Rating Rationale
July 08, 2020 | Mumbai
Cothas Coffee Co
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.9 Crore
Long Term Rating CRISIL BBB/Positive (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB/Positive' rating on the long term bank facilities of Cothas Coffee Co (Cothas).
 
The rating continue to reflect Cothas's established market position in the filter coffee segment, and its above-average financial risk profile, marked by healthy debt protection metrics and low gearing. These rating strengths are partially offset by the firm's modest scale of operations and geographical concentration in its revenue profile.

Key Rating Drivers & Detailed Description
Strengths: 
* Established market position in the filter coffee segment:
Being in the retail filter coffee business for over 70 years, Cothas has an established market position, with a dominant market share of around 60 ' 80%, in Bengaluru. At the same time Cothas has managed to increase the market share in Tamil Nadu, Andhra Pradesh, deemed exports and business to business sales i.e through increase in sale of vending machine placed in office space. Cothas has also started sales through e-commerce platform like Flipkart, Big Basket, Amazon and its own website. In FY 20, the firm's revenue grew by 10 - 12% to estimated Rs 88 - 90 cr from Rs 80 cr in the previous year due to its extensive network of about 28 retail stores and 120 distributors. Along with two modern processing facilities, which have advanced industrial coffee roasting and grinding machines imported from Germany, the storage facilities are also up to date. The company derives around 70% of its total revenue from sales to home coffee consumers and the balance from institutions and quick serve restaurants like Hot Chips, Vasantha Bhavan, By2coffee, etc.
 
* Above average financial risk profile:
The financial risk profile is above average due to low gearing and healthy debt protection metrics. The gearing was 0.2 time and net worth was estimated to be at Rs 42 cr as on March 31, 2020 due to healthy profitability and retention of significant portion of profits in the business. Going forwards, even woth expected debt funded expansion plans in place, the leverage ratios are expected to remain comfortable. Cothas has healthy debt protection metrics with interest cover estimated at over 70 times. The debt protection metrics is expected to be at the similar levels over the medium term.
 
Weaknesses:
* Modest scale of operations and susceptibility to intense competition:
Scale of operations is modest as reflected in revenues of Rs 88 - 90 crores in fiscal 2020. The firm has a modest scale despite being in the coffee business for over 7 decades. The firm faces intense competition from various established players, as well as many players operating at the bottom of the value chain because of low entry barriers due to low capital and technology requirement. Although the demand for coffee beans into roasted and grounded filter coffee is healthy, stiff competition has restricted the scale of operations.
 
* Susceptibility of profitability to volatility in coffee bean prices due to climatic conditions and exposure to intense competition:
Coffee plantation companies incur high fixed cost, and thus, operating margin remains vulnerable to risks, arising from less-than-normal production or inability to improve realizations for eg: in FY 15, the operating margins declined to 10.8% from 21.9% in FY 14 due to increase in raw material prices. Pest attacks and inadequate rainfall may adversely impact production levels, and quality of the crop. CRISIL believes that despite its strong hold in the market, Cothas' business risk profile is susceptible to seasonality in coffee production and climatic conditions.
Liquidity Adequate

Liquidity remains adequate, driven by low bank limit utilization of around 13% for the past 12 months ending April 2020 despite moderate working capital requirement. The liquidity is supported by expected healthy net cash accruals of around Rs 10 - 12 crores over the medium term against repayment obligation of Rs 0.8 cr. The firm has capital expenditure plans of around Rs 18 - 20 crores over the medium term which will be funded through internal accruals and term loan. The financial flexibility is healthy due to a comfortable capital structure. The current ratio is healthy estimated at over 3 times as on 31st March 2020.

Outlook: Positive

CRISIL believes Cothas will continue to benefit over the medium term from its established brand in the filter coffee segment

Rating Sensitivity factors
Upward factors:
* Growth in revenue above 20% annually and sustained operating margin, leading to increase in cash accrual of Rs 25 crore
* Sustained working capital cycle
 
Downward factors:
* Decline in operating margin to less than 12%
* A large debt-funded capital expenditure, or higher than anticipated withdrawal by partners weakening the financial risk profile and liquidity
About the Company

Set up in 1948 in Bengaluru as a partnership firm, Cothas processes coffee beans into roasted and grounded filter coffee. The day-to-day operations are managed by Mr. C.S Nitin. The firm had 28 retail stores as on 31st March 2020 and around 120 distributors across different locations.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Cr 80.66 72.50
Profit After Tax (PAT) Rs.Cr 10.83 10.58
PAT Margin % 13.42 14.60
Adjusted Debt/Adjusted Networth Times 0.13 0.05
Interest coverage Times 76.37 80.64

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.Cr)		 Complexity
Levels		 Rating Assigned with Outlook
NA Cash Credit NA NA NA 9.00 NA CRISIL BBB/Positive
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  9.00  CRISIL BBB/Positive  24-06-20  CRISIL BBB/Positive  12-03-19  CRISIL BBB/Positive      28-12-17  CRISIL BBB/Stable  CRISIL BBB-/Positive 
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
Cash Credit 9 CRISIL BBB/Positive Cash Credit 9 CRISIL BBB/Positive
Total 9 -- Total 9 --
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 Bank Loan Ratings
The Rating Process

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