Rating Rationale
April 05, 2022 | Mumbai
Empee Distilleries Limited
Rating upgraded to 'CRISIL A-/Stable'
 
Rating Action
Total Bank Loan Facilities RatedRs.250 Crore
Long Term RatingCRISIL A-/Stable (Upgraded from 'CRISIL BBB/Stable')
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Empee Distilleries Limited (EDL; part of the SNJ Group) to 'CRISIL A-/Stable' from 'CRISIL BBB/Stable'.

 

The upgrade reflects the more than expected improvement in the business and financial risk profiles of EDL over the last 2 fiscals, post-acquisition by SNJ group. The company started operations in August 2020 under the SNJ group and has already achieved production of 4.5 lakh cases in fiscal 2022 as against an earlier expectation of 1 lakh cases annually. This has resulted in revenues of EDL reaching Rs.330 crore for fiscal 2022 with EBITDA margins at over 15%. The company benefits from the strong experience of the SNJ group in operating liquor business in Tamil Nadu and has helped the group in diversifying its presence outside of Tamil Nadu in the last one year. As a result, dependence of SNJ group on Tamil Nadu has reduced to 65% of total sales in 2022 post acquisition of EDL. Financial risk profile of EDL is also strong with gearing and interest coverage estimated at around 1 time and over 10 times for fiscal 2022. With further capacity expansion planes for the strong demand, EDL is expected to grow further, with moderate dependence on outside debt.

 

The rating reflects the strong operational and financial support received by EDL from the SNJ group, SNJ group’s established market position in the liquor industry in Tamil Nadu (TN), and an above-average financial risk profile. These strengths are partially offset by the vulnerability to high regulatory risk, geographical concentration in revenue, and volatile input prices with limited pricing power.

Analytical Approach

For arriving at EDL’s ratings, CRISIL Ratings has applied the parent notch-up framework to factor in the intensity of financial support available to EDL from its parent, SNJDPL. This is because EDL is critical to the SNJ group for its operations with capacities in distillery

Key Rating Drivers & Detailed Description

Strengths:

  • Strong operational and financial support to EDL from the SNJ group: EDL has been acquired by the SNJ group in August 2020 for Rs.475 crore and the acquisition has been funded by unsecured loans of Rs.275 crore and external debt of Rs.200 crore. With this acquisition, SNJ group has expanded its capacities in the liquor segment and hence its geographical penetration outside of TN. EDL receives strong operational support from the group for its operations, leveraging the group’s experience in the sector. Further, any financial requirements of EDL are expected to be supported by the SNJ group.

 

  • Established market position in TN: The SNJ group has diversified its business since inception in 1969. The promoters’ strong focus on expanding the brand’s market share has led the group to successfully acquire and set up SNJB, SNJS and EDL. SNJ group has is expected to achieve revenue of around Rs.1950 crore in fiscal 2022. The SNJ group has prominent presence in the IMFL and beer segment. The group’s revenue share has increased with the acquisition of the EDL in fiscal 2021 and same is expected support the growth over the medium term.

 

  • Above-average financial risk profile: Capital structure is healthy marked by estimated gearing at 1 time as on 31st March 2022 (1.43 times as on 31st March 2021) despite availing term loan of Rs.170 for acquisition of EDL and is expected to improve further, aided by healthy accretion to reserves and repayment of term debt. Debt protection metrics continued to remain comfortable, with estimated interest coverage ratio and net cash accruals to adjusted debt ratio of over 10 times and 0.1 times in Fiscal 2022 (9.9 times and 0.11 times in fiscal 2021).

 

Weaknesses:

  • Exposure to high regulatory risk and geographic concentration in revenue: The exposure towards TN remains high at 60 percent where the state-owned Tamil Nadu State Marketing Corporation entirely controls the distribution. Thus, any regulatory changes or implementation of the current government's proposal to prohibit liquor sales in a phased manner could adversely affect the business risk profile. However, this risk is partially mitigated by the fact that the company has his presence.

 

  • Volatile input prices and limited pricing power: The key raw materials include molasses, malt and barley for the IMFL and brewery segment. All the materials are agro based and is dependent upon the vagaries of the monsoon; consequently, their prices remain volatile. The company has limited pricing power as the prices are governed by the regulatory authorities.

Liquidity: Adequate

Liquidity remains adequate, with cash accrual expected at over Rs 70-80 crore, against repayment obligation of about Rs 35 to 40 crore on an average, per fiscal over the medium term. The surplus cash generated would be used to fund capital expenditure and incremental working capital requirement. Average utilisation of the bank limit of Rs.50 crore was moderate at an average of 65% during the 12 months through February 2022. Further, liquidity is supported by its support received from the parent and group in the form of USL and the benefit of being part of the group.

Outlook: Stable

CRISIL Ratings believes that EDL will continue to benefit from the strong parent support and its above average financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Reduced geographic concentration in revenues, particularly with contribution from TN less than 50%
  • Sustained improvement in financial risk profile of EDL
  • Upward revision in the rating of the parent by one notch

 

Downward factors:

  • Steep decline in revenues and profitability resulting in lower accruals.
  • Change in ownership and support philosophy of SNJDPL towards EDL
  • Downward revision in the rating of the parent by one notch

About the Group:

Empee Distilleries was established over 4 decades back and is into manufacturing of liquor. SNJ Group acquired EDL in fiscal 2021 and the operations have commenced in its plants from August 2020.

 

SNJDPL manufactures IMFL in TN and beer in AP. SNJB, set up in 2009, operates a brewery in Kancheepuram (TN). Set up in 1994, SNJS manufactures sugar. It also has a facility for distilling extra-neutral alcohol and operates a co-generation power plant. Operations of all the three companies are overseen by the managing director, Mr. S N Jayamurugan.

Key Financial Indicators

Particulars

Unit

2021

2020

Revenue

Rs. Cr.

196.06

2.80

Profit after tax

Rs. Cr.

130.03

(23.86)

PAT margin

%

66.32

(851.22)

Adjusted debt/adjusted net worth

Times

1.42

1.62

Interest coverage

Times

9.9

(83.3)

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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

50

NA

CRISIL A-/Stable

NA

Term Loan

NA

NA

31-Mar-28

200

NA

CRISIL A-/Stable

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 250.0 CRISIL A-/Stable   -- 07-01-21 CRISIL BBB/Stable   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Cash Credit 50 CRISIL A-/Stable
Term Loan 200 CRISIL A-/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Understanding CRISILs Ratings and Rating Scales

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