By Sanjuta Goel

The announcement rectifies the version published on 15 October 2020 to correctly state the Long-Term Issuer Rating in the title and the first paragraph. The amended version is as below:

India Ratings and Research (Ind-Ra) has revised Singhania Foods International (SFI) Outlook to Positive from Stable while affirming the Long-Term Issuer Rating at ‘IND A-’. The instrument-wise rating actions are as follows: 

 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loans

FY25

INR185 (increased from INR160.9)

IND A- /Positive

Affirmed; Outlook revised to Positive from Stable

Fund-based limits

 

 

 

INR60 (increased from INR50)

IND A- /Positive

Affirmed; Outlook revised to Positive from Stable

 

Analytical ApproachInd-Ra continues to take a consolidated view of SFI, Dukes Consumer Care Limited (‘IND A’/Stable), Ravi Foods Private Limited (‘IND A’/Stable), Dukes Products (India) Ltd (‘IND A’/Stable), Paragon Consumer Care Private Limited (‘IND A’/Stable), Kamala Consumer Care Private Limited (‘IND A’/Stable), Kamala International Exim Private Limited  (‘IND A’/Stable), Pahal Foods Private Limited, Disha Foods Private Limited, Ankit Biscuits Private Limited, Pahal Foods Exim Limited and sole proprietorship firms, Harsh Bakers and Badami Foods, together known as the Dukes group, while assigning the ratings. This is because all the entities have strong strategic and operational linkages among them and are engaged in the manufacturing and selling of biscuits, cream wafers, chocolates and confectionary under the brand Dukes, Dyna and Treff in India and the overseas markets.  

The Positive Outlook reflects Ind-Ra’s expectation of a further improvement in the group’s credit metrics in FY21 on account of improving operating performance.

KEY RATING DRIVERS

Improvement in Credit Metrics: The group’s net leverage (net debt/EBITDA) improved to 1.70x in FY20 (FY19: 2.26x) and gross interest coverage (EBITDA/gross interest) to 6.46x (5.64x), on account of a higher cash flow generation, due to favourable working capital movement and higher profits. On a standalone basis, SFI’s net leverage was 1.6x in FY20 (FY19: 2.5x) and gross interest coverage was 4.6x (5.7x).

The group generated higher cash flows despite incurring a capex of INR633 million in FY20 majorly towards 1) capacity expansion at Singhania facility, 2) machine upgradation at Paragon facility, and 3) investments towards its Kothur mega project.  These have led to an increase in the group’s total manufacturing capacity to 300,000 metric tonnes per annum (mtpa) in FY21 from 180,000mtpa in FY19.

Ind-Ra expects the group’s credit metrics to improve further in FY21 on the back of an increasing consumer demand, a higher EBITDA and a lower capex. Ind-Ra expects the group’s net leverage to reduce below 1.5x in FY21; which is also the agency’s trigger for rating upgrade.

Improving Revenue: During FY20, the group’s revenue increased to INR13,956 million (FY19: INR12,661 million, FY18: INR11,948 million), primarily driven by increased consumption of biscuits and confectionery items. RFPL is the largest entity within the group. On a standalone basis, SFI’s revenue increased by 17% to INR1,354 million in FY20 (FY19: INR1,159 million).

Ind-Ra expects a shift to in-home consumption from out-of-home in the package goods industry, which will lead to a strong growth in volumes of both own brands as well as job-work clients, leading to 13%-15% yoy growth in revenue in FY21. The agency also expects the organised players to benefit from better reach and distribution efficiency compared with the unorganised players, along with safety concerns leading to customers to switch to branded products from unbranded ones. Ind-Ra believes the group benefits from operating in the essential commodities industry, which has been least impacted by the COVID-19 led lockdown.

Stable Operating Margins: During FY20, the group’s EBITDA margins decreased to 9.7% (FY19: 10.2%), mainly driven by an increase in raw material prices during 2HFY20 and lower orders for higher-margin job work. The group maintained EBITDA margins of 9%-10% over FY17-FY20 and fluctuations were mainly driven by raw material price movements. On a standalone basis, SFI’s EBITDA margins remained largely unchanged at 7.8% in FY20 (FY19: 7.6%).

Under job work, the company operates on a cost-plus model, thus safeguarding its margins. As per the management, the price of commodities is revised every 12-15 months on the basis of the average cost in the prior period, both in direct sales as well as job work; although constraints on account of competitive pressure prevail. Ind-Ra expects the margins of 10%-11% in FY21 as the growth in the sales volumes would be partially offset by the increase in raw material prices. Furthermore, higher orders for job work are likely to cushion the EBITDA margins to an extent.

Established Market Position: The group is an established player in the consumer food industry with a strong presence in North and South India. The group has an extensive network of about 650 distributors across India.  As per the management, the company is a market leader in the wafer segment with its product Waffy and is among the top five players in the overall bakery and confectionery industry.

Diversified Revenue Portfolio: The group has a presence in the domestic markets for its own brands such as Treff, Dukes and Dyna, and undertakes job work for other biscuit manufacturers. The group generates 15% of the revenue from job work. It also has a strong presence in the export markets and supplies to countries such as the US, Japan, Africa, Australia, among others. As of FY20, the group generated 35% of the revenue from exports and has also established a new unit in Kothur to specifically cater to export demand.

The group has a broad product portfolio with more than 125 product offerings. While the share of biscuits continues to be the largest contributor to the overall revenue, the group is continuously diversifying into other segments such as chocolates, confectionery, cakes and premium cookies.

Liquidity Indicator – Adequate: At FYE20, the group’s cash and equivalents stood at INR264 million (FYE19: INR144 million). The group’s liquidity position continues to be supported by its healthy relationships with a large number of bankers and access to over INR1,900 million fund-based limits on a group level. The average utilisation of the fund-based and non-fund-based limits was about 50% and 30%, respectively, during the 12 months ended March 2020. On a standalone basis, SFI has INR50 million of fund-based limits, the average utilisation of which was around 25% for the 12 months ended March 2020.

The group’s free cash flow turned positive to INR592 million in FY20 (FY19: negative INR149 million) owing to a higher working capital inflow. The free cash flow is likely to remain positive in FY21 on account of the lower capex as well as the higher EBITDA on a year-on-year basis. Ind-Ra expects the group to incur annual capex of INR300 million-350 million during FY21-FY22.

Elongated Working Capital Cycle: The group has a relatively elongated working capital cycle (FY20: 99 days, FY19: 100 days) compared to its peers’, primarily because it caters to domestic institutional customers as well as has a presence in the exports market, which together accounted 50% of its total revenue. This leads to higher inventory and debtor days. As per the management, the debtor collection period was around 90 days for exports and 50 days for domestic institutional sales in FY20. All the sales in direct domestic markets are made on 100% advance payments. Although inventory period improved to 69 days in FY20 (FY19: 76 days), it remained relatively stretched than its peers on account of inventory accumulation for packaging material for both own brand and job work. The inventory holding period of finished goods was low at 10-15 days.

Volatile Input prices and Forex Rates: The EBITDA margins remain exposed to the volatility in the raw material prices such as sugar, wheat flour and palm oils, among others, which together account around 80% of the total raw material cost. The raw material cost accounts about 68% of the group’s revenue. The group has a limited ability to pass on the same to its vendors/customers, due to the intense competition in their direct markets. The group enters into fixed-price arrangements with its raw material vendors for a period of three-to-four months to mitigate the risk of future price increases.

About 35% of the group’s revenue is generated from exports, which exposes it to fluctuations in forex rates. However, the group has a strong hedging policy in place, wherein around 80% of the exposure is hedged, thus mitigating this risk to some extent. Furthermore, the group’s reliance on imports is almost negligible as all the raw materials are sourced domestically.

Intense competition: About 70% of the domestic biscuits industry is organised and dominated by three players. While the group is considered as a market leader in the wafers segment, it faces stiff competition in the biscuits segment from both small and large players. Pricing flexibility is also restricted, given the intense competition and the price-sensitive nature of customers. It faces stiff competition from both large organised and unorganised players.

Ind-Ra believes the group’s ability to continuously innovate its products and packaging in line with the emerging trends of product portfolio premiumisation and shifting of consumer to healthy snack options will enable it to maintain/improve its competitive position over the medium term.


RATING SENSITIVITIES

Positive: A significant increase in the scale of operations and above industry revenue growth, coupled with a sustained improvement in the credit metrics with the net leverage reducing below 1.5x on stabilisation of the debt-funded capex could lead to a positive rating action.

Negative: Delay in ramp up of the capacities under planned capex, coupled with a lower profitability or a further elongation of the working capital cycle turning the free cash flow negative on a sustained basis and thereby leading to the net leverage sustaining above 1.5x will be negative for the ratings.


COMPANY PROFILE

Incorporated in 1988, Hyderabad-based Dukes Group manufactures and sells biscuits, cream wafers, chocolates and confectionary under the brand Dukes, Dyna and Treff in India and outside India through group entities. The group also undertakes job-work orders for select large national players such as Britannia Industries Limited, Parle Products Private Limited, among others. The group exports to 110 countries with the US, Latin America, the Middle East and African countries being its major markets. The group has 10 manufacturing facilities in India with a total capacity of 180,000mtpa.

FINANCIAL SUMMARY (Consolidated)

 Particulars

FY20 (Provisional)

FY19

Revenue (INR million)

13,956

12,661

EBITDA (INR million)

1,349

1,289

EBITDA margin (%)

9.7

10.2

Interest coverage (x)

6.46

5.64

Net leverage (x)

1.70

2.26

Source: Dukes Group, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

19 July 2019

Issuer rating

Long-term

-

IND A-/Positive

IND A-/Stable

Fund-based working capital limits

Long-term

INR60

IND A-/Positive

IND A-/Stable

Term loan

Long-term

INR185

IND A-/Positive

IND A-/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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