CARE assigns A1+ ratings to UPL

The rating assigned to the bank facilities and long-term and short-term instruments of UPL Limited (UPL) factors in the stable operating performance with healthy growth in revenue in FY22, driven by growth across geographies.

The operating profitability also improved in FY22 on account of the favourable product mix, cost optimisation, and continued cost synergies derived from the acquisition of Arysta; the margins were comparable to the previous year despite the high inflationary environment. The financial risk profile also remained stable, although there was an increase in the working capital requirements, led by an increased scale and higher inventory cost. The second tranche of sustainability loan of US$ 700 million to part-refinance the acquisition debt has also been availed during FY22 at a lower cost of borrowings and higher average maturity, which is further expected to continue to support the financial risk profile of the entity.

The rating continues to factor in the extensive experience of the promoters in the crop protection value chain and their demonstrated track record of growing the business, organically and inorganically; the strong market position in the global agrochemical industry with presence in all large agriculture cultivating geographies; and the comprehensive product portfolio covering agrochemicals and bio-solutions to post-harvest products. The rating also factors in the increasing focus of the company on differentiated and sustainable agri-solutions, which will be the primary driving force for revenue and profits, going forward.

That said, the aforementioned rating strengths are partially offset by an elongated operating cycle on account of the seasonal nature of agriculture and the exposure to the inherent risks in the agrochemical industry.

The company proposes to increase its commercial paper (CP) borrowing programme to further support its working capital requirements.

Key rating strengths

Strong market position: UPL is the fifth-largest agricultural solutions player, the fourth-largest seed manufacturer, a leading bio-solutions provider, and an agrochem company in ESG. Recently, UPL has been ranked as leading agrochemical company in Environmental Social Governance (ESG) across the globe by Sustainalytics.

UPL is gradually moving away from being a generic post patented agrochemical company to being a company offering differentiated and sustainable crop protection solutions and bio-solutions. The share of differentiated solutions has increased from 14% in FY17 to 29% in FY22 and the company targets to reach 50% by FY27. UPL’s strategy is to provide sustainable solutions and products, as there is an increasing focus towards being conscious of the environment.

UPL has 750+ research and development (R&D) professionals across 20+ R&D centres across the globe, and annually, around 3% (earlier 2-2.5%) of the revenue is invested in R&D. Notably, 80% of the new products being developed are differentiated and sustainable solutions. CARE Ratings Limited (CARE Ratings) believes that going forward, the revenue and margin growth will be supported by the increasing share of differentiated products in the overall product portfolio.

Extensive experience of promoters: UPL was incorporated in 1969 and has a successful track record of more than 50 years in the industry. It is promoted by RD Shroff, Chairman & Managing Director, who has more than 50 years of experience in the field. Shroff is supported by other family members, including SR Shroff, Vice Chairman; JR Shroff, Global CEO of the group; and VR Shroff, Executive Director – all of them having experience in the industry. The top management is ably supported by a professional senior management team managing the day-to-day operations of the company.

UPL, over the past 25 years, has made 40+ acquisitions and been successful in accelerating growth in a profitable manner. UPL’s strategy to enter new geographies or new products is to acquire companies that are already present in the segment and have a significant market presence.

Wide geographical presence and product portfolio: UPL has a presence in more than 138 countries, thereby strengthening its global positioning and de-risking the business from excessive dependence on any single region. It has 48 manufacturing facilities (34 active ingredient and formulation plants of UPL and 14 formulation plants of Arysta) spread across the globe.

Healthy growth in revenue in FY22; margins remained stable: UPL reported healthy revenue growth of 19% y-o-y during FY22, driven by a mix of volume +8% and price +10%. The differentiated and sustainable products revenue grew by 19%, maintaining a revenue share versus FY21. The PBILDT margin was comparable to the previous year, despite the inflationary environment. Better pricing, coupled with efficient supply chain management and the benefit of backward integration, aided in keeping the EBITDA margin intact. Going forward, UPL’s revenue growth is expected to be around 10% and PBILDT growth around 12%. The healthy growth is expected to be supported by favourable market conditions, superior growth of high-margin differentiated and sustainable solutions, and an accelerated penetration in select markets, crops, and segments.

Stable financial risk profile: UPL’s financial risk profile is characterised by a sizeable adjusted net worth and healthy accretion to reserves. The deleveraging initiatives and refinancing undertaken by the company post availing debt for the acquisition of Arysta (US$ 3.0 billion in FY19) have been showing a progressive development over the past two to three years, with surplus generated cash flows being utilised to prepay debt.

UPL swapped its acquisition loan with a sustainability-linked loan (SLL) of around US$ 1.50 billion. The first tranche of US$ 750 million was raised in March and April 2021. The company raised the second tranche of the US$ 700-million SLL on December 31, 2021, with a reduction of interest cost by 35 bps and an opportunity for a further reduction of 5 bps on the achievement of sustainability indicators agreed with the banks. Of the US$ 1.45 billion, the debt maturity for US$ 1.25 billion gets extended by two years, to FY2026 (against FY24 earlier).

The overall consolidated borrowings increased from ₹23,744 crore as on March 31, 2021 to ₹25,866 crore as on March 31, 2022, primarily on account of the increase in working capital borrowings to support higher revenues, especially from Brazil, where the credit period is higher, as well as due to the higher raw material prices due to inflation.

CARE Ratings believes that the healthy cash generation from operations and the absence of large debt-funded capex indicated are likely to keep the leverage indicators at comfortable levels over the medium term. However, any sudden sizeable debt-funded capex or debt raised for funding the buyback of shares from minority investors, resulting in deterioration of the leverage profile, will be a key monitorable.

Key rating weaknesses

1. High working capital intensity of operations: UPL has a high receivable period on account of the credit offered to the dealers
2. and channel partners in various geographies. Dealers in each region have different payment terms, with the receivable cycle
3. varying from 90 days to 360 days (in the case of Latin America). UPL’s widespread presence, wherein the products are
4. manufactured in one location and distributed to other locations, required it to maintain adequate stock, thus increasing its
5. inventory-holding period. Nevertheless, the attempts made by the company to geographically diversify its manufacturing locations
6. reduce its inventory period to some extent. Furthermore, post-acquisition of Arysta, UPL has benefitted from the larger scale of
7. operations, thus implying increased bargaining power with the suppliers and also a wider distribution channel of Arysta. Both
8. these factors have resulted in the shortening of the working capital cycle in FY21 and FY22.
9. Exposure to risks inherent in agrochemical industry: The crop-protection sector remains susceptible to various
10. environmental rules and regulations in different countries. UPL sells its products in more than 130 countries across the world
11. (through more than 90 subsidiaries), with production units spread in 48 locations. Considering the nature of the product usage,
12. registration, consequent environmental impacts, etc, UPL is required to comply with various local laws, rules, and regulations and
13. operate under a strict regulatory environment. Furthermore, the sector is highly dependent on farm income and monsoon levels.
14. Thus, the infringement of any of the laws and any significant adverse change in the regulatory policies or distribution of monsoon can have a consequence on the operations of the company.