CRISIL has revised its rating outlook on the long-term bank facilities of Vimal Agro Products Pvt Ltd (VAPL; part of the Vimal group) to ‘Negative’ from ‘Stable’, while reaffirming the rating at ‘BBB’; the short-term facility has been assigned a ‘P3+’ rating.

The outlook revision reflects CRISIL’s belief that the Vimal group’s business performance and liquidity will be under pressure over the medium term. The group’s revenues have been stagnant in the past two years, despite a three-fold increase in its capacity to 275 tins of mango pulp per minute from 75 tins of mango pulp per minute (involving a capital expenditure [capex] of about Rs.90 million). Revenue growth over the medium term is also expected to be constrained because of expected poor mango crop and high prices; the group depends significantly on mango derivative products for revenues-this segment contributes 65-70 per cent of its total revenues. The stagnancy in revenues will keep the group’s cash accruals, and thereby liquidity, under pressure; liquidity is expected to come under pressure also because of its ongoing capex of about Rs.65 million. Although the group is planning to increase the diversity in its revenue profile by processing other fruits and vegetables, its ability to scale up its operations and establish itself in other products categories will remain a key determinant of its credit risk profile.

The ratings continue to reflect the Vimal group’s moderate market position in the processed foods industry, and the group’s moderate financial risk profile, marked by healthy gearing and moderate debt protection metrics. These rating strengths are partially offset by the Vimal group’s susceptibility to volatility in raw material availability and prices, and exposure to intense market competition because of low entry barriers and fragmentation in the food processing industry.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of VAPL and Vivek Agro Products (VAP; 70 per cent owned by VAPL), together referred to as the Vimal group. This is because the tow entities have operational, financial, and management linkages; VAPPL holds a controlling stake in VAP.

Outlook: Negative
CRISIL expects the Vimal group’s business risk profile to remain constrained in the near term, as the group’s revenues are expected to be stagnant and the group is expected to remain significantly dependent on mango derivatives for revenues. The ability of the group to scale up its operations and establish itself in other product categories need to be demonstrated. The group’s liquidity is expected to remain under pressure because of its ongoing capex and pressure on cash accruals resulting in increase in its debt level. The ratings may be downgraded if the Vimal group is not able to improve its revenues and profitability in the medium term, resulting in more-than-expected pressure on its liquidity. Conversely, the outlook may be revised to ‘Stable’ if the group generates more-than-expected revenues, and if it increases the diversity in its product offerings, thereby reducing its dependence on mangoes for revenues.

About the Group
VAPL was incorporated in 1988, promoted by Mr. Subhashchandra Nemani. The company manufactures and exports food and food products that includes mango pulp, ready-to-eat food in tins and pouches, packed vegetables, pickles, chutney, cooking paste, pulses and papads; it derives about 80 per cent of its revenues from sale of mango products. The company has an installed capacity to manufacture 275 tins of mango pulp per minute (or 7,000 metric tonnes of mango pulp per annum) at its plant in Bardoli, Surat (Gujarat).

VAPL has ISO 22000:2005 certification for its products and is a 100 per cent export-oriented unit, catering to markets in the US, Canada, the UK, and other European countries. It exports its products under the brands Vimal (for bulk packaging) and Swad (bulk packaging and retail sale). Bulk packaging generates around 70 per cent of the company’s total turnover, and the rest comes from the retail channel.

VAP is a partnership firm owned by the Nemani family and VAPL. VAP exports frozen foods products, ranging from frozen paratha, naan, roti, snacks, and vegetables. It discontinued with trading in agricultural commodities three years ago, following the government ban on export of pulses.

For 2009-10, the Vimal group reported a profit after tax (PAT) of Rs.11.4 million on net sales of Rs.447.3 million, against a PAT of Rs.20.1 million on net sales of Rs.444.4 million for 2008-09.