Dear shareholders,
I have great pleasure in presenting UPL's second Sustainability Report corresponding to the financial year 2017-18. This year marks 49 years of our successful business operations and I wish to recapitulate that we continue to stand by our motive of 'Doing things better'. This is a part of our practice and what we stand by and live by. The journey from a phosphorus based industrial chemical company to the fastest growing Agro Company has been extraordinary. It is through the encouragement and support of our stakeholders that UPL has grown over the past nearly five decades into such a large organization.
R. D. Shroff
Chairman, UPL Limited
At UPL Limited, Sustainability is driven by smarter innovation and profitable growth. We believe that a business can be profitable by adopting sustainable practices ensuring harmony with the society and environment. We are constantly working to reduce our environmental footprint and find innovative product solutions that benefit the society. We are committed to health & safety and environment protection beyond the legal compliances. Our organisation has decided to reduce environmental footprint by 30% till 2020 from FY 2015-16 across the four focus areas: water consumption, carbon emissions, waste generation and waste water generation. At UPL, we ensure to decrease our environmental footprint and work more responsibly towards a better future.
At UPL, our engagement in research & development is primarily to offer new, innovative and effective products. We constantly engage and widen our market approach, with a focus on increasing profitability and to alleviate risks from businesses. This is how we help improve food security for the world. UPL has continued to invest significantly in research and development. The Company invests 2.2% of its revenues on research; we are a research-driven Company and our focus is on how our products can be better suited to diverse customer needs throughout the world. This research driven focus has helped widen our brand portfolio and strengthened our understanding of how effectively to plug market gaps. Our research and development efforts are focused on inventing rather than innovating.
For instance, our R&D team worked on one of the fungicides, which was primarily used on fruits and vegetables, and innovated a label extension for treatment against fungal disease on row crops. The market for this fungicide expanded significantly, particularly in Latin America. We have further invested in backward integration and ensured that key raw materials needed for this fungicide are manufactured in-house, reducing dependency on third-party suppliers to a large extent and leading to greater cost and supply chain efficiencies. These efforts made by UPL makes us one of the largest and most cost efficient players in this product.
Also, as we launched a new product in northern American markets, we had set up pilot plants and increased production in record time at lower costs compared to the market. The bottom line is that at UPL, we don't compete with the market; we compete with
There is a growing danger that the acute food shortages will become a reality in many parts of the world. The growth of global population by 2050 will require the world to produce at least 70% more food. When one factors the plugging of prevailing and prospective gaps, the purpose of why UPL is in business continues to be relevant. These scenarios may seem alarming, there are concerns of limited arable lands, peaked out yields and climate change which are impacting agricultural productivity. There is a vast shift in dietary consumptions in emerging economies. More people are consuming dairy and poultry products, thus increasing the demand for fodder. This is already placing an increasing productivity load on arable land which is causing the world to lose a substantial crop quantity in pre-harvest and post-harvest losses owing to pest attacks. In India, ~15-25% of the potential crop output is lost on this count.
The Company's focus continues to be around the pre-harvest and post-harvest spaces that helps in protecting a sumptuous crop yield and enhances farmers income. The Company's wide products range covers the entire crop cycle, protecting farm viability. The Company extended its business model beyond core products to solutions, providing customers allied services (crop protection chemicals spraying, price trends and ancillary products supply). Our innovative products help in conservation of ground water which is of paramount importance in drought conditions. For timely product launches, we have made significant investments in strengthening expertise. We have come forth as one of the largest players in the post-patent space and as an effective cost leader.
Going ahead, UPL intends to leverage a five-pronged strategy to grow its business: UPL's sustained R&D investment will empower it to alter formulations and launch new products capable of overcoming pest resistance more effectively.
UPL's revenue from branded products increased from 25% of overall sales in FY2014 to 87% in FY2018. The Company will strengthen its branding, generating significant shares in branded sales in the geographies of its presence, especially Latin America and North America.
UPL filed 378 patents (58 patents granted) over FY2014-18. The revenue from innovative products in three years increased from 5% of revenues in FY2015 to 19% in FY2018. Going ahead, UPL will leverage its in-depth knowledge of registration requirements to enter new markets and introduce new products, strengthening revenues.
UPL aims to make the most of the impending opportunity in the generics space, as a number of products (~USD 3 billion) are going off-patent over CY2017-20. Despite the dominance of existing MNCs in Latin America, Europe and North America, UPL has been able to make significant inroads in these markets on the back of its distinctive products and robust distribution network, an initiative that will be sustained.
The Company will continue to improve profits by optimising product mix, rationalising costs and enhancing operational efficiency.
The global crop protection chemicals sector passed through two consecutive years of contraction and one year of flat growth. This scenario is steadily improving with crop protection chemical inventories declining and realisations stabilising. UPL's range of products and deep distribution bandwidth should address a growing demand for cost-effective generic crop protection chemicals. In the last five decades, the Company invested proactively and the foreseeable future now appears more exciting than ever.
Inspite of slowing market demand, our performance was above the market average. The Company reported an exceptional growth of 7% during the reporting period. The Indian market grew slower than expected due to a number of reasons: the lingering impact of demonetisation affected off take; the 2017 monsoon was less than adequate; GST implementation led to destocking in the first quarter and slowed business during the first half of the year. The availability of raw materials also increased challenges. As a result of stricter environment control regulations, the material imports from China saw decline. Undertaking proactive measures, we invested in building additional capacity and strengthening resource security. Our value chain and manufacturing predictability have been strengthened due to resource security.
Our key markets of North America and Latin America performed favourably during the year under review. One of our key products, Glufosinate performed admirably in the US. Mancozeb another key UPL product, reported attractive off take in the global market. As we prepare ourselves for future endeavours, UPL continues to strengthen registration, patent filing and market widening exercises. During the year under review, we filed 169 patents and registered 247 new products across markets. We also successfully launched 101 products during the year under review.
Reported an exceptional market growth of
During the year, UPL strengthened its functional efficiencies. We managed to save INR 65 crore in operating costs and strengthened gross margins by 30 bps to 41.3%. During FY 2017-18, the Company strengthened its Balance Sheet to address prospective growth by mobilising USD300 million through 10-year bonds from the European and Asian markets. Additionally, a large part of our existing debt was reconstituted with the target to reduce interest costs and increase tenure, strengthening our cash flows.