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Rating Action:

Moody's changes outlook on UPL's ratings to stable from positive; affirms Baa3 ratings

25 Nov 2019

Singapore, November 25, 2019 -- Moody's Investors Service has changed the outlook on UPL Corporation Limited's ("UPL Corp") ratings to stable from positive. At the same time, Moody's has affirmed the company's Baa3 long-term issuer rating and the Baa3 rating on the company's senior unsecured notes maturing in 2021.

RATINGS RATIONALE

"The change in outlook to stable from positive reflects the weaker than expected operating performance of the broader UPL Group, and our expectation that it will take longer for its credit metrics to improve to a level appropriate for a higher rating" says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

"Specifically, we expect UPL Group's EBITDA margin to remain below or at the lower-end of our previous expectations of 22%-25% over the next 12-18 months, and for its leverage -- as measured by adjusted debt/EBITDA -- to remain above the upgrade trigger of 2.5x," adds Chaubal, who is also Moody's Lead Analyst for UPL Corp.

Looking ahead, slowing revenue growth and a higher contribution from the relatively lower margin Latin American markets, that accounted for almost 34% of the company's consolidated revenues in the fiscal year ending March 2019 (FY2019), will likely constrain a substantial improvement in UPL Group's EBITDA margins, even as the slightly more profitable Arysta starts contributing earnings and revenue.

In January 2019, UPL Corp completed the acquisition of Arysta LifeScience Inc. for $4.2 billion, funded with a mix of debt ($3.0 billion) and equity ($1.2 billion). Arysta's asset-light and lean operations with a strong presence in Africa, Russia and Eastern Europe complement UPL Group's leading position in India, the Americas and Western Europe, as well as its vertically integrated manufacturing capabilities.

In addition, Arysta's product offering, with a strong presence in herbicides, bio solutions, seed treatment and other products, complements UPL Group's products and has helped increase its market share across these verticals.

Despite these positives, the acquisition was large, the first of its kind for the UPL Group, and entailed execution risks, such as a timely and seamless execution, integration, and success in realizing business synergies. In addition, the partial debt financing of the acquisition increased the company's financial leverage.

The affirmation of the Baa3 ratings reflects UPL Group's status as the largest post-patent agrochemicals manufacturer by revenue globally, its geographically diversified operations with complementary product offerings from Arysta that smoothen intra-year sales volatility, and the economies of scale following the acquisition that will result in cost and revenue synergies.

The Baa3 ratings also capture as credit challenges: (1) the company's elevated financial risk profile, with leverage likely to remain above 3.0x by March 2020; (2) execution risks associated with the company's ability to continue to extract synergies from the Arysta acquisition, including by rationalizing working capital; and (3) the inherent risks associated with the time-consuming and stringent regulatory requirements for the industry, especially in terms of product registrations.

The stable outlook reflects Moody's view that the company will maintain a strong business profile with credit metrics appropriate for its Baa3 rating. The stable outlook also incorporates the expectation that the company will not undertake any large or transformational acquisitions, at least until Arsyta is completely integrated and the company's financial profile has been restored to pre-acquisition levels.

The UPL Group comprises UPL Limited, the ultimate holding company of the group, UPL Corp, and its various operating subsidiaries. All UPL companies operate through a centralized treasury function that is housed under UPL Limited. Furthermore, there is significant overlap between the group's Indian and overseas operations. Moody's ratings on UPL Corp, therefore, reflect the credit quality of the group as a whole.

Moody's ratings for UPL Corp also considers the following environmental, social and governance (ESG) factors.

UPL Group faces a moderate level of environmental risk, primarily stemming from the risk of air, soil and water emissions, as well as from the clean-up of hazardous waste. In addition, the company's earnings are susceptible to adverse weather conditions. Climatic conditions such as drought or excessive rainfall can have a significant impact on demand for crop protection products, although the company's geographic diversification somewhat mitigates this risk.

Ownership and control are key to Moody's assessment of governance risk, with concentrated ownership having either a positive or negative influence on corporate performance. UPL is 27.9% owned by the founder family and the remaining shareholding rests with institutional shareholders and the public. Private equity firm TPG Capital and sovereign wealth fund Abu Dhabi Investment Authority have a 11% shareholding each in UPL Corp and also have board representation at UPL Corp. Overall, Moody's assesses UPL Group's governance practices as in line with other large companies in India, and regards governance risk as manageable.

WHAT COULD CHANGE THE RATING DOWN/UP

Given today's change in outlook to stable from positive, an upgrade is unlikely over the next 12-to-18 months.

The rating could be upgraded in the longer term once synergies from the Arysta acquisition start to translate into EBITDA margins at the higher end of the 22%-25% range, leverage below 2.5x and consistent positive free cash flow generation.

Conversely, the ratings could be downgraded to non-investment grade if the company's EBITDA margins slide below 18% or if leverage deteriorates to levels in excess of 3.5x, both on a sustained basis.

Any large debt-funded acquisitions that materially weaken the company's financial profile will also exert negative ratings pressure.

Moody's ratings incorporate the assumption that UPL Corp remains an integral part of UPL Group and the significant inter-linkages between the two continue. Therefore, any divestiture in UPL Corp by UPL Group, or any significant increase in dividend payments by UPL Corp to UPL Group, will be viewed negatively.

The principal methodology used in these ratings was the Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Incorporated in Mauritius, UPL Corporation Limited (UPL Corp), is a 78% owned subsidiary of UPL Limited. Private equity firm TPG Capital and the Abu Dhabi Investment Authority, a sovereign wealth fund each hold 11% in UPL Corp. UPL Limited is one of the largest agro-chemicals companies globally, operating in the post-patent markets. For the fiscal year ended 31 March 2019 (fiscal 2019), UPL Limited reported revenues of INR215.9 billion ($3.1 billion) with an adjusted EBITDA of INR43.5 billion ($631 million).

Headquartered in Mumbai and listed on the National Stock Exchange and Bombay Stock Exchange, UPL Limited is 27.9% owned by the promoter family, led by Rajnikant Shroff, who is the company's chairman and managing director.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kaustubh Chaubal
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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