Rating Rationale
November 08, 2021 | Mumbai
Gujarat Co-Operative Milk Marketing Federation Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities RatedRs.2200 Crore (Enhanced from Rs.1500 Crore)
Long Term RatingCRISIL AAA/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long-term bank facilities of Gujarat Co-Operative Milk Marketing Federation Limited (GCMMF).

 

GCMMF continues to leverage its established brands ‘Amul’ and ‘Sagar’ and command market leadership across a host of dairy and related products.

 

Revenue in fiscal 2021 continued to grow despite the Covid-19 pandemic. Revenue grew 2% year-on-year to Rs 39,331 crore, supported by steady sales of pouch and ultra-heat-treated (UHT) milk. Revenue growth is expected to be strong at 10-15% this fiscal, driven by 4% hike in retail prices since July 2021, as well as pick up in both retail and institutional demand with the reopening of hotels, restaurants and offices. While operating margin is expected to moderate on account of increase in input costs (packaging, transportation and power), its impact will be limited because of the financial flexibility enjoyed by the federation on account of two-step price mechanism and ability to pass on incremental operating and financing costs to member district unions.

 

Continuing procurement by GCMMF and its member unions this fiscal, coupled with lower off-take of ice-cream and other value-added products in the first quarter because of the second wave, led to significant build-up of skimmed milk powder (SMP) inventory of about 40,000 metric tonne (MT) by March 2021 and about 60,000 MT by June 2021 with GCMMF. Consequently, the company’s working capital borrowings increased to Rs 1,491 crore (~50% utilisation of fund-based bank limits) in March 2021. Pick up in domestic demand for value-added products, such as ice cream and cheese, as well as export support of Rs 50 per kilogram (kg) announced by the Government of Gujarat will aid the liquidation of SMP inventory and reduction in short-term borrowings in the near to medium term. Furthermore, GCMMF benefits from interest subvention scheme of 4% on working capital borrowings extended by the Government of India till March 31, 2026.

 

The financial risk profile of GCMMF continues to remain supported by steady cash accrual of more than Rs 160 crore per fiscal, which will be sufficient to cover debt obligation and partly fund capex of setting up the SMP plant at Rajkot, Gujarat, over the medium term. Furthermore, unencumbered cash balance and sufficient availability under the fund-based lines provide financial flexibility.

 

The rating continues to reflect GCMMF’s dominant market position in the Indian dairy industry, driven by strong brand, diverse product portfolio and robust distribution network. The rating also factors in the federation’s adequate financial risk profile because of strong financial flexibility and adequate debt protection metrics. These strengths are partially offset by exposure to government regulations, epidemic and environmental factors that influence agriculture-related sectors, and risks related to milk supply on account of volatility in global milk powder prices.

Analytical Approach

The rating is arrived at on a standalone basis, with GCMMF’s debt adjusted for the debt of district cooperative milk unions guaranteed by, or routed through, the federation. CRISIL Ratings also factors in the financial flexibility that the federation enjoys on account of the two-step price payment mechanism.

Key Rating Drivers & Detailed Description

Strengths:

  • Dominant position in the dairy industry: The federation remains the largest dairy product marketing organisation in India, with superior brand equity, wide product portfolio, well-spread distribution network and aggressive marketing strategy. GCMMF is the market leader in pouch milk, butter, milk powders, cheese, ice cream and UHT milk segments.

 

  • Strong control over procurement price: The federation is part of a cooperative structure, wherein farmers are owners and suppliers to district cooperative milk unions that supply milk and milk products to GCMMF for marketing. It follows a two-step price payment mechanism, with the final price during the year reflecting strong control over the effective price paid to unions.

 

  • Adequate financial risk profile: Networth is moderate at Rs 545 crore as on March 31, 2021 on account of the business model followed, wherein the provisional procurement price is paid periodically and the balance is distributed during the year. Furthermore, debt was Rs 2,197 crore (including loans guaranteed by the federation) and gearing was 4.0 times as on March 31, 2021. However, the federation has strong financial flexibility, driven by control over the effective price paid to the district cooperative milk unions and healthy liquidity to meet its financial obligation. GCMMF is expected to maintain adequate financial risk profile over the medium term, supported by steady cash accrual and adequate debt protection metrics.

 

Weaknesses

  • Susceptibility to changes in government regulations and environmental conditions: GCMMF, like all dairy players, is susceptible to government regulations—such as ban on SMP exports in the past and removal of export incentives. Furthermore, it is also susceptible to failure in milk production because of external factors such as cattle diseases.

 

  • Exposure to risks related to volatility in global milk powder prices: Exposure to risks related to volatility in global milk powder prices are inherent in the dairy industry. For instance, the global crash in SMP prices in fiscal 2018 led to surplus procurement, which translated into large inventory and led to an increase in working capital debt. The lockdowns imposed to contain the pandemic has affected institutional demand for value-added products, thereby resulting in surplus milk procurement and build-up of SMP inventory levels. Consequently, GCMMF's inventory levels and working capital borrowings have peaked.

Liquidity: Superior

Liquidity position is superior as GCMMF is expected to generate cash accrual of more than Rs 160 crore per fiscal over the medium term, which will be sufficient to cover its debt obligation of Rs 15 crore in fiscal 2022. Federation has bank lines of more than Rs 4,600 crore, which are utilised at 50% on average in the 12 months through August 2021, providing sufficient cushion to meet any exigencies.  Unencumbered cash and bank balance of about Rs 325 crore as on March 31, 2021, coupled with financial flexibility driven by control over the effective price paid to farmers will support liquidity. The federation distributes excess funds to unions after meeting working capital and capex requirement, which keeps debt manageable and provides flexibility.

Outlook: Stable

CRISIL Ratings believes GCMMF will continue to benefit from its dominant market position in the dairy industry over the medium term, supported by strong milk procurement capability and distribution network. The financial risk profile is also likely to remain adequate, backed by high financial flexibility and steady cash accrual.

Rating Sensitivity factors

Downward Factors

  • Deterioration in operating performance or sustained high inventory and working capital debt, resulting in interest coverage ratio of less than 3 times
  • Significant increase in financial support to district cooperative milk unions
  • Disruption in raw milk procurement because of adverse environmental conditions, constraining revenue
  • High pressure on cash flow due to increase in milk procurement prices

About the Federation

Set up in 1973, GCMMF is India’s largest marketing organisation and exporter of dairy products. It procures milk from over 36 lakh member farmers. It has 18,554 active village dairy cooperative societies and is the apex marketing federation of 18 district cooperative milk unions in Gujarat. The federation markets and distributes products of its member unions under the Amul and Sagar brands. The sales infrastructure, comprising numerous stock points, is supported by a network of more than 10,000 distributors and 10 lakh retailers across India.

Key Financial Indicators

Particulars

Unit

Fiscal 2021

Fiscal 2020

Revenue

Rs.Crore

39,331

38,587

Profit After Tax (PAT)

Rs.Crore

58

56

PAT Margin

%

0.1

0.15

Adjusted debt/adjusted Networth

Times

4.03

1.50

Interest coverage

Times

6.17

9.16

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.Crore)

Complexity levels

Rating assigned with outlook

NA

Working Capital Demand Loan@

NA

NA

NA

2200.0

NA

CRISIL AAA/Stable

@Interchangeable with Cash Credit/Inland/Import Letter of Credit/Bank Guarantee

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 2200.0 CRISIL AAA/Stable   -- 30-09-20 CRISIL AAA/Stable 29-11-19 CRISIL A1+ / CRISIL AAA/Stable 24-08-18 CRISIL A1+ / CRISIL AAA/Stable CRISIL A1+ / CRISIL AAA/Stable
Non-Fund Based Facilities ST   --   --   -- 29-11-19 CRISIL A1+ 24-08-18 CRISIL A1+ CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Working Capital Demand Loan@ 50 Kotak Mahindra Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 150 ICICI Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 110 State Bank of India CRISIL AAA/Stable
Working Capital Demand Loan@ 100 DBS Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 100 YES Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 40 BNP Paribas Bank CRISIL AAA/Stable
Working Capital Demand Loan@ 150 HDFC Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 100 The Federal Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 100 Axis Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 200 Kotak Mahindra Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 208 HDFC Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 242 HDFC Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 168.9 The Hongkong and Shanghai Banking Corporation Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 81.1 The Hongkong and Shanghai Banking Corporation Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 50 HDFC Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 50 State Bank of India CRISIL AAA/Stable
Working Capital Demand Loan@ 100 Kotak Mahindra Bank Limited CRISIL AAA/Stable
Working Capital Demand Loan@ 50 Sumitomo Mitsui Banking Corporation CRISIL AAA/Stable
Working Capital Demand Loan@ 100 Bank of Baroda CRISIL AAA/Stable
Working Capital Demand Loan@ 50 ICICI Bank Limited CRISIL AAA/Stable
@Interchangeable with Cash Credit/Inland/Import Letter of Credit/Bank Guarantee
This Annexure has been updated on 08-Nov-2021 in line with the lender-wise facility details as on 08-Nov-2021 received from the rated entity.
 
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
CRISILs Bank Loan Ratings
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for rating short term debt

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