Fitch Downgrades UPL Corporation After Parent’s Weak FY24

Fitch Ratings downgraded UPL Corporation Ltd.’s long-term issuer default rating to BB from BB+, as well as its senior unsecured rating and the ratings on the senior unsecured notes to BB from BB+.

The downgrade of UPL Corporation follows a fall in its parent UPL Ltd.’s EBITDA in the financial year ended 31 March 2024 (FY24) and sharply higher EBITDA leverage, both of which were worse than expectations, Fitch said in a statement.

The EBITDA of agro-chemical producer UPL, with whose credit profile UPL Corporation’s rating is aligned under Fitch’s Parent and Subsidiary Linkage Rating Criteria, plunged by more than 50% after incorporating the rating agency’s adjustments.

Fitch, which has a Negative outlook on UPL Corporation, said weaker EBITDA and higher finance costs resulted in negative free cash flow and a surge in its parent UPL's leverage. UPL's total debt-to-EBITDA leverage, based on deduction of net dividends to minorities from EBITDA, jumped to 8.9x in FY24 from 3.6x in FY23, it added.

“While we expect leverage to improve, persistent oversupply from China could delay UPL's deleveraging and sustain pressure on its financial profile,” Fitch said. “This is reflected in the Negative outlook.”

Fitch said the ratings incorporate the group's robust market position in the post-patent segment of crop-protection chemicals and its robust product and geographical diversification.

“We see UPL's significant backward integration as a key competitive advantage, but this may shrink in the face of sustained manufacturing overcapacity in the industry,” it noted.

FINANCIAL METRICS

Fitch said it expects the leverage to fall to around 5x by FY26, on a six percentage points EBITDA margin recovery and an 8% revenue CAGR over FY25-FY26.

The rating agency said UPL's FY24 EBITDA was hit by higher channel rebates and high-cost inventory liquidation and this will likely diminish from 2QFY25, supported by a better demand-supply balance for the industry.

Margin and revenue growth should also be supported by UPL's aim to increase the share of higher-margin products, which UPL deems as differentiated and sustainable, to 50% of revenue by FY27 (FY24: 36%), it added.

Fitch said UPL's working-capital cycle should shorten in FY25 due to management's focus on better planning, collections and inventory management.

The rating agency said it expects UPL's free cash flow margin to be largely neutral over FY25-FY26. It also projected EBITDA interest coverage to increase to around 3x by FY26 from below 1.5x in FY24.

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