S&P Downgrades UPL Corp On Weak Cash Flow, Poor Operating Environment

S&P Global Ratings downgraded its long-term issuer credit rating on UPL Corporation Ltd., a subsidiary of UPL Ltd., to BB from BB+ on weak cash flow and poor operating environment.

The rating agency also lowered its issue rating on the Indian agrochemical producer’s senior unsecured notes to BB from BB+ and subordinated perpetual securities to B+ from BB-.

UPL Corp.’s leverage and cash flow will likely deteriorate amid poor industry conditions, with limited prospects for a full earnings recovery over the next 12 months, S&P said in a statement.

The rating agency, which has negative rating outlook, said the agrichemical industry fundamentals sharply deteriorated in recent quarters, and industry-wide destocking and price declines have negatively affected major players, including UPL Corp.,

That is particularly the case in Latin America, which typically accounts for about 40% of the company's sales, it noted.

S&P said its negative rating outlook reflects risk that the company's earnings recovery may be prolonged and cash flow fail to recover rapidly over the next 12 months.

LIQUIDITY POSITION

S&P said UPL Corp.'s liquidity position has weakened, with a jump in short-term debt and higher funding costs. The India-listed agrochemicals maker faces lengthy working capital cycles typical for the sector, and its initiatives -- including a rights offering of up to $500 million by its parent UPL Ltd., -- provide only partial relief, it added.

The rating agency said due to soft markets for its agrochemicals, UPL Corp.'s short-term debt ballooned to 119 billion Indian rupees ($1.43 billion) during the second quarter of the current fiscal year ending 31 March 2024. It stood at 28.6 billion rupees at the end of FY23.

“We expect UPL Corp.'s weakened operations and increased debt levels to aggravate its credit quality,” S&P said.

The rating agency said the normalization of operations will take time. Destocking will likely continue through the first half of FY25, while high production from competitors will continue to pressure prices, it added.

S&P said it expects a gradual recovery in the industry, but UPL Corp.'s use of rebates to attract sales during the recovery will likely reduce its profitability.

The rating agency projected UPL Corp.'s EBITDA in FY24 will decline by 60% to 46 billion rupees, and its EBITDA margin will contract to about 11% from 21.2% in FY23. It, however, expects EBITDA and EBITDA margin to recover to 70 billion rupees and 14%, respectively, in FY25.

Note: $1 = 82.9944 Indian rupees

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