| A.V. Thomas and Co. Limited | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities of A.V. Thomas and Co. Limited (AVTCL).
AVTCL’s performance in fiscal 2022 has improved on account of the essential nature of its key products, tea, and coffee, which contribute to over ~70% of the revenue and 80% of the operating profit. Revenues from trading grew by 29% in fiscal 2022 driven by increase in prices of Aluminium & Galvanized Iron. The volume of tea sales had declined by 2% on account of closure of Tea shops, Café, other showrooms etc due to covid related lockdowns during H1 of fiscal 22. Further tea sales was impacted as the Tea prices reduced during fiscal 2022 which allowed unorganised players to make inroads due to which both volumes and realisations were down. However, Profitability has improved by 50 bps from 6.1% (FY 21) to 6.6% (FY 22) mainly on account of reduction in auction prices of tea leaves due to higher tea production post covid related disruptions. Further higher sales of AVT premium in Tamil Nadu, a premium tea variety which entails higher margin has also contributed to improvement in margin despite reduced tea sales.
In first half of current fiscal, the revenue has grown by 20% on year basis mainly due to improvement in domestic demand for Tea coupled with rise in tea prices. Company is expected to register a revenue growth of ~10-11% with improvement in tea demand and performance of the trading and roofing segment with increase in construction activity in line with expected recovery in overall economy. Operating margins are expected to remain at similar levels of 6-6.5% in fiscal 2023 due to the uptrend in auction prices during the current year due to increased export demand on account of lesser tea output from Srilanka and Kenya due to economic crisis and drought like situation respectively
Financial risk profile should continue to remain healthy, as capital expenditure (capex) is expected at a nominal Rs 8-10 crore annually and TL obligations of around Rs.2 crore annually over the medium term which will be met entirely through net cash accruals of around Rs.45-50 crores generated annually and liquid surplus of around Rs. 87 crores as on March 31, 2022. Besides, incremental working capital requirement is also expected to be negligible. Hence, AVTCL is expected to sustain its healthy capital structure and debt protection metrics.
The ratings continue to reflect the company’s healthy financial risk profile because of steady accrual and almost debt-free balance sheet and its strong position in the branded tea segment in South India. These strengths are partially offset by geographical concentration in revenue and susceptibility to volatility in commodity prices. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has considered the standalone performance of AVT for arriving at the ratings and has not consolidated the group entities on account of separate management of entities, arms-length transaction and no cash flow fungibility. |
Key Rating Drivers & Detailed Description Strengths: Strong position in the branded tea segment in South India AVTCL is the largest player in the branded tea segment in Kerala (around 45-50% market share) and the second largest in Tamil Nadu (around 25% market share) after Hindustan Unilever Ltd (rated ‘CRISIL AAA/Stable’). AVTCL has maintained its market position in Kerala and Tamil Nadu despite the presence of strong national and other regional brands. Revenue from the packaged tea segment registered a healthy compounded annual growth rate of ~9% in the past 4 years.
Healthy financial risk profile and liquidity The financial risk profile is supported by a healthy balance sheet and adequate networth of around Rs 311 crore as on March 31, 2022. Steady cash generation, nominal capex and moderate incremental working capital will lead to continued healthy credit metrics. Besides, the company had surplus liquidity of Rs.87 crore as on March 31, 2022.
Weaknesses: Geographical concentration in revenue A large chunk of AVTCL’s revenue from the consumer products division (CPD) and domestic trading business is derived from Kerala and Tamil Nadu. Though the company plans to gradually increase tea supply to Andhra Pradesh and Karnataka, gaining foothold in new markets may take a while. Therefore, AVTCL’s business risk profile will, likely, remain constrained by its exposure to risks related to geographical concentration in revenue over the medium term.
Susceptibility to volatility in commodity prices Tea prices are volatile because of dependence on monsoons and international demand, resulting in fluctuations in operating margin, however the volatility is partially mitigated considering 25-30% of the tea leaves are procured from group entities. Besides sale of branded tea, AVTCL trades in galvanised iron (GI) and aluminium and, thus, is exposed to volatility in the prices of these commodities. |
Liquidity: Strong AVTCL’s liquidity is healthy driven by expected cash accrual of Rs 45-50 crore per annum over the medium term vis-à-vis negligible yearly debt obligation of about Rs 2 crore and capex of around Rs 8-10 crore per annum, to be funded through internal accrual and liquid surplus. Utilisation of fund-based limit of Rs 75 crore was nil over the 12 months through October 2022. |
Outlook: Stable CRISIL Ratings believes AVTCL will continue to benefit from its leading position in the packed tea segment in Kerala and Tamil Nadu. The company’s financial risk profile will remain healthy, supported by steady cash accrual, negligible debt and comfortable liquidity. |
Rating Sensitivity Factors Upward factors:
Downward factors:
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About the Company
AVTCL has three segments: CPD, trading and roofing material and logistics. CPD buys and processes tea and sells it under the AVT brand through a wide network of distributors across Tamil Nadu, Kerala, Karnataka, Andhra Pradesh and Odisha. It also sells a small quantity of coffee under the same brand.
CPD contributed around 68% to the revenue in fiscal 2022. Under the roofing materials division (9% of the revenue in fiscal 2022), the company makes GI sheets from GI coils. The GI sheets are used as roofing materials in the construction industry. Under the trading division (~30% of the revenue in fiscal 2022), AVTCL trades in aluminium sheets, GI sheets and other agro-based commodities. The company also has a logistics services division (around 3% of the revenue in fiscal 2022), wherein it earns income from freight forwarding and customs services. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with packing credit and bill discounting |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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Criteria Details
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