Rating Rationale

Strengths
* Large scale with diverse geographical presence and wide product portfolio:
The UPL group would be among the top 5 players in the global agrochemicals industry by fiscal 2020. The revenue base is well diversified, with 83% generated from markets such as Latin America, Europe, and the US, in fiscal 2019. 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. UPL's business risk profile will remain healthy, also aided by a combined portfolio of 12,400+ registrations, over 200 active ingredients and 1023 patents. The combined revenues are expected to reach about USD 5 billion after one year of combined operations.

* 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 2019. The operating margins were briefly impacted in Q4-FY19 and Q1-FY20 due to PPA adjustment on Arysta inventory on acquisition. Since this adjustment is non-recurring, profitability is not expected to be impacted adversely from FY21.

Synergistic cost savings in excess of USD 100 million are expected in FY19 on account of acquisition due to better backward integration and 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% in the medium term, from ~18.5% in fiscals 2019.

* Adequate financial risk profile; albeit moderation expected in key credit metrics in medium term
The UPL group's financial risk profile is supported by material annual operational cash flows and sizeable adjusted net worth of Rs 17,305 crore as on March 31, 2019. Interest coverage and net cash accrual to total debt ratios were moderate at 3.40 times and 0.07 time in fiscal 2019. Even though these metrics are lower than 4.79 times and 0.36 time respectively in fiscal 2018, fiscal 2019 includes only 2 months of Arysta's performance. A thorough inference could be made in FY20 with a full year performance of the combined entity.

The acquisition has been funded through a substantial debt component (~ USD 3 billion), which has resulted in moderation in credit metrics over the medium term. However, Gross Debt/EBITDA is expected to reduce below 3.7 times in fiscal 2020 (net debt to EBITDA below 3.2 times) with steady repayment of debt and accruing synergies. The management is however, committed to reducing debt levels over the medium to long term. Nevertheless, CRISIL believes improvement in the financial risk profile is dependent on successful integration and benefits from synergies through the acquired entity. Any additional material acquisitions 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, 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. 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.

Liquidity: Adequate
Cash and cash equivalents stood at Rs. 2198 crore as on June 30, 2019 (Rs. 2829 crore on March 31, 2019). Utilization of fund based limits has been moderate at about 42% (of drawing power) for past twelve months ending July 2019. The liquidity position is expected to remain adequate, supported by healthy cash generation, notwithstanding higher working capital requirements. Annual capex estimated at about Rs -2000 crore is also expected to be funded largely from internal accruals. Moreover, there are no scheduled debt repayments, as the debt raised for acquisition has a scheduled bullet maturity at the end of 5th year. The internal accruals would be sufficient to fund the repayments, capex and additional working capital in FY20 and FY21.