Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the long-term bank facilities of Dharampal Satyapal LImited (DSL; flagship concern of Dharampal Satyapal Group)

 

The rating reflects the robust business profile of DSL, supported by strong presence of its ‘Rajnigandha’ brand across India, its established distribution network and leadership position in the premium pan masala segment, and the healthy financial profile. These strengths are partially offset by exposure to risks arising from product concentration in revenue, regulatory risk associated with the pan masala segment and sizeable support provided to group concerns and external entities.  

 

DSL has recently won the bid for Viceroy Bangalore Hotels Limited through National Company Law Tribunal (NCLT) route for a bid price of Rs 300 crore. Viceroy Bangalore Hotels owns Renaissance Bengaluru Race Course Hotel, a 5 star property by Marriot International. The property has 277 rooms and was constructed in 2018. The property has proximity to business and leisure destinations in the city and offers views of the Bangalore Turf Club. As per DSL, the Hotel is currently operating at occupancy of 70-80% with ARR ~Rs 10,000. Also, as per DSL, the hotel is currently generating monthly revenue of ~Rs 5-6 crore with cash profit of ~Rs 2.5 crore. Due to the debt availed for construction of the hotel, and stress during the pandemic the hotel started facing financial issues and was admitted in NCLT. The transaction is expected to be complete in next few months and DSL plans to avail debt to partly fund the acquisition. CRISIL Ratings understands that even after the acquisition, debt metrics and financial profile of DSL will be comfortable. However, ability of the company to ramp-up the hotel operations will remain important and CRISIL Ratings will continue to monitor the same.

 

Operating revenue is expected to register 8-12% growth per fiscal over the medium term, backed by opening of all retail and distributor establishments, focus on new products, online marketing and sales, and scale-up of mid-market product offerings. The company is also undertaking backward integration of key raw materials and this shall translate into additional cost savings in the medium term, with operating margin sustaining in the range of 23-25%. Interest coverage and net cash accrual to adjusted debt (NCAAD) ratios are estimated at 12-14 times and 0.5-0.7 time, respectively, in fiscal 2023, compared to 19.24 times and 0.47 time, respectively, in fiscal 2022.

 

Following a decline in revenue (around 14%) in fiscal 2021, amidst the pandemic related lockdowns, operating revenue grew 22% in fiscal 2022, primarily led by sales of Rajnigandha pan masala. The company enjoys pricing power, given its strong brand loyalty among customers and the largely price-inelastic product segment (pan masala), also reflected in successful price hikes implemented in the past. The company has also ventured into the hydroponics business in fiscal 2021. Operating margin improved by nearly 80 basis points in fiscal 2022, owing to stability in prices of key raw materials and cost cutting measures.

Analytical Approach

The consolidated financials have been considered to arrive at the final rating for DSL. The subsidiaries and joint ventures have been factored in proportionately as they are also engaged in similar businesses with significant operational and financial linkages.

Key Rating Drivers & Detailed Description

Strengths:

Leading market position in the premium pan masala segment and strong business risk profile demonstrated by healthy growth in fiscal 2022

DSL has been engaged in the tobacco and pan masala business for over 80 years. The company is one of the largest players in the Indian pan masala segment, through its flagship brand, Rajnigandha (world’s largest selling premium pan masala), which commands 65-70% share in a highly fragmented market. Leadership position in the premium pan masala segment supports the strong operational and financial performance of the company.

 

The recent launch of Mastaba, a mass market product in the pan masala segment, should also expected to aid growth in the medium term. DSL is focused on securing backward integration for key raw materials and has recently acquired sandalwood plantations. The company also enjoys pricing power in a largely price-inelastic product segment, also exhibited by successful price hikes implemented in the past.

 

Strong pan India distribution network and healthy operating efficiency

DSL’s market position is supported by its established and strong pan India distribution network spanning nearly 3,000 dealers and 7 lakh retailers. Strength of this widespread distribution network is reflected in the group’s demonstrated ability to push sales of new products and variants. Over the years, the group has successfully forayed into new segments such as spices, beverages, mouth fresheners, confectionary and dairy products (via brands such as Pulse, Catch, Pass Pass, Chingles and Ksheer), besides maintaining a dominant position in the pan masala and tobacco segments (under Rajnigandha and Mastaba brands).

 

Operating margin has been steady over the past few years and likely to sustain in the range of 23-25% in the medium term. Stability in price of key raw materials, along with cost cutting measures, should result in additional cost savings in fiscal 2023. Return on capital employed (adjusted for cash) is likely to sustain above 16% going forward.

 

Healthy financial risk profile

DSL has consistently generated cash accrual greater than the requirement of its core business operations, supported by sustained healthy revenue and profitability. External borrowings rose to around Rs 1,489 crore in fiscal 2022, from nearly Rs 953 crore in fiscal 2021, owing to investments towards backward integration, acquisition in the hospitality space, capital expenditure (capex) towards the newly ventured hydroponics business and overall expansion. However, gearing remained comfortable at 0.36 time as on March 31, 2022. The company also has unencumbered cash surplus of Rs 226 crore and a sizeable investment portfolio.

 

Liquidity is superior, characterised by sizeable cash and liquid investment balances and undrawn working capital limits during the year (average utilisation of around 65% during the 12 months ending October 31, 2022). While debt levels rose in fiscal 20222, debt coverage metrics were comfortable levels with interest coverage and NCAAD ratios at 19.24 times and 0.47 time, respectively, in fiscal 2022 (24.70 times and 0.69 time, respectively, in fiscal 2021). Adjusted gearing may improve to 0.15-0.25 time with total outside liabilities to tangible networth ratio at 0.40-0.50 time despite moderate capex.

 

Weaknesses:

Exposure to brand and product concentration risk

DSL remains highly dependent on Rajnigandha pan masala sales, with the brand accounting for more than 75% share in revenue. While in recent years, the company had expanded its product portfolio to include mouth fresheners, confectionaries and dairy products, shift of its confectionery business to a group entity from October 2019, has again increased concentration on the pan masala segment. Besides heightened product and brand concentration risk, the company is also exposed to increased regulatory risk associated with the product category. It has also forayed into the hydroponics business in fiscal 2021 and it continues to invest in the hospitality sector through hotels. Scalability of these segments is critical to reduce dependence on pan masala business and also improve RoCE.

 

Susceptibility to regulatory risks due to adverse health effects of pan masala

Given the adverse health effects of pan masala products, the company remains susceptible to changes in government policies related to its sale. The government disincentivises consumption of pan masala by levying high taxes and periodically increasing tax rates. Thus, the ability to pass on the hikes in taxes remains critical for sales growth and profit of DSL. The company also remains exposed to periodic bans, as witnessed in the first quarter of fiscal 2021, when the government imposed a temporary ban \on manufacturing, sale and storage of pan masala and tobacco across India, to contain the spread of coronavirus. Although the company has transferred the tobacco business to another group entity, it remains exposed to regulatory risks associated with the pan masala segment.

 

Sizeable investment in group companies and external firms

DSL continuously invests in affiliate concerns to support diversification, business operations as well as scalability. Additionally, the company also invests in external firms linked with development of new technology, strategic investments related to new growth areas, start-ups etc. for sustained improvement in operating efficiency. Loans and advances to affiliates and external firms rose to around Rs 1,040 crore during fiscal 2022 (current loans and advances constituting almost 80%), compared to around Rs 354 crore in fiscal 2021.

Liquidity: Strong

Liquidity remains strong with a comfortable cash surplus and unutilised limits. Moreover, the company’s demonstrated ability to generate healthy cash flow from operations, together with limited debt obligation and moderate expansion plans, should also support the liquidity profile, despite the regular funding support extended to group entities, via incremental investments, loans and advances. Cash accrual of around Rs 700 crore is estimated against debt obligation of nearly Rs 135 crore in fiscal 2023.

Outlook: Stable

The Stable outlook reflects expectation of a robust credit profile, supported by established position of DSL in the pan masala business. It also factors in adequate profitability and cash generation, low reliance on debt and limited capex/ investments plans.

Rating Sensitivity factors

Upward factors

• Steady and sustained improvement in operating performance, supported by a diversified range of products and brands, along with stable operating margin of 23-25%
• Sustenance of healthy financial risk profile and debt metrics, supported by moderate cash generation and prudent working capital management
• Maintenance of healthy liquidity

 

Downward factors

• Increase in gearing above 0.6-0.7 time on a sustained basis
• Any regulatory change in the pan masala segment weakening the operating performance
• Lower  cash generation, along with stretch in working capital cycle and increased capex, impacting debt metrics
• Steep decline in liquidity, due to sizeable support to group companies as well as investments and loans and advances to other parties

About the Company

DSL is the largest entity of the DS group, which contributes over 75% of the group’s revenue. The company operates in various product segments such as perfumery, pan masala, dairy, and hospitality. DSL derives 65-70% of its revenue from its flagship brand- Rajnigandha, with annual sales of over Rs 2,500 crore. It sells perfumery and gold and silver leaves to other group companies, which use these leaves to manufacture other flavoured and essence products.

 

DSL also sells milk and other dairy products under the brand Ksheer’. Products include ultra-high-temperature (UHT) milk, cow and desi ghee, fresh milk, chaach, dahi, paneer, khoya, flavoured milk, dairy whitener and creamer.

 

In fiscal 2014, DSL demerged its food, beverage and packaging divisions into separate companies, while also transferring some of its investments in hospitality, real estate and agriculture to new holding companies. Since December 2014, DSL started shifting tobacco manufacturing into a newly formed group entity, DS Chewing Products LLP, and in October 2019, the company also shifted its confectionery business to DS Confectionery Products Ltd.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Long-term loan	NA	NA	Mar-26	180	NA	CRISIL AA/Stable
NA	Fund-Based Facilities	NA	NA	NA	120	NA	CRISIL AA/Stable