017. Wider geographic reach reduces susceptibility to cyclicality in demand from any one region. The group is also present across the crop lifecycle, from seeds, seed-treatment products, pre- and post-harvest products, to storage-treatment products. CRISIL believes UPL's business risk profile will remain healthy, post the acquisition, also aided by a combined portfolio of 13,000 registrations and over 200 active ingredients.

* 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 16-20% over the five fiscals through March 2018. Post-acquisition, with backward integration likely to result in significant cost saving for the combined entity, operational efficiencies could be enhanced further.

* Adequate financial risk profile; albeit moderation expected in credit metrics in near term
Financial risk profile is supported by sufficient operational cash flows and sizeable adjusted networth of Rs 8,732 crore as on March 31, 2018. Healthy cash balance of Rs 2,894 crore, and gearing and net gearing, at 0.84 time and 0.51 time, respectively, as on March 31, 2018, lend further comfort. With improved profitability, gross and net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratios were steady at 2.09 and 1.26 times, respectively in fiscal 2018 (2.16 and 1.18 times in fiscal 2017). Interest coverage and net cash accrual to total debt ratios were also adequate for fiscal 2018.

The proposed acquisition is likely to be funded through a substantial debt component (~ USD 3 billion), and may result in increased leverage over the near to medium term. Post-acquisition, the gross debt-to-EBITDA of the combined entity is expected to weaken, and be in the range of 4-4.3 times in fiscal 2019. The management is however, committed to reducing debt levels over the long term.
Nevertheless, CRISIL believes improvement in the financial risk profile is dependent on successful implementation of the acquisition plan, and benefits from synergies through the acquired entity.

* 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, thus resulting in large receivables. Further, 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 the working capital cycle (316 days of gross current asset days). However, CRISIL believes the company will contain the exposure to markets with long credit cycle to less than one-third of its revenue, thereby mitigating 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. Further, the sector is also highly dependent on monsoon and level of farm income. Hence, timing and distribution of rainfall during a year, plays a crucial role.

About the UPL Group
Incorporated in 1969 and promoted by Mr Rajju Shroff, UPL manufactures, markets, and distributes crop protection products, intermediates, specialty 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 its product profile and increase its geographical reach. The UPL group now includes 96 entities. Apart from UPL Ltd, the other key operating companies in the group are United Phosphorus Inc (US), United Phosphorus Ltd (UK), Cerexagri SAS, Icona SA (Argentina), Decco US Post Harvest Inc, and UPL do Brasil Industria e Comercio de SA (Brazil). The group has manufacturing units in India, France, the Netherlands, Argentina, the UK, Vietnam, Turkey, Brazil, and Columbia.

About Arysta
Arysta is an agrochemical company with almost entire production process outsourced from third parties in various geographies, such as China, Eastern Europe, and India. Arysta owns about 800 domestic and foreign patents, and approximately 6,800 product registrations. Arysta specializes in the development, formulation, registration, marketing and distribution of differentiated crop Protection solutions, including BioSolutions and Seed treatments, for a variety of crops and applications. The company has presence in over 100 countries globally.
Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs.Crore 17378 16276
Adjusted Profit After Tax (PAT) Rs.Crore 2030 1725
PAT Margin % 11.68 10.6
Adjusted debt/Adjusted networth Times 0.84 0.92
 Adjusted interest coverage Times 4.90 5.00

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)
Maturity date Issue
Rating assigned  with outlook
N.A. Non-convertible debentures* N.A. N.A. N.A. 500 CRISIL AA+/Watch Negative
N.A. Cash Credit# N.A. N.A. N.A. 1150 CRISIL AA+/Watch Negative
N.A. Letter of credit & bank guarantee N.A. N.A. N.A. 650 CRISIL A1+
N.A Proposed Cash Credit Limit N.A. N.A. N.A. 200 CRISIL AA+/Watch Negative
N.A. Proposed Long Term Bank Loan Facility N.A. N.A. N.A. 500 CRISIL AA+/Watch Negative
N.A. Commercial paper N.A. N.A. 7-365 days 900 CRISIL A1+
*Yet to be issued
#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.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  900.00  CRISIL A1+      17-10-17  CRISIL A1+  14-09-16  CRISIL A1+  08-12-15  CRISIL A1+  CRISIL A1+ 
            31-08-17  CRISIL A1+      30-11-15  CRISIL A1+   
                    14-09-15  CRISIL A1+   
                    31-08-15  CRISIL A1+   
                    24-07-15  CRISIL A1+   
                    07-07-15  CRISIL A1+   
Non Convertible Debentures  LT  0.00
CRISIL AA+      17-10-17  CRISIL AA+/Stable    --    --  -- 
Fund-based Bank Facilities  LT/ST  1850.00  CRISIL AA+/Watch Negative      17-10-17  CRISIL AA+/Stable  14-09-16  CRISIL AA+/Stable  08-12-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            31-08-17  CRISIL AA+/Stable      30-11-15  CRISIL AA+/Stable   
                    14-09-15  CRISIL AA+/Stable   
                    31-08-15  CRISIL AA+/Stable   
                    24-07-15  CRISIL AA+/Stable   
                    07-07-15  CRISIL AA+/Stable   
Non Fund-based Bank Facilities  LT/ST  650.00  CRISIL A1+      17-10-17  CRISIL A1+  14-09-16  CRISIL A1+  08-12-15  CRISIL A1+  CRISIL A1+ 
            31-08-17  CRISIL A1+      30-11-15  CRISIL A1+   
                    14-09-15  CRISIL A1+   
                    31-08-15  CRISIL A1+   
                    24-07-15  CRISIL A1+   
                    07-07-15  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit# 1150 CRISIL AA+/Placed on 'Rating Watch with Negative Implications' Cash Credit# 1150 CRISIL AA+/Stable
Letter of credit & Bank Guarantee 650 CRISIL A1+ Letter of credit & Bank Guarantee 650 CRISIL A1+
Proposed Cash Credit Limit 200 CRISIL AA+/Placed on 'Rating Watch with Negative Implications' Proposed Cash Credit Limit 200 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 500 CRISIL AA+/Placed on 'Rating Watch with Negative Implications' Proposed Long Term Bank Loan Facility 500 CRISIL AA+/Stable
Total 2500 -- Total 2500 --
#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.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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