Rating Rationale
October 17, 2017 | Mumbai
UPL Limited
'CRISIL AA+/Stable' assigned to NCD
Rating Action
Total Bank Loan Facilities Rated Rs.2500 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
Rs.500 Crore Non-Convertible Debentures CRISIL AA+/Stable (Assigned)
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 assigned its 'CRISIL AA+/Stable' rating to the Rs 500 crore non-convertible debentures (NCDs) of UPL Ltd (UPL; part of the UPL group). The ratings on other bank facilities and commercial paper programme have been reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+'.
Revenue growth in fiscal 2018 is expected to be at 10-11% supported by the likely normal weather conditions in Indian and some key overseas markets. The diversified geographical presence and wide product portfolio should help mitigate the impact of monsoon vagaries and sustain growth over the medium term. Operating profitability is expected to remain at 17-18% in the medium term supported by supply-chain efficiencies, backward integration for critical inputs, and market intelligence obtained from its wide distribution network across various geographies. During the quarter ended June 30, 2017, sales grew 6.1% year-on-year to Rs 3723 crore, while operating profit before depreciation, interest and tax (OPBDIT) margin remained at 18.6% (19.2% in the previous corresponding period).
Financial risk profile is expected to remain steady, despite working capital-intensive operations, supported by healthy cash accrual, moderate capital expenditure (capex) plans, and scheduled repayment of long-term debt obligations. Liquidity remains healthy, with cash accrual sufficient to comfortably cover upcoming repayments. Larger-than-expected, debt-funded capex or working capital requirement will remain key monitorables.
The ratings continue to reflect the UPL group's healthy market position in the agrochemicals sector, sound operating efficiency, and an above-average 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 87 subsidiaries. This is because all these 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 both UPL's share in profits for these entities and any incremental investments required, in its assessment.
* CRISIL has also amortised goodwill, arising out of consolidation of subsidiaries, over five years.

Key Rating Drivers & Detailed Description
* Large scale with diverse geographical presence and wide product portfolio: The UPL group is among the top players in the global agrochemicals industry. Revenue base is well diversified, with 80% being generated outside India in fiscal 2017; Latin America, Europe, and the US are its largest markets outside India. Presence in several geographies reduces susceptibility to cyclicality in demand in any one region. Furthermore, the group is present across the crop lifecycle, from seeds, seed-treatment products, pre-harvest and post-harvest products, to storage-treatment products. 
* Sound operating efficiencies supporting healthy profitability: Backward integration and supply-chain management have led to strong operating efficiencies. A significant portion of raw material and power requirement is met in-house, helping maintain stable raw material supplies and mitigate price volatility. Also, flexible and multi-product manufacturing facilities, and a well-established supply chain and distribution network have helped maintain healthy operating margin of 16-19% over the five fiscals through 2017.
* Above-average financial risk profile: The financial risk profile is supported by healthy operational cash flows and sizeable adjusted networth of Rs 6935 crore.  Healthy cash balance of Rs 2881 crore as on March 31, 2017, also provides comfort. While total debt increased to Rs 6361 crore in fiscal 2017 from Rs 5196 crore in previous fiscal mainly due to issue of senior unsecured notes, net debt declined to Rs 3480 crore from Rs 4040 crore. Gearing and net gearing remained comfortable at 0.92 time and 0.50 time, respectively, as on March 31, 2017. With improved profitability, gross debt-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) and net debt-to-EBITDA ratios also improved to 2.16 times (2.20 times in fiscal 2016) and 1.18 times (1.71 times in fiscal 2016), respectively, in fiscal 2017. Interest coverage and net cash accrual to total debt ratios were also adequate in fiscal 2017. Usage of cash and bank balance, including towards any large, partly debt-funded acquisition and its credit implications, will remain a key monitorable.

* Large working capital requirement: The crop protection business is seasonal in nature. Though sales occur at the start of the season, payment starts coming in after harvest, resulting in large receivables. Moreover, because goods are manufactured at one place and then distributed to other locations, finished goods inventory is sizeable (77 days as of March 2017). Working capital-intensity also stems from high credit required by customers in key Latin American markets. CRISIL believes the company will contain the exposure to markets with long credit cycle to less than one third of its revenue, partly mitigating the impact of long working capital cycle on overall credit profile.
* Susceptibility to risks inherent in the agrochemicals sector: The crop-protection sector is highly regulated by specific and separate registration processes in different countries, and is subject to various environmental rules and regulations. Changes in regulatory requirements such as export and import policies, and environmental and safety requirements in countries where exposure is significant, could impact revenue growth prospects. The crop protection 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.
Outlook: Stable

CRISIL believes the UPL group will maintain its healthy business risk profile over the medium term, supported by steady revenue growth due to higher market penetration and new product launches, and by steady profitability backed by integrated operations. The financial risk profile is expected to benefit over this period from steady cash generation, prudent funding of capex, and continued focus on improving the working capital cycle.
Upside scenario
* Significant increase in cash generation from operations, along with improved working capital cycle
* Sustained decline in gross debt-to-EBITDA to 1.3-1.5 times or in adjusted gearing of below 0.6 time
* Sustained revenue growth while maintaining geographical diversification in revenue
Downside scenario
* Deterioration in business conditions leading to continued stretch in the working capital cycle to over 300 days
* Gross debt-to-EBITDA ratio increasing to above 2.5 times, most likely due to higher working capital borrowing, large debt-funded acquisitions, or lower profitability
* Sustained decline in operating profitability to below 15%

About the Group

Incorporated in 1969, UPL, promoted by Mr Rajju Shroff, manufactures, markets, and distributes crop protection products, intermediates, specialty chemicals, and other industrial chemicals; it also undertakes research in these. Over time, UPL has undertaken multiple acquisitions, and entered into various strategic alliances to diversify its product profile and increase its geographical reach. The UPL group currently includes 96 entities. Apart from UPL India, the other key operating companies in the group include 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 sites in India, France, the Netherlands, Argentina, the UK, Vietnam, Turkey, Brazil, and Columbia.

Key Financial Indicators
Particulars Unit 2017  2016
Revenue Rs crore 16276 14015
Adjusted profit after tax (PAT) Rs crore 1725 927
PAT margin % 10.6 6.6
Adjusted debt/Adjusted networth Times 0.92 0.96
 Adjusted interest coverage Times 5.00 4.05

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
(Rs crore)
Rating assigned  with outlook
N.A. Non-convertible debentures* N.A. N.A. N.A. 500 CRISIL AA+/Stable
N.A. Cash credit# N.A. N.A. N.A. 1150 CRISIL AA+/Stable
N.A. Letter of credit & bank guarantee N.A. N.A. N.A. 650 CRISIL A1+
N.A Proposed cash credit facility N.A. N.A. N.A. 200 CRISIL AA+/Stable
N.A. Proposed long-term bank loan facility N.A. N.A. N.A. 500 CRISIL AA+/Stable
N.A. Commercial paper N.A. N.A. 7-365 days 900 CRISIL A1+
* Yet to be placed
# 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 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  900  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  30-06-14  CRISIL A1+  -- 
Non Convertible Debentures  LT  500  CRISIL AA+/Stable    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  1850  CRISIL AA+/Stable    No Rating Change    No Rating Change    No Rating Change  30-06-14  CRISIL AA+/Stable  -- 
Non Fund-based Bank Facilities  LT/ST  650  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  30-06-14  CRISIL A1+  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
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+/Stable 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+/Stable Proposed Cash Credit Limit 200 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 500 CRISIL AA+/Stable 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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