Rating Rationale
January 20, 2017 | Mumbai
Lactose India Limited
Rating outlook revised to 'Negative', rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.29 Crore
Long Term Rating CRISIL BB-/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Lactose India Limited (LIL) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL BB-'.
 
The outlook revision reflects CRISIL's belief that LIL's liquidity will remain stretched in fiscal 2017 since cash accrual is expected to tightly match its debt obligations. Cash accrual declined in the first half of fiscal 2017 on account of temporary closure of lactulose plant; the plant was closed till January 2017 since the company had applied for additional regulatory approvals. However, business has improved in the third quarter of fiscal 2017 on account of increased offtake from existing customer (Kerry group) leading to improved cash accrual. Furthermore, the lactulose plant has begun commercial operations in January 2017. Hence the business risk profile is expected to improve over the medium term. Scaling up of operations while maintaining profitability is a key rating sensitivity factor.

Analytical Approach

CRISIL has treated interest-bearing unsecured loans of Rs 2.57 crore from promoters as on March 31, 2016, as neither debt nor equity. This is because these loans are expected to remain in the business over the long term. Further, these unsecured loans are expected to increase going forward.

Key Rating Drivers & Detailed Description
Strengths
* Exclusive manufacturing contract from a leading pharmaceutical company: In January 2013, LIL signed an agreement with the Kerry group, under which it expanded facility to 10,000 tonne and uses it exclusively for the group. Though the 10-year agreement is to be renewed after five years, with the group having asked LIL to expand capacity further, chances of non-renewal are slim. Further, the company already has ready sales agreements for its new lactulose plant.
 
* Promoters' extensive experience: Mr S M Maheshwari has experience of over three decades in the pharmaceutical industry. His son, Mr Atul Maheshwari (an MBA graduate), joined the business in the late 1990s.
 
Weakness
* Moderate financial risk profile: Gearing was 1.95 times as on March 31, 2016, due to debt-funded capital expenditure. Networth was moderate at Rs 20.4 crore due to continuous equity infusion and healthy accretion to reserves. Debt protection metrics were moderate, with interest coverage and net cash accrual to total debt ratios of 2.6 times and 0.15 time, respectively, for fiscal 2016.
Outlook: Negative

The negative outlook indicates lower-than expected cash accrual in fiscal 2017, leading to stretched liquidity. The rating may be downgraded if the scale of operations does not improve or if liquidity further weakens on account of stretch in its working capital cycle. The outlook may be revised to 'Stable' if cash accrual increases on account of higher revenue or profitability margins while maintaining the working capital cycle.

About the Company

Established in 1991 and based in Mumbai, LIL, promoted by Mr S M Maheshwari and his son, Mr Atul Maheshwari,  manufactures lactose for the Kerry group and undertakes jobwork for other pharmaceutical players. It has also set up a lactulose manufacturing facility, with an installed capacity of 2860 tonne per annum.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Cash Credit NA NA NA 8.00 CRISIL BB-/Negative
NA Term Loan NA NA Details awaited 21.00 CRISIL BB-/Negative
1 crore = 10 million
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014   
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Beginning
Fund-based Bank Facilities  LT/ST  29  CRISIL BB-/Negative    No Rating Change    No Rating Change  17-12-15  CRISIL BB-/Stable/ CRISIL A4+    No Rating Change  CRISIL B/Stable/ CRISIL A4 
Non Fund-based Bank Facilities  LT/ST   0 --   No Rating Change    No Rating Change  17-12-15  CRISIL A4+    No Rating Change  CRISIL A4 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 8 CRISIL BB-/Negative Bank Guarantee .1 CRISIL A4+
Term Loan 21 CRISIL BB-/Negative Bill Discounting* .75 CRISIL A4+
-- 0 -- Cash Credit 1.35 CRISIL BB-/Stable
-- 0 -- Letter of Credit 1.85 CRISIL A4+
-- 0 -- Proposed Long Term Bank Loan Facility 22.55 CRISIL BB-/Stable
-- 0 -- Term Loan 1.55 CRISIL BB-/Stable
-- 0 -- Working Capital Term Loan .85 CRISIL BB-/Stable
Total 29 -- Total 29 --
1 crore = 10 million
* Includes sublimit packing credit of Rs 0.75 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for the Pharmaceutical Industry
CRISILs Bank Loan Ratings
Criteria for rating Short-Term Debt (including Commercial Paper)
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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