INDIA MARKET OPEN | Fitch | Aakash Gupta | NDTV Profit
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00:00 Well, we have with us Akash Gupta, Director Corporate Ratings, Fitch Ratings, who joins
00:05 in to talk to us about what his concerns are about UPL.
00:08 Hi Akash, good morning, thanks for joining us.
00:12 Akash, you seem disappointed with UPL, there's been a downgrade from Fitch.
00:17 You want to talk to us about what has led to this because there is a sense that maybe
00:21 they're turning the corner, you know, the cycle of destocking may eventually be coming
00:26 to an end.
00:27 Sure, so let me talk about the downgrade rationale first and basically what we saw was UPL's
00:35 leverage has been elevated since it made the Arista acquisition back in FY19.
00:40 So we expected rapid deleveraging and that did not happen.
00:44 Additionally, last year, industry conditions worsened and we saw demand being weak due
00:49 to destocking as you mentioned and supply increasing due to capacity additions in China.
00:54 So we now estimate that UPL's leverage will remain elevated in FY24 and FY25 and decline
01:01 gradually.
01:02 So a weaker financial profile and risks on the supply side in the industry are behind
01:07 our downgrade.
01:08 So UPL's leverage will continue to be a concern.
01:13 How long was this on your watch list to begin with and what happened this quarter that led
01:18 you to act on your, of course, downgrade?
01:23 So UPL has been on a negative outlook for a couple of years now.
01:27 There were issues earlier about working capital increase.
01:31 If you remember in the last quarter of FY22, there was a significant increase in UPL's
01:38 working capital.
01:40 And then since last year, they have been saying that the industry conditions are not great.
01:46 There has been destocking at the distributor level.
01:48 We also think that the supply side risks have sort of taken a toll on UPL's performance.
01:56 And now we see that these risks, although they should abate over the next few years,
02:03 they will, nonetheless, the deleveraging will be gradual.
02:07 And that is one thing that we have sort of factored in our rating action.
02:10 Going ahead, this downgrade is only going to make it tougher for UPL to go out and raise
02:15 low quality funds or debt in that sense, right?
02:19 I mean, it's a little bit of a cat and mouse that's going to play out now.
02:24 So while this downgrade has happened, I'm assuming if UPL fulfills a few conditions,
02:29 goes out and deleverages, which is going to make it tougher, like I said, post your de-rating,
02:34 how do you expect this to play out in the foreseeable future if the fundamentals of
02:39 the industry actually improve?
02:42 So, I mean, obviously UPL remains a good quality credit, maybe not investment grade, but yeah,
02:49 I mean, the business fundamentals remain strong.
02:53 And UPL is also undertaking initiatives to deleverage in the form of capital raising.
02:58 We know that the board has approved a rights issue.
03:02 The company is also talking about raising additional capital in its various business
03:06 verticals.
03:07 So I think over the next few years, these capital raising initiatives should help it
03:13 deleverage.
03:14 As I said, we also expect industry conditions to improve.
03:18 And with this, hopefully we'll see better financial metrics and that should be reflected
03:25 in our ratings as well as its financing costs.
03:28 Prakash, any concerns?
03:30 I mean, I know it's sounding very negative here, but any concerns on failing or defaulting
03:38 any of that outstanding debt that the company has?
03:42 I do understand that the cycle of destocking is improving, that should be coming to an
03:46 end.
03:47 But just give us perspective, right?
03:49 Because I know investors generally have been worried post this and your rating action of
03:53 today will play out or pan out the landscape for tomorrow for UPL.
03:59 So one thing which UPL has done well is it has spread out its debt maturity profile.
04:09 So over the next 12 months or so, there is no long-term debt maturity.
04:15 And regarding the short-term debt, which is mainly for working capital, we do not see
04:18 a lot of stresses emerge.
04:21 What we understand is that the banking relationships are still there.
04:25 The UPL, the presence on the ground across the world is there.
04:29 It has competencies in terms of its product diversification.
04:34 So we do not sort of expect any stresses emerge in terms of its debt repayment capacity.
04:41 Akash, if you see them raise some equity or liquidate equity in that sense and improve
04:47 the debt equity ratio, do you think you'd go back and revisit your rating on UPL in
04:53 the next quarter or the next couple of quarters?
04:55 Sure.
04:56 So we look at debt to EBITDA.
05:00 So that is the key metric that we focus on.
05:03 And our rating actions certainly take into account past performance as well as our outlook
05:10 for the next few years.
05:11 So if UPL's performance, it could be the next couple of quarters, it could be a year or
05:19 so, we certainly will take that into account and calibrate our ratings accordingly.
05:24 Akash, so it's past performance more than the outlook that has led to that downgrade
05:31 from what I'm picking up from this conversation.
05:33 But hopefully it works out for UPL and you'll probably go back and re-look at those numbers.
05:37 But for now, it's stress.
05:38 A bunch of brokerage downgrades, rating agencies also expressing their concern about the high
05:44 leverage that UPL holds on its books.
05:46 But thank you, Akash.
05:47 Great having you today on the show.
05:48 Thank you.
05:49 Thank you.
05:50 Thank you.
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