UPL Ltd
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UPL Ltd
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Ladies and gentlemen, good day, and welcome to UPL's First Quarter FY 2023 Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Radhika Arora. Thank you, and over to you, ma'am.
Thank you, Inba. Good morning and good evening to everyone. Thanks for joining us today for the results for the quarter ended June 30, 2022. On this call, we will be referring to a presentation that is available on our website, and we take as having read the safe harbor statement.
From the management team, we have with us today, Global CEO, Jai Shroff, but he's down with a bad throat. So I would apologize on his behalf that he won't be able to present today. We do have our Group CFO, Rajendra Darak; President and COO, Mike Frank; Global CFO, Anand Vora; and Chief Supply Chain Officer, Raj Tiwari. We are also joined by the Head of our India business, Mr. Ashish Dobhal. We will start with an overview from -- and a financial update from Mike and Anand and followed by the Q&A.
With that, let me now hand it over to Mike. Mike, over to you.
Thank you, Radhika, and hello, everyone. It's been a fast and exciting first 6 months for me at UPL. Best of all has been working with our meeting team around the globe as we [Technical Difficulty] help farmers become more successful with the commitment to [ reimagining sustainability ] in everything that we do. We continue to operate a highly volatile and uncertain world, and we take pride in the agility of our team, strong customer relationships, unique backward integration and our supply chain resilience to address these challenges head-on. Our strong results in the first quarter demonstrate this competitive advantage.
I would like to also highlight 2 important achievements for the last quarter. First, we're excited about our recently announced collaboration with Bunge for the creation of Origeo in Brazil, which is subject to antitrust approvals. This innovative company will increase productivity, profitability and sustainability for farmers in 5 states of the North and Northeast region of Brazil. Secondly, after extensive trials, we have also launched the first Flupyrimin-based insecticide in India to protect rice fields by controlling brown plant hopper and yellow stem borer on rice, making it an important milestone with our collaboration with Mitsui Chemicals subsidiary, MMAG.
So now turning to our performance highlights. In Q1, we have experienced strong growth across the Americas, in particular, the favorable market conditions and strong commodity prices allowed us to improve gross margins in Brazil, and we've grown both volume and price in the U.S. market. Multiple challenges have been faced in Europe, including unfavorable weather conditions, the impact of product bans and the war in Ukraine, and overall, the devaluation of the currency. In spite of that, we continue to see strong growth in our business in Europe.
In India, the application timing was impacted by delayed [Technical Difficulty]
Ladies and gentlemen, it looks like Mr. Frank's line is disconnected. We request to please hold the line while we reconnect him back. Please do not disconnect. Ladies and gentlemen, thank you for your patience. We have the line from Mr. Mike connected. Over to you, sir.
Yes. Thank you. Sorry that I got disconnected.
As I was saying, we continue to operate in a highly volatile and uncertain world, and we take pride in the agility of our team, our strong customer relationships, unique backward integration and our supply chain resilience to address these challenges head-on. Our strong results in the first quarter demonstrate this competitive advantage.
I would like to highlight 2 important achievements for the last quarter. First, we're excited about the recently announced collaboration with Bunge for the creation of Origeo in Brazil, which is still subject to antitrust approvals. This innovative company will increase productivity, profitability and sustainability for farmers in 5 states of the North and Northeastern regions of Brazil. Secondly, after extensive trials, we have also launched the first Flupyrimin-based insecticide in India to protect rice fields by controlling brown plant hopper and yellow stem borer on rice, making it an important milestone in our collaboration with Mitsui Chemicals subsidiary, MMAG.
So now turning to our performance highlights. In Q1, we have experienced strong growth across the Americas, in particular, the favorable market conditions and strong commodity prices allowed us to improve gross margins in Brazil, and we grew both volume and price in the U.S. market. Multiple challenges have faced our team in Europe, including unfavorable weather conditions, the impact of product bans and, of course, the war in Ukraine, as well as the overall devaluation of the currency. Despite all those challenges, we did see strong growth in our European business. In India, the application timing was impacted by delayed plantings.
So moving to the financial results. Our revenue as well as our EBITDA for the quarter have both grown by 27% versus Q1 of our last fiscal year. The growth in revenue was led by significantly improved price realizations, coupled with a healthy volume increase despite the multiple challenges. Our contribution margins delivered at around 44%, enabled by 18% price realizations, offsetting the inflationary input and freight costs. Our EBITDA margins lowered slightly as a result of increasing our investment in SG&A. The key driver for this SG&A increase was related to employee costs, which were around an increase of INR 214 crores. We intentionally increased our head count versus last year in the areas of R&D, our NPP BioSolutions business, and in our Southeast Asia business where we're transitioning that business to a B2C model.
Let us now talk about the performance of our regions in the quarter. In Latin America, we achieved a strong 38% growth led by our herbicide portfolio and through improved pricing. The growth was mostly led by Brazil, driven by a robust demand for post-emergent herbicides and strong price realization. Argentina and Andean countries also contributed to overall growth of the region, mostly driven by herbicides. As another highlight in Latin America, our NPP BioSolutions business achieved a strong double-digit growth in Mexico and the Andean countries.
In North America, revenue grew by 47% in this quarter due to higher volumes as well as improved price realization. Our performance was supported by high commodity prices with strong growth in both U.S. and Canada. Despite challenges, which included the drought in Western U.S., where we have a strong NPP BioSolutions business, this did impact that part of our business in Q1 in that specialty crop market. The preemergent herbicides have led the growth in the region through a mix of volume and price. We also successfully launched our new 3-way herbicide in soybeans, Preview. I visited with our U.S. field technical team last week, and the field results are looking fantastic. We expect Preview to really start ramping up in the next crop season.
In Europe, we grew by a robust 13%. This strong performance has been achieved through increased volume growth and higher price realization. Among major countries, growth in France was led by NPP BioSolutions. Central Europe grew through a mix of volume increase as well as price. The European business achieved this growth despite multiple challenges that I mentioned earlier, including the devaluation of the euro by around 6% against the INR versus last year.
In India, we achieved a moderate growth of 8%, much impacted by the delayed planting of key crops. Regarding crop protection, our NPP BioSolutions portfolio delivered strong growth. In addition, we are pleased that our procurement-based sales have started in the last quarter. Among other businesses, Advanta's growth has been led by corn-related sales. Due to the recent start of the monsoon season, we are now seeing significant product applications in the field, which will set up for a strong Q2.
The rest of the world delivered a 31% growth in revenues driven by significant increases in volumes and supported by improved price. Significant growth in Southeast Asia, Australia and New Zealand were led by insecticides and fungicides despite the [Technical Difficulty] supply constraints. This includes [Technical Difficulty] PT Excel acquisition in Indonesia. Strong growth was also achieved in Western and Central Africa, largely driven by our insecticides. Sales in China were negatively impacted by unfavorable weather that affected key crops and by channel stocks, while Japan was impacted due to the devaluation of the Japanese yen.
During our Capital Markets Day presentation in May, we emphasized the importance of our Advanta business. For this reason, we would like to share the financial details of Advanta for the last quarter. Advanta had a strong performance with revenue growth of 28%, led by field corn in India, canola in Australia and field corn and fresh corn in Thailand. We also saw a margin improvement of 60 basis points, driven by improved pricing and product mix and an overall EBITDA increase of 27%, impacted by higher investments in SG&A to pursue our B2C strategy.
As part of our reimagining sustainability efforts, in the last quarter, we hosted the second OpenAg Symposium in partnership with the University of Oxford and The Oxford India Centre for Sustainable Development and discussed the role of global agriculture on the path to net zero. Also, we have launched our first-ever Africa Sustainability Report, showcasing UPL's commitment to farmers and food systems across the Continent.
Before I hand over to Anand, our Global CFO, I would like to highlight that we are poised to deliver strong growth for the year. Considering this positive outlook, we are revising our FY '23 guidance to 50% -- 15% growth for revenue and 15% to 18% growth for EBITDA. Our strong Q1 performance, anticipated robust demand for our portfolio of solutions for the balance of the year and an expectation of contribution margin expansion support the revised guidance. We will also be very diligent with SG&A as we are experienced inflation across our various SG&A components.
Lastly, and very importantly, we are also laser-focused on the working capital management and delivering a strong net cash flow for the year. While Anand will get into the details on working capital and net debt, I would like to emphasize here that we remain committed to deliver 80 days of working capital by the end of the year.
Finally, I would like to congratulate and thank our team for their resilience, dedication and unified focus in delivering such strong performance in this quarter despite challenges on several fronts.
I will now turn it over to Anand to take a deeper dive into the financial performance.
Thank you, Mike. A warm welcome to all of you who have joined us today.
I'll begin by discussing the key financial highlights for the first quarter and then take you through the detailed financials. At the outset, I'm delighted to share that we have delivered a solid all-around operational performance during the first quarter, marked by robust growth in both revenue and profitability. Delivering such a solid performance against the backdrop of challenging macro environment and significant input cost pressures vindicates the robustness of our business model and more important, our team's ability to adjust and deliver superior performance in a dynamic environment.
Talking specifically about our quarter -- year-on-year performance on the key financial metrics in Q1, we ended the first quarter with revenues of over INR 10,800 crores, reporting a robust growth of 27%, of which 6% came from volume growth, 18% from price increase and 3% due to favorable exchange impact. Almost all major regions delivered double-digit growth. And as Mike alluded to earlier, we are confident of a strong performance in Q2, including India, which had seen muted growth in Q1 due to the delayed monsoon.
Contribution margins were higher by 7 basis points on the back of improved margins in our herbicide portfolio and improved margins in our Latin American market. SG&A expenses rose by 29% as the company invested in building teams and capabilities to grow its differentiated and sustainable portfolio, strengthen distribution capabilities and normalization of overheads post-COVID. However, it's heartening to see that we are still able to keep our EBITDA margins intact and deliver a strong EBITDA growth of 26%. Strong contribution and EBITDA growth led to 29% growth in net profit after taxes, minority interest and exceptional costs.
On the finance costs and other income, let me share with you certain details. As you would have seen, the finance costs in Q1 are lower by INR 88 crores. This reduction is largely on account of gains on hedges taken against advance orders. Overall interest costs has, for the quarter, gone up to INR 478 crores on the back of increase in the LIBOR rates and the base rates in most of the countries.
As regards other income for the quarter, we had an expense of INR 124 crores versus INR 41 crores in the same quarter of last year. This, again, was largely on account of mark-to-market on receivables and payables across various geographies. Therefore, net exchange gain year-on-year for the quarter has been INR 183 crores.
Tax for the quarter was INR 59 crores, and we expect to end the year, as per the guidance, of 12% to 15% of expected taxes, that's the ETR. Previous year's same quarter due to losses in Brazil in Q1 on account of foreign exchange impact and recognition of certain deferred tax assets in our Swiss subsidiary, we had a net tax credit of INR 152 crores. Further, minority interest rate rose significantly due to the superior performance of our global business. Despite the increase in tax and minority interest, we reported a net profit growth of 29% to INR 877 crores, while the earnings per share grew by 33% to INR 10.76.
The first quarter also witnessed an increase of INR 5,608 crores in net working capital on a sequential basis, primarily on account of 4 major factors. We saw a robust growth in sales of 27%. There has been a conscious reduction in factoring quantum by almost INR 3,000 crores in Q1 FY '23 as compared to INR 619 crores in Q1 FY '22. To optimize -- this was done largely to optimize the interest costs in certain geographies, which saw a disproportionate spike in factoring premium. As a result of this, receivables and net working capital was higher by 28 days. Inventory is higher by 10 days due to buildup in inventory on account of strong demand and uncertainties around the supply chain. However, notwithstanding the reduced factoring and the ForEx exchange impact of INR 588 crores, the increase in net working capital would have been lower at INR 1,931 crores vis-a-vis the INR 5,600 crores, reflecting actually a reduction of 11 days year-on-year.
The net debt at the end of first quarter stood at INR 7,574 crores as compared to March 2022 levels of INR 26,480 crores, primarily due to significant increase in working capital, as highlighted earlier. However, adjusting for the reduced factoring, that of INR 3,000-odd crores, the FX impact and the implied increase in net debt as a sequential basis would have been lower by INR 3,392 crores vis-a-vis the INR 7,574 crores. Accordingly, the implied net debt would have been around INR 22,300 crores as of June as compared to INR 26,480 crores as is reported. Going forward, we expect the working capital days to be in line with our guidance of 80 days by the end of the year. This would lead to a significant release of working capital in second half of FY '23, enabling us to manage our net debt position effectively by the end of the year.
Further, as Mike and Jai -- as Mike highlighted, we have revised both revenue and EBITDA growth range guidance for FY '23 upwards by 300 basis points and 500 basis points, respectively, considering the improved performance.
On this optimistic note, I would request -- I would hand over back to the operator, and we can start the question-and-answer session. Thank you.
[Operator Instructions] Our first question is from the line of Prashant Biyani from Elara Capital.
Sir, what would be the mandate of our JV with Bunge? And why to form a new JV after Bunge's investment in Sinagro?
Yes. Prashant, I'll take that question. So yes, this is the second venture that we have entered with Bunge. We see them as a very good partner for our business in Brazil. They have an extensive soybean trading business, as you likely know, and they're very strong, particularly in the country of Brazil. The opportunity we have with Origeo is in the 5 states where that business is focused, largely, those are large growers that are not served by extensive retailers in that region. And so, there's not a significant overlap between our Sinagro business and the geography where the Origeo business is being focused. And so, this is an opportunity for us to take an entire portfolio to these large growers and work with them in a way that, not only brings them solutions, focusing on sustainability and yield, but also a complete package, including the buying of their grain on the back end, which helps from a risk management standpoint. So it's a very unique model, and we're very excited about this opportunity to really grow our business in that region of Brazil, where we don't have a significant presence today.
Sure. Sir, secondly, while Europe is going through a very unfortunate gas crisis, but business-wise, it would be beneficial for Agchem players or it's maybe loss of business due to lower agriculture activity?
Yes. So Prashant, the agricultural activity continues across Europe. I mean, obviously, there has been an impact with the conflict in Ukraine, as well as hot, dry conditions across much of Europe over the past month, especially. That being said, we continue to see opportunities for our portfolio in Europe. Our NPP business is exceptionally strong in Europe. And so, we've seen good growth of that business in several countries. But yes, I mean, the gas situation, I would say, is not impacting agriculture and not impacting the -- what farmers are doing in the field, and therefore, our business continues to evolve and we're having good momentum there.
Sir, would we have any nutrient-based product to -- which can be placed against fertilizers because fertilizers have been quite expensive now? So it may be an opportunity for those nutrient-based products to be sold?
Yes, absolutely. And it's a very exciting part of our NPP portfolio, where we have microbials and other nutritional products, which really help growers create stronger roots and ultimately manage some of their increasing costs that they're seeing with fertilizer.
Maybe I'll ask Ashish to provide some color to the situation. We have a very strong portfolio in India, and we've expanded it recently. And so, Ashish, maybe you can highlight some of the opportunities and products that we're selling in India and how they're helping farmers with managing their overall fertilizer costs.
So I think fertilizer scarcity is a big, big problem in India, and I think we are very big [indiscernible]. We have perhaps the biggest NPP or the BioSolutions portfolio in India, starting right from the time when soil is prepared. We have products -- we have micro as our base product, which actually helps to pick up the fertilizers from soil, and we all know that fertilizers are lying there inside and a lot of elements are [indiscernible] these products help them to take the extra fertilizers or extra macro and micro elements inside.
We have products like phosphate solubilizing bacteria, this can actually move the [indiscernible] which is already there in the trial, then we have products. In these days, [ laying of fertilizers ] is one thing but we also have a huge challenge and the kind of heat wave that we are seeing in India. Again, [ normally it gets ] very, very well placed with that and where we have certain stress -- abiotic stress products, which are very, very establishment product, and we have the full range of products which can help to counter this entire thing on the fertilizer shortage. We also have -- in addition to this, we also have liquid fertilizers, which are having macro and micro nutrient mix, which also has been very, very [ welcomed ] in India.
We will take our next question from the line of Girish Achhipalia from Morgan Stanley.
Is it possible to guide a range on interest cost because we are saying that 80 days is a net working capital at the end of the year? Obviously, your expectation on interest costs would have increased given what is happening. So if you can guide on that range?
Secondly, what is the net debt reduction guidance? And does it include the share buyback? Or is it excluding the share buyback amount that you've already spent in Q1?
Yes. Girish, this is Anand here. On the interest cost, you're right, I mean, there is a spike because of the base increase in LIBOR of so far as these days, that's been the benchmark, and we are seeing corresponding increase in most countries. And we expect at least the interest cost level, I'm not talking the finance cost, the interest costs are anywhere in the range of around $300 million would be the overall cost of borrowings for the financial year -- full financial year. So that's on the interest costs.
And on the net debt guidance, we have told at the beginning, we are looking at $400 million. I think as Mike also alluded, we are committed to [ rein ] in the working capital. And we are -- at least at this stage, we are maintaining what it is, but we will keep you updated as we move forward quarter-on-quarter. All of us are being made to see wherever possible to reduce the working capital and see how we can reduce the net debt.
So is this number gross of the share buyback or net of the share buyback, the $400 million?
It's gross of the share buyback.
Okay. And if you can guide on the CapEx because your run rate on growth is a surprise on the upside. Is there any upward guidance to that?
And I also see in your exceptional items, insurance claim was close to INR 600-odd crores or higher. So if you can provide any color on when this money would be received?
No. So as far as the CapEx, we are not changing the guidance. We are retaining our guidance of what we had said at the beginning of the year, around $300 million to $325 million.
And as far as the insurance claim and the exceptional, we are -- these are large amounts. The insurance companies are taking a bit of time, but we are confident of getting these claims either this quarter or definitely by next quarter. So that's the plan as of now. That's what we hear from the insurance company.
Our next question is from the line of [ Abhiram Iyer from Deutsche Bank ].
Congratulations on good set of numbers. I had similar questions sort of mirroring on the net debt reduction. Now obviously, we're targeting $400 million net debt reduction over the year, and it's gone in the opposite direction because of lower factoring receivables. So is it fair to say that towards the end of the years, the reduction might potentially come from the reversal of this lower receivables? Or would this come through a different avenue in terms of paying down the debt from our cash flows?
No. I think for this quarter, at least we've done the assessment, and we kept the -- we chose to do the borrowings -- normal borrowings rather than do the factoring. Now we'll assess the situation. So -- but typically, as you know, every -- at least beginning of Q1, Q2 and Q3, the working capital keeps going up. And then in Q4, we have the drop in working capital as we see the collections coming through from Latin America as well as from the European and U.S. markets. So that's the trajectory. If you look at the last 5 years, you will see that working capital going up quarter-on-quarter and then it drops in Q4.
As far as factoring is concerned, we would like to maintain at the same levels because what we are seeing is increasingly as far as the rating agencies are concerned, they don't give us the benefit of factoring, although almost -- not almost -- not a single dollar of factoring is with recourse, all our factoring is without recourse. So clearly -- and also as far as delinquencies is concerned in terms of our receivables, it's a very low ratio. We also take credit insurance. So we will now see -- as we move forward, we will see what are the arbitrage opportunities available if fracturing costs are very high. As I mentioned, also in certain geographies, Q1, we saw them going -- shooting up. We decided to go for plain vanilla borrowing. So we'll continue to keep evaluating. But as I've said, we will see -- we will work towards the net debt reduction target what we have guided for at the beginning of the year.
Got it. And just, sir, sort of a quick question on your perpetual bonds. What's the company's current status on the same? Is it to be called at the first date? Or is it a decision that should be taken later and maybe only at the step-up date?
Well, by definition, they are perpetual. So they need to be -- they remain -- we are closer to the -- after 5.5 years, there's an interest reset, and we will put up with the Board and decide as to how we want to -- whether we would like to continue or discontinue. I think some of the rating agencies, even if we continue after 5.5 years, do not give us the benefit of it being treated, 50% of it being treated as equity. So we will take a call based on when we are closer to the date, which is at the end of 5.5 years, where we have the interest reset to be done.
And our next question is from the line of Antonio Luiz Gomes from Ninety One.
I appreciate it. I just had a couple of questions regarding your financial policy. You mentioned the $400 million debt reduction. And as you've mentioned, the receivables factoring, you're looking to keep it stable. I was just wondering on the equity, any dividends or share buybacks that you're planning on going forward. And what kind of free cash flow you're looking for overall towards the end of the year?
So Antonio, as far as share buyback is concerned, we have done it at the beginning of the year. And as for the regulators in India, we cannot do one until next 18 years -- 18 months from now. And therefore, we have no intentions as of now, at least for this financial year, statutory we cannot do. And not that we have any intentions of doing a share buyback again, having just completed one.
As far as dividends, we do -- our policy is put up on the website. We declare anywhere between 20% to 22% of our PAT -- 20% to 25% of our PAT as dividends. And that's our policy, unless there is -- at the end of the year, based on the financial results and the cash flow, if the Board decides, then we may change the policy, but I don't see that happening. That's been a consistent policy for many years now.
So -- and whatever free cash we have, we go to reduce our debt and besides whatever is the budgeted CapEx and other, so to say, the budgeted expenses on other things. So that's broadly our financial policy on free cash flow.
Our next question is from the line of Abhijit Akella from Kotak Securities.
So just a couple from my side. First is on the guidance. I just wanted to clarify whether this 15% to 18% revenue -- sorry, EBITDA growth guidance is on a U.S. dollar basis. And should we take the FY '22 base of EBITDA as $1.368 billion? Would that be the right assumption to make?
I think, Abhijit, we have to go with the INR, whatever it is. And our original guidance also was in INR. So basically, guidance is typically we give it on INR basis only, that's our reporting currency, right?
Okay. So it's on an INR basis. Okay. And second, on the balance sheet front, the guidance of 80 days for net working capital, the last quarter's presentation showed a net working capital days of 69 as of March '22. So how should we read that? I mean, is there a 10-day increase in net working capital that you are talking about?
And the other thing I just wanted to check was on Latin America, last quarter, we had guided to about single-digit revenue growth for fiscal '23. It seems to be growing considerably faster than we had anticipated, which probably puts pressure on the working capital. So how do we sort of manage that situation?
Sure. No. So you're right. I mean, we delivered 69 days, and it would be our endeavor to keep improving on the working capital. We always give a bit of a conservative guidance. And therefore, we have always -- even last year, we had guided for 80 days, around those levels, and we maintain that for a business of the model which we follow and the business of our size, we will rather be conservative than to shoot -- overshoot our guidance. But as you have seen, last year also, we delivered much better numbers on working capital and that endeavor to keep reducing our working capital year-on-year is something which we continue doing it. So you're right, and maybe you can pin in something in-between for your modeling. But that's broadly the indication from our side.
Maybe on Latin -- yes, I'll give it to...
Maybe I'll jump in on...
Perfect. Yes, Mike.
Yes. So obviously, coming out of Q1, which is a smaller quarter for us, but we clearly have significant momentum in Latin America with overall growth of 38%. So as we increase our overall guidance on revenue, we would expect that Latin America will be greater than the single-digit growth. And so, that would be our expectations. Now there are parts of Latin America where working capital is quite efficient in other parts, such as Brazil, where our working capital is not quite as efficient. So we're working with our teams there and with our partners, and we're looking for ways to improve the working capital efficiency. I do believe that we will [Technical Difficulty] success of doing that this year, although we would like it to be a multiple-year journey. But yes, depending on where our growth is, it does have an impact on overall working capital. So that would be the color on our Latin America growth.
Our next question is from the line of S. Ramesh from Nirmal Bang Equities.
My first thought is on the stupendous performance in Latin America and North America. And to see the ground level data points in currency, we have been hearing negative news on the weather and the expensive cost of chemicals and fertilizers. So what has exactly driven this growth in spite of all the challenges? And is there any inventory you have pushed to the trade, which explains the volume growth?
And secondly, what is the current status on your credit rating?
Yes. So maybe I'll start with the Latin America and North American business, and then, Anand, you can talk about the credit rating. So I mean, generally speaking, coming into the planting season in the Americas, the weather was generally in a good situation. Again, other than, I would say, some parts of Mexico and then the western part of the U.S. where it's been extremely dry. So the crop got planted, the row crop got planted. And our portfolio has performed very well. Now look, I think the entire market was strong. So as the rest of the industry will be reporting over the next several weeks, I would expect that there is overall strong market growth across the Americas. I do think our performance is going to be on the high side, both from a price and a volume standpoint.
And you talked about product costs. There's no question, of course, including with our portfolio that the prices are higher. Of course, our costs are higher as well. When you take it to the growing margins based on strong commodity prices for row crops, generally across the Americas, the income statement is going to be strong. Margins will be strong for growers across that region. So that's how it's played out.
In terms of inventory, look, I do think there was probably a little bit of incremental buying this year in anticipation of a strong market, and with everyone a bit concerned about product availability. When we look at our portfolio in particular, we believe that channel stocks are in good -- in a good position. And so, with our core products in the marketplace, we think that we're well positioned from a channel stock standpoint. And on top of that, we've got a number of new products that we're launching, over 80 products in total around the world and some very significant blockbusters that we're launching in Brazil and the U.S. So yes, we're very optimistic we're going to continue to see strong growth for the rest of the year across that region.
Anand, maybe you can then pick up on the credit agency question.
Yes. I mean, Ramesh, we -- that's something which we are engaged with the rating agencies. We are extremely conscious of our investment-grade rating. And we -- if you look at plain -- if you do a simple calculation of net debt to EBITDA, we are well below the 2%, which is the threshold for investment-grade rating, and we are well below that. And if you see the margins improving this year, I mean, it will only be -- it will only improve further. Having said that, each rating agency has a different model. They -- some of them add back nonrecourse, some add back certain of the cash, which is on the balance sheet, they only consider certain cash as free cash, the other they consider as a part of the business requirement and so on and so forth. So there are different formulas. So we keep monitoring the situation. We work hard to make sure we remain as investment-grade rating, but we keep engaging with the rating agencies on a regular basis. So that's -- we are conscious of -- in summary, I can only say we are conscious that, yes, we are at the borderline, and we'll work hard to maintain our investment-grade.
Sir, if I may just squeeze in one more question. Sir, in terms of your guidance, are you expecting normalized weather for the rest of the year? And what is the risk to that in case of any commodity price deflation? Would that have a negative impact on your margins as you cut prices? Can you give some thoughts on that?
Mike, maybe...
Yes, sure. Yes. So based on our guidance, I would say, we're expecting reasonable weather throughout the key growing areas. That being said, much of Q2 and even parts now of Q3, we do have orders in hand. Supply chain is working hard to deliver against that opportunity. So we wouldn't anticipate price pressures necessarily in Q2 and Q3. Look, at some point if commodity prices -- grain commodity prices come down and grower margins are challenged, that would be a different scenario. That's not what we're seeing right now. We're seeing grower margins strong. And so, look, I think it's a dynamic marketplace. And at this point in time, we're still in an inflationary environment from both a cost of goods standpoint, across SG&A. And again, grower margins, based on commodity prices, have supported this -- the current market dynamic.
All the best.
Our next question is from the line of Surya Patra from PhillipCapital. Mr. Patra, I'm sorry, we can't hear you clearly. Can you switch it to handset mode, please and speak?
Yes. Okay. Is it right? Am I audible?
Yes, we can.
Yes. Sir, congratulations for the great set of numbers, and particularly the key markets, the kind of strong growth number what we have reported. So I'm just trying to understand, is it possible to share what is the volume rise and what is the price rise in the key market, at least North America and Latin America? And that is one.
And secondly, whether this growth is, to some extent, contributed by the operational challenges, what your European peers would be currently facing, whether you have realized any benefit of that competitive advantage?
Yes. Thank you for the question. So as we provided in the materials, overall, the volume increase was 6%, price increase 18%. I would say, specific to your question, in North America, it was heavily weighted to volume. And in Latin America, it was heavily weighted towards price. And so, there was some difference between those 2 markets. Volumes were less of a contribution in Latin America, and we did see really strong herbicide, insecticide, fungicide movement in North America. And so, our volumes there were quite strong. Yes. So that's on -- just from a volume versus price.
With respect to the competitive set, look, we haven't seen any impact from an operating standpoint across our competitors. I think supply chains have continued to be a challenge, including freight and logistics. I think the resiliency of our supply chain is clearly one of our competitive advantages. As I talk to our customers, especially some of the global retailer and distributor companies that really understand the impact of global logistics. We are viewed as a company that can be extremely reliable in delivering product and that has given us a competitive advantage. And so, I think that's an advantage that's going to be durable. But yes, specifically to the European competitors, we haven't seen anything specific at this point in time.
Sure, sir. Sir, just an extended question on this. So how should we look at this gross margin scenario? See, while the prices has gone up by 18%, there is a favorable currency factor. Still the gross margins remained almost -- Y-o-Y remained flat. So now, how should one really explain -- and there is a kind of integrated operation that we generally boast for. So how should one see the gross margin rate going ahead, moving? So how should be that panning out moving ahead? Any sense on that could be useful.
Yes. So I think if you kind of zoom out on the situation and look at our portfolio. Last year, about 30% of our portfolio sales were differentiated in sustainable products and about 70% were Post Patent. As we look ahead and look, say, over the next 5 years, we believe the evolution of that mix will move more towards a 50-50 mix. As we see the performance in our portfolio today, we can see that cost of goods impact has a much lower overall impact on our differentiated and sustainable products. And so, I think that part of our portfolio is extremely durable as -- if we see commodity prices change going forward. Obviously, the Post Patent part of our mix is impacted at a higher rate based on cost of goods, as well as commodity prices. And so, that part of our portfolio, I think, will be more dynamic as the markets evolve and the differentiated and sustainable products, which is our fastest-growing segment, overall, if you look over the next 3 to 5 years, that part is less impacted by this volatility in cost and commodity prices.
Okay. Sure. Just a quick question, sir, on the NPP BioSolutions. I think it has performed strongly this quarter across various regions. So can you share what is the cumulative number for the quarter?
Yes. So we don't break out by segment on a quarter-by-quarter basis. We provide that guidance on the year. And so, we guided for the year that we expect our mix will be approximately 1% sustainable and differentiated products this year. Q1 is a smaller quarter for that part of our business. And so, I would say, there's not a lot to read through based on how Q1 played out. That being said, just like Ashish talked about from an India perspective, there is a lot of interest and growers are looking at the significant portfolio that we do have in BioSolutions, and we continue to add to that portfolio from an innovation and a collaboration standpoint. So yes, we're very excited about that part of our business. We're leading in that whole sustainability front right now, and we look -- we're looking for more collaborations going forward. And so, we do expect that we'll see good growth in that part of our business as the quarters evolve. And like I said, the first quarter is not a significant quarter, specifically globally for the NPP portfolio.
Sure. Wish you all the best, sir.
Our next question is from the line of Vishnu Kumar from Spark Capital.
I want to understand on the ground level measures that we are actually doing to bring down the working capital days, be it the debtors or even inventory or the payables because it appears that we are growing the fastest in the market, which has the highest working capital base. So this is becoming a circular reference every quarter for us. So how do we really break this and -- or at least on the ground, are we doing something different at least that going forward, at least the working capital days could slightly come off? If you could help us understand on this?
Mike, maybe you can [ open ] and then I will chip in.
Yes. Perfect, Anand. So look, it's a very [Technical Difficulty] question, and we do have a lot of focus on this specific area with all of our teams on the ground. And we're working closely with our customers, and we are looking for opportunities to look at our portfolio. Again, as we look at our differentiated and sustainable portfolio, where margins are strong, we continue to want to have commercial terms, which really benefit those products and allow us to grow that part of our business exponentially. I think as we look at just the margin profile of our entire business and just like in any business, there's parts of our portfolio that are lower margin.
And so, yes, I think as we think about our business going forward, we're going to be more discerning on payment terms and credit that we provide on the lower-margin part of our portfolio. But again, I think this is going to be evolutionary in nature, not revolutionary. And so, it's something that we're very focused on. As Anand and I both mentioned, we're committed to getting to 80 days of working capital by the time we get to the end of the year, and our teams are working hard to make sure that we deliver against that.
Maybe we have our Global Head of Supply Chain, Raj Tiwari, and he can -- some of the initiatives which we are taking on inventory management, he can share it. Raj, over to you.
Yes. So on inventory, on the first quarter, we have a little bit higher inventory as compared to last year. It's basically because of the fact that India has been flat, and we have built -- we are building the inventory for bigger Q2 and Q3, looking at the growth momentum what we have. And as you know, that as you have noticed in the previous years that generally, we do that buildup. And then in the Q4, you'll find that our inventory comes down dramatically, and we are confident of delivering on the inventory guidance what we had given earlier.
Or maybe you can allude on some measures, which are taking to reduce inventory?
Well, on the measures, specifically for inventory, what we are doing is, we are running a project specifically on inventory measurement, wherein we are looking at building the inventory at technical level and not at formulations where we can be closer to the market. And when the demand comes up or pents up, at that point of time, we can quickly formulate and serve the market, especially for LATAM and U.S. As I mentioned during our annual investors meet, we are targeting a 10% reduction on the inventory as compared to last year's closing. And that I'm confident that we should be able to achieve.
So to your question, Vishnu, there are several initiatives being taken. And as also Mike mentioned in his initial remarks, I think we are really working hard to make sure that we manage and see how we can improve on our working capital, and there are several initiatives being taken, both on receivable, on inventory, [ slowing ] inventories and so on and so forth. So it's a clear focus area. And we will -- we are quite confident that we will be able to bring some changes by the end of this year.
Got it, sir. And just on the commodity prices, on one side, we are seeing some softening. And secondly, we are taking price hikes. I wanted to understand that next couple of quarters should our margins expand. And also connected point, if crude were to stay stabilize at $100-or-say closer to $90, then is there a possibility of a faster working capital at least? Because I think as of March, we were probably $100, $115 what we closed. And I assume if it ends up slightly lower, then should we see a faster -- should we see a guidance of $400 million go up slightly? I mean, hypothetical question, but at least directionally fit as possible on both these.
Yes. So on commodity prices, they did spike up 3 or 4 months ago. And of course, we've seen, at least in most row crops, those prices have come back down. I mean, generally, the prices are very strong. And as I mentioned earlier, grower margins are still supported based on both current and future commodity prices. I think in terms of our margin expectations, we do expect an increase in margin on the year. Again, depending on what happens with cost of goods, as the quarters play out, we'll see how that evolves. But we would anticipate a little bit of a strengthening of margins as the year plays out and especially as we look at Q2, Q3.
Got it, sir. And one question, if I may. On Brazil, we have been growing quite -- pretty fast. As one of the previous participant who was also asking, if our European competitors are not able to supply in the market, do we have a significant headroom for growth in this market? Or we are more or less there from a medium-term angle? If you could just give some direction on this?
Yes. So again, at this point we're not --. Yes. No, understand. We're not anticipating that there's going to be significant shortages. But look, we've got a very strong portfolio in Brazil. We -- our OpenAg farm where we are focused specifically on UPL products in both soybeans and corn, over 70% of all the inputs on this research and demo farm are UPL products. And so, we have a portfolio that really stands across both crops. And on that farm, we're seeing yields much higher than average yields. And so, we're very confident in our portfolio. We're launching new products this year, like Evolution, Lifeline Sync, which is one of our important herbicides. And so, we have growth built in one of the strengths, and I think core competencies of UPL is our agility. So as the market evolves and if certain situations happen with our competitors, again, we'll use our agility as one of our core strengths to take advantage of any opportunities.
Got it, sir. And all the best.
Our next question is from the line of Tarang Agrawal from Old Bridge Capital.
3 questions from my side. One, while Brazil is the biggest crop production market, and we've been doing reasonably well there. But it is also a sizable portion of your business now, which brings in reasonable amount of concentration risk, whether it's geography or clearly in terms of balance sheet. So how should we see this sort of getting hedged over a span of next 2, 3 years? Do we anticipate this part of the market to contribute lower than what it does right now? And if so, what are the steps that are going to be taken to sort of address that? That's #1.
Number 2, if you could give us a sense on what your working capital cycle is, the first markets that you operate in?
And #3, with the fire incident in Ankleshwar, did it have an impact on your business in Q1? If so, if you could give us some qualitative sense as to how it impacted your business? That's it.
All right. Why don't we answer that in reverse order? So Raj, why don't you take the Ankleshwar question and then, Anand, you can take the working capital cycle?
So this fire was in a plant which used to make monocrotophos. And there is a very small impact, basically India business. So monocrotophos is India-based, and that's a very small -- out of the total year, the requirement of monocrotophos, 50% volume we already had in hand. So it's only about 50% volume loss of business. So -- which is not significant, which is quite small. So that's on that fire incident loss of business, which you asked.
Thanks, Raj. And so, Tarang, on the working capital by region, we generally don't share that data because it's not only that we do factoring in some markets we don't do. And then the terms vary from each market to market within that also within the crop, the terms vary. So it's -- it depends on what sort of weather, what cropping is done and that determines the working capital because in certain markets, it has to be based on what we call the crop terms in certain markets, the fixed 90-day in France, it's 45 days as per the statute. So it varies from market to market.
Do you Mike...
And maybe just on -- yes, on Brazil. So look, I think if you look out over the next 2 or 3 years, the reality is we've got strong momentum in Brazil, but also in many regions outside of Brazil. So I wouldn't anticipate a material change in the mix of our business from a geographic standpoint in the next 2 or 3 years. The strength where we're going to see, I think, exponential growth beyond Brazil is going to be in North America, in India, in Southeast Asia. We're seeing very nice growth across Africa right now. And so, with our NPP business, that really has a global opportunity for us and probably weighted very heavily on Europe. And so, we do have a number of layers of growth that we are aggressively pursuing outside of Brazil. That being said, our Brazil business and portfolio is extremely strong. And so, we're going to continue to, I believe, to see strong growth in that market there as well.
Our next question is from the line of Rohan Gupta from Edelweiss.
Sir, the question is on our increase or reduction in factoring per se. So basically, a lot of working capital requirement has gone into that. Just wanted to understand that the reduction in factoring, which are the primary key markets where you have reduced the factoring? And where you see that going forward this number stand before the year?
Thanks, Rohan, for joining us and for your question. So Rohan, currently, at least we have reduced factoring in Latin America, where the interest costs have gone significantly higher. So we are monitoring the situation. I mean, at least I don't see it -- the cost coming down over the next 1 or 2 quarters. So we'll probably compensate that by doing it out of more in other markets like U.S. and Europe. That's as of now the plan. Let's see where we -- how the interest rates we have as we move forward.
And sir, factoring definitely not only just to improve our cash flow, but also give you in terms of hedges as against any payment failures. So do you see that with Latin American market where the reduced factoring and increase in working capital increases your risk of bad debts and further increase in overall working capital cycle overall?
No. So we looked at those things, aspects and based on that only, we took a decision that we will better go for taking plain vanilla loans instead of going for factoring because we looked at the track record over the last 3 years, and we have extremely low bad debts in single decimal. So we're quite comfortable. And considering where the interest costs have gone up, almost 3x more. I mean, average cost of borrowing last -- I mean, the CDI, what we call, in Brazil and some of the other LATAM countries, the basic bank rates, they have gone up almost 300%. They were in the range of 4% to 6%, they are now in the range of 12% to 15%. So it doesn't make sense to pay that sort of cost of borrowing.
And sir, just last on my side. So on the increased or revised guidance for the year, sir. Can you just give some more color that it is primarily driven by net growth? And which are the key markets you see that there is a higher growth which you are projecting now than -- earlier than we gave the guidance earlier?
Mike?
Yes. So Rohan, I would say, again, we'll likely see very strong growth coming out of the Americas, across the Americas, strong growth in Southeast Asia, in Australia and in India and Africa. I think those -- all those markets will contribute to our growth and are giving us confidence in the revised guidance that we issued today.
Ladies and gentlemen, in the interest of time, we'll be taking our last question, that's from the line of Rohit Nagraj from Centrum Broking.
And congrats on a strong set of numbers. My first question is on the FMC contract. So where are we currently? We've started supplying the material. And when are we expecting material benefits from this particular collaboration?
Yes. So maybe there's 2 aspects to that. One is from a supply chain standpoint, another one is from a commercial standpoint. So I'll let Raj talk about the supply chain piece of it. Commercially, we have started commercializing CTPR in a number of markets. As we look at the next 24 months, we have the opportunity to commercialize in more and more markets. And so, for FY '23, this will not be a material part of our business, but looking at FY '24 and beyond, it will become a more important part of our business.
But Raj, maybe you can also talk about it from a supply chain standpoint.
Yes. So Rohan (sic) [ Rohit ], on the CTPR, on the supply chain side agreement, we have already commissioned the plant in this -- in the last quarter, which is Q1 of this year, and we have started already commercializing the supplies to [indiscernible].
All right. Sir, second question, again, harping on the working capital. So the higher working capital is also a function of gaining market share from competitors? Or is it purely based on the other factors that we have elucidated in discussion?
Yes. So I would say, yes, so specifically, we're not using, let's say, our balance sheet to try and gain advantage over competitors. And so, we're not going out with extended terms or something like that to gain an advantage. In fact, we're being very diligent with how we position our product. That being said, I think with our increase in volume in INR of 6%, it's likely on the higher side. So I do believe we are gaining share in the marketplace. And I really think it's based on the strength of our portfolio, our go-to-market approach and the relationships that we've established with our customers. And again, the view and the understanding of our -- the resilient supply chain we have, and we're getting the benefit of that when customers are looking at alternatives and they're deciding to derisk their business by partnering with us. And so, those are the advantages we have, I would say, in our business right now.
Right. Got it. Just one last clarification. On revenue growth guidance of 12% to 15%, what is the volume growth that we are considering?
So again, coming out of Q1, we saw about 1/4 of our revenue increase was from volume and about 3/4 from price if you ignore currency. I would say that ratio will likely make up our growth as we look at the whole year. So it will be a piece of it, a 1/4 to 1/3 that will be volume related and 2/3 to 3/4 that will be more price related.
Okay. Thank you very much, everybody, for joining us on this call. If you have any follow-up questions, feel free to either reach out to me or to Radhika. We will be happy to answer the call -- answer your questions.
Thanks, again, for joining us on the call. Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of UPL Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.