Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the long-term bank facilities of Banaskantha District Co-operative Milk Producers Union Ltd (Banas). It has also reaffirmed its rating on Rs 65 crore bank loan facility at ‘CRISIL AAA (CE)/Stable’ after factoring in a corporate guarantee given by Gujarat Co-Operative Milk Marketing Federation Ltd (GCMMF; ‘CRISIL AAA/Stable’).

 

The ratings factor in the unconditional, continuing and irrevocable guarantee from GCMMF and an undertaking by the parent for securing principal and interest obligations on the debt of the union. The CE suffix reflects the payment structure that is designed to ensure full and time-bound payment to lenders.

 

Revenue for fiscal 2024 is estimated to have grown by 5-6% to Rs 19000 crores from Rs.18,063 crores in fiscal 2023 driven by prices hikes and growing share of value-added products (VAP). Operating margins are expected at 12.5-13% in fiscal 2024 in line with previous fiscal supported by full year impact of price hikes taken in the last fiscal. Revenue growth is expected to remain healthy in the range of 10-11% while operating margins are expected to remain around 12-13% over the medium term. Further, company has been undertaking various initiatives towards developing other channels for revenue generation such as sale of biofuel, development of food products such as honey, edible oil, frozen foods etc. which will add to diversification of product portfolio. 

 

The union is planning to undertake capital expenditure (capex) of Rs 500-550 crore per annum over the next two fiscals (funded through a mix of debt and accrual) to set up powder plant in Gujarat and Uttar Pradesh. The capex is expected to be funded by mix of debt and internal accruals in the ratio of 80:20. Further, short term loan is also expected to increase with increase in SMP inventory. Financial risk profile is, however, expected to remain moderate after factoring in the capex and increase in short term debt. Timely completion of the capex, ensuring steady improvement in cash flow, will be monitorable.

 

The ratings continue to reflect the dominant position of Banas in the value chain of GCMMF, strong support from the federation, and healthy raw milk procurement capability. These strengths are partially offset by average financial risk profile because of modest networth and large, debt-funded capex plans, and susceptibility to government policies and environmental conditions, including epidemics.

Analytical Approach

• For arriving at the rating on the long-term bank facilities guaranteed by GCMMF, CRISIL Ratings has applied its criteria for rating instruments backed by guarantee.
• For arriving at the rating not guaranteed by GCMMF, CRISIL Ratings has applied its criteria for notching up ratings for parent support. GCMMF support is treated as similar to parent support on account of the cooperative structure, with GCMMF being the apex marketing federation for all the cooperative unions in Gujarat. There is an arrangement between GCMMF and its cooperative unions for an assured offtake of their products. Around 85% of Banas sales in fiscal 2024 were to GCMMF.
• CRISIL Ratings also factors in the financial flexibility the union enjoys on account of the two-step price payment mechanism.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from GCMMF: As per the cooperative union model, outside the local market, GCMMF purchases all products processed by Banas and markets them under the Amul brand. The union also receives financial support from the parent through letters of comfort for its bank borrowings.

 

• Established market position driven by dominant standing in the GCMMF cooperative value chain: Banas is the largest milk cooperative under GCMMF and contributes to about 30% of its overall milk supply. It has capacity to process 113 lakh litre per day (llpd) in Gujarat,  Uttar Pradesh and Haryana . Banas has continued to invest in increasing its capacities over the years which has helped it to cater to increasing milk requirements of GCMMF.

 

This established position has enabled Banas to invest and undertake various new initiatives such as venturing into food products, biogas generation, etc. Banas has ventured into food products such as honey, edible oil, frozen snacks etc. In last two fiscals, it has set up a frozen potato plant in Sanadar, Gujarat and generated Rs.101 crores in the FY24. It also started  processing edible oil since fiscal  2016 and has generated  Rs.75 crores in FY24. Banas is the first amongst co-operatives to set up a Biogas plant and has signed agreement with Suzuki Motor corporation, Japan to set up five biogas plants in Gujarat. 

 

• Strong procurement set-up backed by cooperative model: Banaskantha has a sizeable procurement network of 1465 village cooperative societies in Gujarat, 400 villages in Rajasthan and 4700 villages in UP. The union has rights to procure milk from Banaskantha Rajasthan and UP and procures 23.82 crore litres of milk per month. The robust procurement set-up assures regular milk supply. Banas also has exclusive rights to collect milk from the Banaskantha district, and even procures milk directly from Rajasthan, Uttar Pradesh, National Capital Region, Odisha, Jharkhand and Andhra Pradesh.

 

Weaknesses:

• Average financial risk profile: Networth remained moderate at Rs 661 crore as on March 31, 2023, because of the business model the union follows wherein a part of the procurement price is retained as deposit and released at the end of the year. Additionally, the union also has convertible debentures of Rs 233 crores as on 31st March, 2023 which the union expects to convert into equity and will further increase the networth in medium term. With the on-going capex, increase in short term debt and considering convertible debentures as debt, gearing is expected to remain elevated at ~3.4 times in fiscal 2024 (fiscal 2023: 2.5 times). However, excluding convertible debentures, adjusted gearing improves to ~2.5-2.6 times in fiscal 2024 (1.57 times in fiscal 2023). Further, strong financial flexibility and liquidity should ensure financial obligations are met on time.

 

• Large, debt-funded capex: Proposed capex of about Rs 500-550 crore per annum over the medium term will be funded majorly through 80% debt and rest through equity. Timely ramp-up of operations after the capex will be a key rating sensitivity factor.

 

• Susceptibility to changes in government policies and environmental conditions: Banas, like all dairy players, remains susceptible to changes in government regulations, including duty on import of milk and milk products and risks related to volatility in global milk powder prices. Moreover, milk procurement is vulnerable to environmental conditions such as outbreak of bovine diseases.

Liquidity: Superior

Expected annual net cash accrual of over Rs 300 crore will be sufficient to cover yearly debt obligation of Rs 150-200 crore, over the medium term. The union generally maintains unencumbered cash and bank balance of over Rs 700 crore. Additional comfort is derived from bank limit utilisation of just 41% over the 9 months through December 2023. Banas distributes excess profit to members after meeting debt obligation, capex and working capital requirement, thereby providing financial flexibility.

Outlook: Stable

Outlook on rating on facility guaranteed by GCMMF: Stable

The outlook is based on the ‘Stable’ outlook on the rating of GCMMF. The rating on Banas will remain sensitive to any change in the ratings on GCMMF.

 

Outlook on rating on facility not guaranteed by GCMMF: Stable

Banas will continue to benefit from its significant contribution to the product portfolio of GCMMF, strong milk procurement capability, wide distribution network and initiatives taken towards new product development. Financial risk profile is also likely to remain adequate, backed by healthy cash accrual and moderate gearing.

Rating Sensitivity factors

Downward factors

• Large, debt-funded capex or stretch in working capital cycle resulting in gearing above 5 times
• Disruption in raw milk procurement or softening of milk prices impacting operating profit
• Weakening credit risk profile of GCMMF or lower criticality of union to GCMMF

Unsupported ratings - CRISIL AA+

CRISIL Ratings has introduced the ‘CE’ suffix for instruments with an explicit Credit Enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has applied its criteria for notching up ratings for parent support. GCMMF support is treated as similar to parent support given the cooperative structure.

 

Rating sensitivity factors for unguaranteed rating

Upward factors

• Share of Banas in overall revenue of GCMMF sustaining at 32-35% aided by scaling up of new initiatives with adequate support of GCMMF.
• Timely ramp-up of operations after capacity expansion and efficient working capital management

 

Downward factors

• Large, debt-funded capex or stretch in working capital cycle resulting in gearing above 5 times
• Disruption in raw milk procurement or softening of milk prices impacting operating profit Weakening credit risk profile of GCMMF or lower criticality of union to GCMMF

About the Company

About the union

Set up in 1969, Banas works within the cooperative structure of GCMMF. It procures milk from 1465 village dairy cooperative societies in Gujarat. During fiscal 2022, Banas procured an average of 75 lac litres per day. It has capacity to process around 113.10 llpd. It also has capacity to manufacture 2800 metric tonne of cattle feed per day. The union has set up processing capacity in Faridabad (Haryana), Kanpur (Uttar Pradesh) and Lucknow. Products are marketed and distributed under the Amul and Sagar brands through the GCMMF channels.

 

About the federation

Set up in 1973, GCMMF is the largest dairy product marketing organisation in India and procures milk from over 34.94 lakh member farmers. The products of its member unions are marketed and distributed under the Amul brand. It has 18,554 active village dairy cooperative societies and is the apex marketing federation of 18 district cooperative milk unions in Gujarat. The sales infrastructure, comprising numerous stock points, is supported by a network of more than 10,000 distributors and 10 lakh retailers across India.

Key Financial Indicators

Particulars*	Unit	FY23	FY22
Revenue	Rs.Crore	18063	15258
Profit After Tax (PAT)	Rs.Crore	1994	1635
PAT Margin	%	11.0	10.7
Adjusted debt/adjusted networth^	Times	2.48	2.31
Interest coverage	Times	25.72	21.6

^The adjusted debt includes debentures of Rs 233 crores as of 31st March 2023;

*CRISIL Ratings-adjusted numbers

List of covenants

The list of material covenants under guaranteed instrument are as follows:

• The guarantor shall not sell, transfer or dispose of in any manner any of the assets/properties owned by or in possession of the guarantor until the loan is repaid to the satisfaction of the bank, without the prior permission of the bank.
• The liability of the guarantor under the guarantee shall not be affected by any change in the ownership or constitution of the borrower.

Any other information: Not applicable