CRISIL has revised its rating outlook on the long-term bank facilities of Gujarat Ambuja Exports Ltd’s (GAEL’s) to ‘Stable’ from ‘Negative’, while reaffirming the rating at ‘A’; the rating on the short-term facilities has been reaffirmed at ‘P1’.

The outlook revision reflects CRISIL’s belief that GAEL’s exposure to downside risks in foreign exchange (forex) transactions and to risk of substantial inventory accumulation (leading to increase in gearing) will diminish significantly over the medium term, as GAEL has decided to not enter into any derivative contract other than forwards in future. In the past, GAEL had stocked up substantial quantity of raw material to capitalise on increasing prices in edible oils. This led to a significant increase in the company’s short-term debt. The company is unlikely to repeat the same in the near to medium term, given the current high prices of edible oils. Also, with improvement in GAEL’s financial risk profile over the past 18 months, the company can comfortably manage moderate inventory level through short-term funding without adversely affecting its capital structure. CRISIL also believes that GAEL’s business risk profile will be relatively less volatile in future, given the increasing contribution from its maize processing business division, which is more stable and profitable than its edible oil business. GAEL’s liquidity is also adequate; it had unutilised bank limits of Rs.4.76 billion as on November 30, 2010, and unencumbered cash and bank balance of Rs.80.00 million as on March 31, 2010.

The ratings continue to reflect GAEL’s well-diversified revenue profile, high operating efficiencies, and healthy financial risk profile. These rating strengths are partially offset by GAEL’s constrained profitability, given the limitations inherent in agriculture-based commodity businesses, and the company’s working-capital-intensive operations.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of GAEL and its wholly owned subsidiary, Gujarat Ambuja International PTE Ltd.

Outlook: Stable
CRISIL believes that GAEL will maintain its business risk profile over the medium term, supported by its established market position in the solvent extraction business, strong demand prospects for its maize processing segment, and its improving profitability in the cotton yarn segment. The outlook may be revised to ‘Positive’ if GAEL significantly improves its financial risk profile, most likely driven by sustained improvement in its revenues and profitability. Conversely, the outlook may be revised to ‘Negative’ if GAEL’s revenues and profitability is lower-than-expected, or if the company’s capital structure and debt protection metrics weaken.

About the Company
GAEL was established in 1991 by Mr. Vijay Kumar Gupta. The company manufactures and sells refined oil (mainly soya) and de-oiled cakes (DOC), cotton yarn, and maize products, such as starch, glucose, sorbitol, dextrose monohydrate powder, and maltose dextrine powder. The company has solvent and extraction refineries in Kadi (Gujarat), Akola (Maharashtra), and Pithmapur (Madhya Pradesh), with a total seed crushing capacity of 1.32 million tonnes per annum (mtpa) and a refining capacity of 0.42 mtpa. GAEL has maize processing capacities of 0.35 mtpa, located in Himatnagar (Gujarat) and Sitarganj (Uttarakhand). The company is planning to set up a new plant in Karnataka, which is expected to commence commercial operations by December 2011 and increase its maize processing capacity by 0.25 mtpa. Its cotton yarn spinning unit, with capacity of 74,180 spindles, is also located in Himatnagar. In 2009-10 (refers to financial year, April 1 to March 31), GAEL derived 61 per cent of its revenues from agro-processing business (includes edible oil and soya meal), 24 per cent from maize processing, 13 per cent from cotton yarn, compared with 83 per cent, 7 per cent, and 8 per cent respectively in 2007-08.

For 2009-10, GAEL reported, on consolidated basis, a net profit of Rs.607.2 million (Rs.242.5 million for the previous year) on net sales of Rs.14.3 billion (Rs.16.2 billion). For the six months ended September 30, 2010, GAEL, on a standalone basis, reported a net profit of Rs.378.5 million on net sales of Rs.6.8 billion, compared with a net profit of Rs.185.1 million on net sales of Rs.6.1 billion for the corresponding period of the previous year.