Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings to the bank facilities of Gokul Refoils and Solvent Limited (GRSL; part of the Gokul group).

 

The ratings reflect the extensive experience of the promoters in the edible oil industry, the healthy position of the Gokul group across refined oil segments (mustard, castor, soyabean and groundnut) and its above-average financial risk profile. These strengths are partially offset by susceptibility of operating margin to volatility in raw material prices and exposure to competition.

 

The business risk profile of the group is supported by its diverse revenue profile in terms of products, customers and geography. The products include different kinds of oil (75% of revenue) and multiple castor derivatives (20% of revenue). In the edible oil segment, the group sells to both retail and institutional customers. Branded sales account for 51% of revenue and institutional for 11-12%. The group has brands across income levels, for instance, Vivaan is a premium brand, Gokul is a mass brand and Rozana is a low-cost brand. The rising share of manufacturing sales'94% in fiscal 2021 against 79% in fiscal 2018'indicates healthy volume growth. Furthermore, customers in the castor derivatives segment are sticky and the group caters to multiple industries such as cosmetics, personal care products, pharmaceuticals, lubricants, paints and adhesives. Revenue is expected to grow 15-16% in fiscal 2022.

 

Operating efficiency is supported by higher profitability in the castor derivatives segment (operating margin of 5.5-6.0%), prudent risk management policies, and efficient raw material procurement and working capital management. The group keeps inventory of only a month and 40-50% of the edible oil sales are against advance orders, which reduces the risk of inventory loss because of volatility in commodity prices. The group hedges the commodity risk by entering into forward contracts. Operating profitability is expected at 3.0-3.5% over the medium term. Any major impact of volatility in commodity prices on operating profitability remains a monitorable.

 

The financial risk profile is supported by no long-term debt. The group has no major capital expenditure (capex) planned over the medium term and hence no long-term debt is expected. Working capital is funded through short-term borrowings. Higher dividend and capital withdrawal in Gokul Overseas (rated CRISIL BBB+/Stable/CRISIL A2) constrained increase in networth to Rs 25 crore over the past four fiscals. The networth was Rs 306 crore and total outside liabilities to tangible networth (TOLTNW) ratio 1.78 times as on March 31, 2021. No buyback/large dividend in GRSL and major capital outflow in Gokul Overseas are expected over the medium term. Hence, with gradual accretion to reserves, the networth will increase, improving the gearing and TOLTNW ratios. More than expected capital outflow from Gokul Overseas and large dividend pay-out in GRSL will remain key rating sensitivity factors. Further, the liquidity remains adequate backed by moderate bank limit utilisation. Cash accrual will be used to partly fund working capital in the absence of debt obligation.

The experience of the promoters and management will support the credit risk profile. The promoters will likely provide support during any exigency.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of GRSL and its subsidiary, Gokul Agri International Ltd (Gokul Agri; rated CRISIL BBB+/Stable/CRISIL A2) and Gokul Overseas. The entities, collectively referred to as Gokul group, are in the same business and under a common management and have significant operational and financial linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoters and leadership position in the edible oil industry:

The Gokul group is one of the top players in the edible oil industry, with presence of over three decades. It is one of the largest players in east and north India and is expanding its reach. It has solvent extraction capacity of 1,000 tonne per day (TPD) and refinery capacity of about 600 TPD. The group has an established presence in Gujarat, Rajasthan, Bihar, Maharashtra, Uttar Pradesh, Uttarakhand, Madhya Pradesh, Delhi, Punjab, Haryana, Himachal Pradesh, Jammu & Kashmir, Bihar and Assam.

 

The group sells its products under the Gokul, Vivaan and Rozana brands. In fiscal 2021, branded edible oil accounted for 51% of edible oil sales. The Gokul group is among the top three manufacturers and exporters of castor derivatives in India. Revenue is likely to grow at a steady pace, aided by the extensive experience of the promoters and diversified distribution network. Expansion of geographical reach within India remains a key monitorable.

 

• Above-average financial risk profile:

The financial risk profile is supported by nil long-term debt and no major capex planned over the medium term. With continued dependence on short-term borrowings for funding working capital, debt remained at Rs 377 crore as on March 31, 2021.

 

The networth slipped to Rs 306 crore as on March 31, 2021, from Rs 321 crore a year earlier because of the share buyback in GRSL and capital outflow of Rs 23 crore in Gokul Overseas. With no major capital outflow expected in Gokul Overseas, the group’s networth is expected to increase with gradual accretion to reserve over the medium term. Consequently, gearing will improve to below 1 time over the medium term from 1.24 times as on March 31, 2021, while the TOLTNW ratio should improve to 1.2-1.5 times from 1.8 times. With expected stable performance over the medium term, Gokul group will generate annual cash accrual of Rs 40-50 crore, which will partly fund the incremental working capital.

 

Weaknesses:

• Susceptibility of operating margin to volatility in raw material prices:

The group faces risks inherent in the agriculture-based commodity business, such as availability of raw material or fluctuations in prices. For instance, the solvent extraction business is susceptible to the availability of oilseeds in the domestic market as well as the international prices of degummed oil and crude oil as these are imported. Oil prices also depend on global demand-supply and movement in prices of other edible oils. Besides, when the monsoon is erratic, quality seeds are in short supply, which leads to high input costs, thereby adversely affecting margins. The operating profitability of the group ranged from 0.6% to 3.6% in the past 6-7 years.

 

• Exposure to competition

Presence of several small, unorganised players across the value chain (from crushing to solvent extraction) has led to intense competition in the edible oil industry. Given the price-sensitive nature of demand, players mainly cater to regional demand to avoid high marketing and distribution costs. Furthermore, the industry is vulnerable to government policies in the form of duties imposed on the import of refined and crude edible oil, and volatility in edible oil prices and foreign exchange (forex) rates. Any large movement in edible oil prices or forex rates could adversely impact profitability

Liquidity: Adequate

Liquidity is supported by sufficient cash accrual and moderate bank limit utilisation. Cash accrual is expected at Rs 40-50 crore per fiscal against nil debt obligation. Fund-based bank limit utilisation averaged 72% for the 12 months ended July 31, 2021, while non-fund-based limit was utilised 69% on average. With no major capex planned over the medium term, no long-term debt is expected.

Outlook: Stable

CRISIL Ratings believes the Gokul group will continue to benefit from its established position and the experience of its promoters in the edible oil business. The prudent risk management policies should support performance and improve the financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors

• Better-than-expected operating performance leading to cash accrual of more than Rs 40-45 crore on sustained basis
• Operating profitability remaining above 4-5% at group level on sustained basis
• Improvement in debt protection metrics and TOLTNW ratio remaining below 1-1.1 time on sustained basis, in the absence of any major capex

 

Downward factors

• Weaker operating performance, with net cash accrual declining below Rs 20-25 crore
• Large debt-funded capex exerting pressure on the capital structure
• Stretched working capital cycle, straining the financial risk profile and liquidity
• More-than-expected capital outflow impacting the networth

About the Group

Incorporated in 1992, GRSL was promoted by Mr Balvantsinh Rajput and Mr Kanubhai Thakkar (who have been in the business since 1982 and started with trading sugar and edible oil). The company set up an oil refinery at Sidhpur in Gujarat. Over the years, it has expanded its refining capacity and set up crushing and extraction facilities at different locations. The promoters set up a castor oil refinery and castor oil derivatives manufacturing facility under Gokul Overseas in the Kandla special economic zone in 1995.

 

In July 2015, GRSL de-merged its Gandhidham unit into Gokul Agro Resources Ltd (owned by Mr Kanubhai Thakkar) and transferred its Sidhpur unit to Gokul Agri. In fiscal 2018, GRSL sold its Haldia unit in an all-cash deal to Adani Wilmar Ltd. GRSL is listed on the National Stock Exchange and Bombay Stock Exchange.

 

The operations of the Gokul group are managed by Mr Balvantsinh Rajput. Gokul Agri is mainly involved in crushing and refining edible (revenue share 61%) and non-edible oils (39%). The company has an extensive marketing and distribution network which reaches customers in 13 states in India through 23 carrying and forwarding agents, 160 distributors, 1 company own depot and around 55,000 retailers.

 

In the first three months of fiscal 2022, the Gokul group had a profit after tax (PAT) of Rs 11 crore and revenue of Rs 903 crore.

Key Financial Indicators

As on/for the period ended March 31		2021*	2020
Revenue	Rs Crore	2,632	2,271
Profit after tax (PAT)	Rs Crore	40	34
PAT margin	%	1.5	1.5
Adjusted debt/adjusted networth	Times	1.24	0.97
Interest coverage	Times	2.98	2.57

*Provisional

Any other information: Not applicable

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	Proposed Long Term Bank Loan Facility	NA	NA	NA	2.5	NA	CRISIL BBB+/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	2.5	NA	CRISIL A2

 

Annexure – List of entities consolidated

Name of entity	Extent of consolidation	Rationale for consolidation
Gokul Agri International Ltd	100%	Business and financial linkages
Gokul Overseas	100%	Business and financial linkages