Rating Rationale
July 31, 2020 | Mumbai
Chaman Lal Setia Exports Limited
'CRISIL A-/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.95 Crore
Long Term Rating CRISIL A-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A-/Stable' rating to the long-term bank facility of Chaman Lal Setia Exports Limited (CLSE).
 
The rating reflects CLSE's strong market position, prudent working capital management, healthy financial profile and sound operating efficiency. These strengths are partially offset by susceptibility to volatility in raw material prices and regulatory changes and low brand penetration.

Analytical Approach

Of the unsecured loans of Rs 44.6 crore provided by the promoters as on March 31, 2019, 75% has been treated as equity and 25% as debt, as the loans are expected to remain in the business over the medium term.

Key Rating Drivers & Detailed Description
Strengths:
* Strong market position: More than 45-year-long experience of the promoters has led to CLSE's strong market position across domestic and global markets and healthy relationships with international customers based on high quality standards. Exports to approximately 80 countries contributed to 90% of the sales in fiscal 2020. In export and domestic markets, the company primarily caters to the private label business, but around 20% is derived from sales under its own brands: Mithas, Begum and Maharani.
 
CLSE primarily deals in basmati rice, which contributes to 90-95% of the sales. It has established healthy relationships with suppliers in Haryana and Punjab. Because of the company's dependence of them for milling of rice, suppliers are not changed frequently in order to maintain quality standards. Strong relationships with suppliers enable the procurement of rice throughout the year at comfortable prices.
 
* Prudent working capital management: Gross current assets were 120-150 days over the four years ended March 31, 2020, compared to around 100 days over the previous four years ended March 31, 2016. The increase is largely because of higher inventory in recent times to support growth across new geographies. Inventory has remained at 80-110 days over the four years ended March 31, 2020, compared to 40-70 days over the previous four years ended March 31, 2016.
 
Despite increase in inventory, CSEL's working capital management continues to be prudent compared to its peers. Any significant increase in inventory or receivables because of CLSE's expectation about driving volume by entering new markets will be a key rating sensitivity factor over the medium term.
 
* Healthy financial profile: CLSE's capital structure has been healthy because of reduced reliance on external funds, leading to low total outside liabilities to tangible networth ratio of less than 0.4 time over the four years ended March 31, 2020. CLSE's debt protection metrics have also been strong because of leverage and healthy profitability. Interest coverage and net cash accrual to adjusted debt ratios were 11.2 times and 1.7 times, respectively, in fiscal 2020. In the absence of any major debt-funded capital expenditure, the metrics should remain stable over the medium term.
 
* Sound operating efficiency: CLSEL has sound operating efficiency, backed by continued healthy return on capital employed of over 20% in the four years ended March 31, 2020.
 
Weakness:
* High susceptibility to volatility in raw material prices and regulatory changes: Raw material (paddy) constitutes 75-80% of the sales, and its prices directly impact operating profitability. Paddy, being a kharif crop, is harvested only in September-December. The water requirement for basmati is high, and though the rice-growing states (Haryana, Uttar Pradesh, Uttarakhand and Punjab) have good irrigation systems, there is dependence on the monsoons. Hence, the company is exposed to the risk of limited availability of raw material during a weak monsoon, resulting in low operating income and subdued profitability.
 
Moreover, government regulations directly impact raw material availability through minimum support price and procurement policies. Operating profitability has varied at 8.9-13.2% over the four fiscals through 2020.
 
* Low brand penetration: Majority of the exports by CLSE are under customers' brands (private label business). To maintain quality, customers continue to procure their requirement from CLSE; this helps in maintaining margin.
 
In the domestic market, the company sells rice in retail packaging under its own brands, but contribution from this segment is low. Low brand penetration limits the ability to charge high margin in comparison with industry players such as KRBL Ltd. Significant increase in brand penetration should strengthen the market position and operating margin. The extent of improvement will be a key rating sensitivity factor.
Liquidity Strong

The strong liquidity profile is indicated by healthy cash accrual of Rs 35-55 crore over the four fiscals ended 2020 in the absence of any debt obligation. Bank limit utilisation averaged 16% over the 12 months through June 2020. Liquidity is supported by unsecured loans from the promoters. Current ratio was healthy at over 5 times as on March 31, 2020.

Outlook: Stable

CRISIL believes CLSE will continue to benefit from its strong presence and healthy relationships with clients.

Rating Sensitivity factors
Upward factor
* Contribution from own brand products increasing to more than 30%
* Improvement in working capital cycle management
 
Downward factor
* Decline in net cash accrual to below Rs 40 crore on account of fall in revenue or operating profit
* Large, debt-funded capital expenditure weakening the capital structure
* Substantial increase in the working capital requirement weakening liquidity and the financial risk profile

About the Company

CLSE was established as a partnership firm in 1983 by Mr Chamanlal Setia, Mr Vijay Setia and Mr Rajeev Setia in Amritsar. It was reconstituted as a public limited company in 1994 and was listed on the Bombay Stock Exchange in 1995. It undertakes milling, sorting and packaging of basmati rice for the domestic and global markets. It has its own brands in India, such as Mithas, Begum and Maharani.

CLSE has milling, sorting and packaging plants in Karnal in Haryana and in Amritsar. In Karnal, the company has milling capacity of 12 tonne per hour and sorting capacity of 40 tonne per hour. In Amritsar, however, the plant is currently shut for the purpose of remodelling.

Key Financial Indicators
As on / for the period ended March 31  Unit 2020 2019
Operating income Rs crore 797.69 764.45
Reported profit after tax Rs crore 52.48 34.41
PAT margin % 6.6 4.5
Adjusted Debt/Adjusted Networth Times 0.10 0.28
Interest coverage Times 11.2 9.2

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned with outlook
NA Export Packing Credit NA NA NA 95 NA CRISIL A-/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  95.00  CRISIL A-/Stable    --  28-06-19  Withdrawn/ Withdrawn 20-11-18  CRISIL A-/Stable/ CRISIL A2+ (Issuer Not Cooperating)*  21-12-17  CRISIL A-/Stable/ CRISIL A2+  CRISIL BBB+/Positive/ CRISIL A2 
Non Fund-based Bank Facilities  LT/ST    --    --  28-06-19  Withdrawn 20-11-18  CRISIL A2+ (Issuer Not Cooperating)*  21-12-17  CRISIL A2+  CRISIL A2 
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Export Packing Credit 95 CRISIL A-/Stable Cash Credit 2 Withdrawn
-- 0 -- Foreign Bill Discounting 15.5 Withdrawn
-- 0 -- Letter of Credit 6 Withdrawn
-- 0 -- Packing Credit 76.5 Withdrawn
Total 95 -- Total 100 --
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 Fast Moving Consumer Goods Industry
CRISILs Criteria for rating short term debt

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