Should You Invest in UPL Ltd? Finology’s Take

World’s 5th Largest Crop Protection Company, UPL Ltd., is India’s market leader with sales 5X of its closest rival! Due to its huge growth prospects and a $5 Bn. new product pipeline, it is popular in the markets.

Finology Research Desk has analysed the company for you, along with a verdict on whether it is a good stock to invest in or not. Learn more in this article.

What makes the Agrochemical Industry special?

With population multiplying every passing day, the scarcity of resources too is. According to Trading Economics, the world population was estimated to be over 800 Cr. in 2023. The United Nations estimates the population to grow and reach ~970 Cr. by 2050. The large and growing population increases the risk of food insecurity in the world. It is estimated that ~8.9%-9.4% of the global population may have faced hunger in 2023.

An interesting thing we found out in our research process was that the hunger issue globally was not primarily because of a shortage of food production ability. The Food and Agriculture Organisation estimates that every year, up to 40% of the world's crop protection is lost due to plant diseases and pests. The story is no different in our country as well, with ~30–40% of India's yearly crop yield getting lost due to the attack of various agricultural pests. This made us interested in looking for a theme around crop protection for Finology 30.

The crop protection agrochemicals market was estimated at USD 47.78 billion in 2024 and is expected to grow at a CAGR of 5.8% from 2025 to 2030. Herbicides, Insecticides and Pesticides are the key chemicals used in the crop protection Industry.

Herbicides are the most used crop protection chemicals and account for 46.4% of the total crop protection market. Insecticides and Fungicides accounted for 25.7% and 25.1% market share respectively.

Source: UPL Annual Report FY24

Business Model of UPL

UPL Ltd. is in the business of manufacturing and sale of pesticides, insecticides and micronutrients. The company derives sales majorly from crop protection business - International (72%) and Domestic (7%). Apart from crop protection, it generates sales from speciality chemicals and other businesses.

Source: Annual Report FY24

1. Crop Protection: Crop protection is the general method or the practice of protecting crop yields from different agents including pests, weeds, plant diseases, and other organisms that damage agricultural crops. UPL is the 5th largest crop protection company globally. The crop protection business generates revenue mostly from the sale of Herbicides, Insecticides, Acaricides, Fungicides and Natural Plant Protection.

Source: UPL Annual Report FY24

The crop protection business majorly sells generic crop protection chemicals. Generic chemicals have high competition due to the presence of many players in the industry. Differentiated products, on the other hand, have better pricing power and thus, have higher margins compared to generic products. The company has, over the years improved its sales mix by increasing the portfolio contribution of different products from ~27% in FY23 to ~35% in FY24.

2. Global Seeds: The company sells planting, hybrid, and organic seeds for vegetables, grains, and many other types of crops. This is a smaller segment for the company, contributing ~10% to the total sales. However, it is a high-margin segment, generating 25.7% EBITDA margins for FY24.

Source: UPL Annual Report FY24

The global seeds segment generates sales majorly from field corn, grain and forage sorghum, vegetables and fresh corn, and sunflower and canola seeds. Despite the company's overall sales declining over the last 3 years from ₹46,240 Cr. in FY22 to ₹43,098 Cr., the global seeds segment grew by ~21% CAGR over the same time.

3. Specialty Chemicals: The company sells agrochemical active ingredients and other speciality chemicals for industrial uses under this segment. This division sells mainly to UPL group entities and has 600+ additional B2B external clients in multiple industries- pharma, agrochem, paints, mining, etc. This is a low margin segment for the company with ~12.6% EBITDA margins for FY24. The segment performed poorly and witnessed a 26% decline in sales from ₹11,850 Cr. in FY23 to ₹8,821 Cr. in FY24.

4. Others: This is the company's smallest sales-contributing segment. The company generates sales from Post-harvest solutions, Animal Health, Health and Nutrition, investment and others.

To give you a snapshot, we have analysed this company using Porter's 5 Forces framework.

Porter’s 5 Forces Analysis of UPL Ltd.

Source: Recipe Research Desk

1. Moderate Threat of New Entrants: The agrochemical industry has moderate entry barriers. This is because it takes several years to develop a formulation, get approvals from regulators and market the product. According to a study by CARE ratings in June 2017, getting a product registration in the US/Europe can take up to 3-5 years and 1-3 years in India.

UPL's majority of business comes from generic pesticides, which increases the risk of new entrants due to a lack of patent protection. The price competition is intense in the generic pesticide segments. Despite the price competitiveness, UPL’s large-scale business operations enable a continuous launch of new products. That is why it has a moderate threat of new entrants.

2. High Bargaining Power with Suppliers: UPL's large scale of operations enables it to have greater bargaining power with suppliers. Moreover, due to its wide geographic presence across 130+ countries, the company has to procure raw materials from multiple suppliers. As of FY24, the company had over 3000+ suppliers count. The gross margins for the company have remained very stable throughout the last 8 years. The gross margins fell for the current year due to the company’s expansion in low-margin lucrative regions. 

Source: Compay Annual Reports, Recipe Research Desk

3. Low Bargaining Power with Buyers: UPL's majority of the product portfolio is in generic agrochemicals, where price competition is intense due to the presence of many competitors. Moreover, along with being price-conscious, pesticide buyers are not brand-conscious, i.e. buyers are unwilling to pay a high price even for a branded product. Thus, the company has low bargaining power over its product buyers.

4. High Threat of Substitutes: Non-patented agrochemical products have a high threat from substitute products. There are many alternate products available at similar prices for UPL's generic portfolio products. Thus, the business has a high threat of substitute products.

5. High Competition in the Industry: The agrochemical industry is a highly fragmented market with intense competition and no dominant player. The company faces competition not only in the domestic market but also internationally from big players such as Bayer, Syngenta, BASF, Sumitomo, etc.

Why did we reject UPL Ltd. for Finology 30?

1. Inorganic Growth: Over the years, acquisitions and mergers have led UPL’s business growth. However, growing through acquisition becomes problematic if the acquisition is not value-accretive.

In 2019, UPL made a large acquisition of Arysta Lifesciences Inc. - the 9th-largest agrochemical company globally at that time. It acquired Arysta Lifesciences Inc. for ~USD 4.2 billion, which was ~1.5x larger than UPL's 2018 sales. UPL had paid a substantial premium for the acquisition. This can be observed in the company's goodwill increasing to ₹16,627 Cr. in 2019 compared to only ₹432 Cr. in 2018.

Apart from overpaying for the acquisition, there were other outcomes of the acquisition that we did not like:

1. The acquisition resulted in a steep decline in the company's ROE from 22.1% in 2018 to 10.4% in 2019.
2. UPL’s debt burden increased post-acquisition, with debt/equity ratio more than doubling from 0.72x in 2018 to 1.99x in 2019.
3. Although the BVPS increased post the acquisition from ₹180 to ₹287, the EPS for the company reduced from ₹39.79 to ₹28.42. The reduction in EPS highlighted a dilution of profit per share for the equity shareholders.

2. Increasing Debt Burden: Over the last few years, UPL’s debt burden has increased a lot. The interest costs as a % of sales have increased over the years from 4.6% in FY20 to 8.94% in FY24.

Source: Finology Ticker
Also, the interest coverage ratio (ICR) for the company is very low at 0.46x. A lower interest coverage ratio indicates that a company’s earnings are not sufficient to meet its debt obligations. Ideally, the interest coverage ratio should be greater than 2x.

The increasing debt burden as reflected in the rising interest costs and lower interest coverage ratio has resulted in CRISIL revising its long-term rating outlook for the company from AA+/Stable to AA+/Negative in March 2024.

The Bottom Line

We look for businesses whose financial fundamentals justify its business. In UPL’s scenario, despite the company having strong market leadership, according to us, the company has shown signs of weak capital allocation by having too much exposure to debt capital. According to us, investment in UPL is a high risk bet where even safety of invested capital has the risk of getting blown out.

Growth at the cost of financial strain is risky, especially when it isn’t working out. We avoid such risky bets. So, we decided not to go ahead with UPL Ltd. in Finology 30.

However, there are very few stocks that made it to Finology 30. Check them out here.