Detailed Rationale

CRISIL ratings has revised its outlook on the long term bank facilities and fixed deposits of 3F Industries Limited (3FIL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. Rating on the short term bank facility have also been reaffirmed at ‘CRISIL A2+’.

 

The revision in outlook reflects the expected continued pressure on the business risk profile of the 3F group over the medium term, despite some improvements visible during the first half of current fiscal. Following sharp sharp moderation in palm oil prices in fiscal 2024, revenue declined by ~41% in fiscal 2024 to Rs 2708 crore while consolidated Earnings before interest tax depreciation and amortization (EBITDA) margins too remained muted at ~4.1%. With recovery in prices and change in product mix, operating income as well as EBITDA margins is expected to show some improvement this fiscal but the extent of recovery is expected to be lower than earlier expectations. Continued pressure on operating performance for an elongated period might further weaken the business risk profile of the company, and hence, will remain a key rating sensitivity factor.

 

3FIL’s revenues declined by 41% in fiscal 2024 driven primarily by sharp moderation in palm oil prices in fiscal 2024 and reduction in trading income. Palm oil prices, used in manufacture of refined oil, moderated sharply from the second half of fiscal 2023 and has since then impacted the performance of the company’s oil refinery division. Cheaper imports of palm oil from countries like Malaysia made the operations unviable. Hence, the company reduced production to reduce losses and increased imports of RBD Palmolein over the past 12 months The oleochemicals and specialty fats (value products) division’s performance also declined driven by an increase in competitive intensity and moderation in realisations, due to linkage with palm oil prices. Operating margins declined to 4.1% in fiscal 2024 from 4.6% in fiscal 2023, due to lower refined oil realisations, high overheads and suboptimal utilization in refinery division. However, there were no inventory losses recorded. Lower EBITDA and exceptional losses of Rs. 36.4 crore in 69% subsidiary Viaton energy Private Limited,  on account of floods which destroyed a part of their inventory, resulted in losses of Rs. 30 crore during FY24.

 

In the first half of fiscal 2025, 3FIL’s standalone revenues declined by 12% on year, primarily due to lower sale volumes and realisations from the refined oil division. The company has consciously changed the product mix and increased the share of value added products which offer higher profitability. The value added products division which contributed to 75% of total sales during the period (60% share in H1FY24; 60% in FY24) has witnessed an improvement of 25-30% driven by an increase in volumes as order inflows have started picking up which were getting deferred in fiscal 2024 due to the volatile prices. Operating profitability improved to 7.7% in the first half of fiscal 2025, compared with 5.7% in the first half of fiscal 2024, due to increasing realization in the value-added segment especially shea butter and chocolate. For the full fiscal, revenues are expected to record a year on year improvement of 3-5% especially owing to lower sales in the refinery division. Operating margins too are expected to show moderation in the second half with price normalization in the value added segment (esp. shea butter) and full year margins are expected in the range of ~6.5-7%.

 

3FIL has a planned capex of Rs.70-75 crores in fiscal 2025 which will be invested in multiple projects. 3F is in the process of setting up capacities for chocolates, dimers and stearates. Besides, 3FIL will also set up a hydrogenation plant for backward integration. Overall, long term debt of ~Rs.65-70 crores is expected to be availed for the capex out of which Rs.40-45 crores has already been drawn. Net debt addition is expected to be around Rs 25 crore for fiscal 2025. The financial risk profile is expected to remain a little muted despite showing an improvement this fiscal. Net worth had declined to Rs. 493 crore in fiscal 2024 (FY23: Rs. 529 crore) due to one time inventory loss recorded in subsidiary Viaton Energy Limited of Rs.37 crores. The ratio of total outside liabilities (TOL)/ Adjusted net worth (ANW) is expected to improve to ~2.1 times in fiscal 2025 (2.4 times in fiscal 2024).  Liquid surplus has also declined to Rs.176 crore in fiscal 2024 (FY23: Rs. 356 crore)as it was used for repayment of debt due to insufficient cash generation in fiscal 2024.

 

The ratings continue to reflect 3FIL’s established business risk profile marked by integrated operations in the edible oil refining value chain, diversified product profile in the specialty fats segment and long standing experience of the promoters in the industry. These rating strengths are partially offset by the vulnerability to sharp changes in raw material prices, mainly crude palm oil and foreign exchange rates exposure. The financial risk profile also remains average, constrained mainly by working capital intensive operations. Liquidity will continue to be supported by sufficient accruals against repayments, unencumbered cash balance and unutilized working capital lines.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of 3FIL and its wholly owned subsidiaries due to the similarity in lines of business and strong business linkages (refer annexure for list of consolidated entities).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Vast experience of the promoters: 3F, which was established in 1960, has gradually expanded operations over the years primarily driven by the experience of the promoter family. 3F has been successful in establishing integrated manufacturing besides expanding into other value-added products like lauric fats, shea fats, etc. Promoters, driven by their competence, have also been instrumental in new product launches in the value chain, which continues to offer better realizations and margins than the edible oil refining business. Additionally, the promoter, is well assisted by a professional team, who are actively involved in day to day operations as well as undertake proactive risk management, including hedging in the commodity exchanges.

 

Promoters have also set up domestic and overseas subsidiaries which are also involved in related businesses. 3F Oil Palm Private Limited(3FOPPL) manages palm plantations across India. Another major subsidiary, 3F Ghana Oils & Fats Limited(3FGOFL) is involved in processing of shea nuts and has a 5 year contract with the market leader of shea nuts. There are other smaller subsidiaries, which are mainly trading partners with no manufacturing facilities across global locations. Some of the subsidiaries which were into trading is under the process of liquidation.

 

• Integrated operations in the edible oil value chain: 3F has established integrated manufacturing operations from sourcing of raw materials, extraction and refining of crude palm oil to manufacturing of value added products like Vanaspati, speciality fats for confectionaries and bakeries and by-products like fatty acids, shea fats, oleins, glycerine etc. The by- products from the edible oil refining serve as the key raw material for the speciality fats segment, thereby providing additional cost benefits. The power generated through biomass plants is used for captive consumption and lowers the power and steam costs.

 

• Established market position in speciality fats segment: 3F has an established market position in about six to seven product verticals in the speciality fats segment such as Exotic Fats, Lauric Fats, Bakery Ingredients, Oleo chemicals etc.

 

The value-added products and specialty fats have an established customer profile in FMCG / MNCs as well as in exports (about 60% of the segment revenues during fiscal 2024), wherein the price volatility is much lower compared to edible oil refining segment.

 

Profitability in specialty fats segment is much higher than the edible oil business and has higher capability to pass on the increase in prices to customers due to higher value addition. Increasing contribution from value-added downstream products and established standing in the industry will support sustenance of the company’s performance over the medium term.

 

Weaknesses:

• Average financial risk profile: Financial risk profile is expected to remain average with a moderate capital structure and adequate debt protection metrices. Company had a tangible net worth of Rs. 493 crore as on March 31, 2024 as against total debt of Rs. 740 crore (including promoter loans of Rs. 56 crore) resulting in gearing of 1.50 times. Company has capex plans of Rs. 70-75 crores in fiscal 2025 (compared to Rs.190 crores in fiscal 2024) which is expected to result in net debt addition of Rs.25-30 crores in fiscal 2025. With accretion to reserves, gearing is expected to come down to below 1.40 times in fiscal 2025. TOL/ANW is expected to improve to ~2-2.1 times in fiscal 2025, from 2.4 times in fiscal 2024. With expected improvement in EBITDA margins, interest cover is expected to improve to over 2.5 times in fiscal 2025 from ~1.54 times in fiscal 2024. Any further share buyback impacting the net worth and leading to deterioration in leverage metrics will be a key monitorable.

 

• Vulnerability to sharp changes in raw material prices and forex rates: Operations are exposed to inherent risks associated with the agriculture-based commodity business, such as availability of raw material or fluctuations in prices. For instance, the solvent extraction business is exposed to availability of raw material, crude palm oil that are mainly imported. Prices also depend on global demand-supply and movement in prices of other edible oils (such as palmolein and vanaspati). While this is partially mitigated by taking back to back sale contracts with customers as well as forward contracts in commodities, any sharp change in input prices or forex rates could adversely impact the operating margins of players in the industry including that of 3FIL. The industry is also vulnerable to government policies in the form of duties imposed on the import of refined and crude edible oil, and volatility in edible oil prices and foreign exchange (forex) rates.

Liquidity: Adequate 

3FIL has adequate liquidity driven by expected cash accruals of Rs.110-150 crore per annum over the medium term and unencumbered cash of ~Rs.200 crores as on March 31,2024. 3FIL also has access to fund-based limits of Rs. 120 crores, which have been utilized at 85% over the last 12 months ended September 2024. The non-fund based limits have been utilized at 54% (average) during the same period. The company has long-term debt repayment obligations of Rs 40-45 crores per annum in fiscals 2025 and fiscals 2026, which will be funded by internal accruals. Incremental working capital requirements are also expected to be met by internal accruals, bank lines and cash surpluses.

Outlook: Negative

CRISIL Ratings believes continued pressure on operating performance for an elongated period might further weaken the business risk profile of the company impacting cash flows and consequently have an impact on the debt protection metrices.

Rating sensitivity factors

Upward factors:

• Better revenue diversity and significant increase in scale of operations while sustaining operating profitability at over 5.5-6% 
• Sustained improvement in debt metrics, supported by better than anticipated cash generation and prudent working capital management; for instance, TOL/TNW below 1.8-2.0 times

 

Downward factors:

• Slower revenue growth or sustained decline in operating profitability to below 3-3.5%, impacting cash generation
• Higher than expected debt funded capex or higher than anticipated short term funding or sizeable share-buyback leading to deterioration in debt metrics; for instance, TOL/TNW exceeding 3.5-3.75 times, on a sustained basis
• Steep decline in unencumbered liquid surpluses, including due to buyback and capital reduction, or dividend payouts.

About the Company

3FIL, promoted by Mr. B K Goenka in 1960 in Tadepalligudem in Andhra Pradesh is an integrated manufacturer in the edible oil value chain. 3F has an installed edible oil refining capacity of 289,500 MTPA and specializes in a wide range of products covering bakery fats, specialty fats, lauric fats, shea stearin and oleo chemicals. 3FIL operates a captive 6 MW capacity biomass power plant and 3.30 MW windmills.

 

3FIL has operational presence across Singapore, Middle East, Vietnam and West African countries with manufacturing plant in Ghana. 3FIL established 200 TPD plant to process primarily shea nuts and soya seeds under the company 3FGL in 2009. 3FOPAPL was incorporated in 2010-11 to manage palm plantations. Besides, presence in India, 3FOPAPL has presence in Suriname, South America and Gabon. 3FIL also has other small subsidiaries which do not have manufacturing operations and are involved in trading.

 

3FIL was equally held by five brothers and their families. With the buyback in fiscal 2023, one of the brother’s stake reduced to 11%. Mr. Sushil Goenka serves as the chief executive officer of 3FIL.

Status of non cooperation with previous CRA:

3FIL has not cooperated with CARE Ratings which has classified it as issuer not cooperative vide release dated Jan 28,2021, The reason provided by CARE Ratings is non-furnishing of information.

Any other information: Not Applicable