Key Rating Drivers & Detailed Description

Strengths:

Established market position, supported by comfortable operating efficiency:

DCIC has been in the ice cream industry for over 19 years, with an established presence in Karnataka and Tamil Nadu. Growing reach and popularity of the Dairy Day brand has led to healthy growth in volume and realisations. Furthermore, with consistent focus on reducing key costs, the company has been able to maintain greater control on its gross margin.

Healthy financial risk profile:

Financial risk profile is marked by a strong capital structure and healthy debt protection metrics. Equity infusion by a private equity player in fiscal 2017, led to an increase in capital base and deleveraging. Gearing stood at 0.7 time and net worth at Rs 103.2 crore, as on March 31, 2020. Debt protection metrics continue to remain strong, reflected in interest coverage and net cash accrual to total debt ratios at 7 times and 0.3 times respectively, for fiscal 2020. However, in the current fiscal, the company faced impact on profitability and cash accruals, which will result in an impact on debt coverage. With improvement in operating performance next fiscal, the metrics are likely to improve.

Weakness:

Intense competition in ice cream industry and geographic concentration in revenues:

The industry is marked by several players in both organized and unorganized sector, with pan-India brands such as AMUL, Kwality Walls, Dinshaw's, Arun, Havmor etc. In Karnataka and Tamil Nadu, which contributed significantly to the revenues for DCIC during fiscal 2020, there are other regional brands leading to intense competition. Furthermore, the company is entering into new markets of Maharashtra and Andhra Pradesh, where there are established regional players.

Susceptibility to volatility in raw material prices:

Raw material cost forms a key part of overall cost for DCIC. Prices of key inputs, milk and skimmed milk powder, have fluctuated in the past, owing to droughts and supply constraints. This has led to fluctuation of operating profitability between 10 – 14% in the past three years.

Rating Sensitivity factors

Upward Factors:

• Strong growth in revenue by 20 - 25% while sustaining its operating profitability leading to accruals of over Rs 30 crore
• Sustenance of the strong financial risk profile

Downward Factors:

• Stagnant revenue growth or steep decline in profitability
• Deterioration in working capital cycle impacting the GCA (not including cash) above 100 days.

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