Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable' rating on the long-term bank facility of Haldiram Foods International Private Limited (HFIPL; part of the HFIPL group).

 

Consolidated turnover of the HFIPL group is expected grow 30% in fiscal 2022, year-on-year, primarily on account of improved demand. Operating profitability is expected to decline slightly to 15-16% in fiscal 2022, compared to around 19% in fiscal 2021, primarily due to higher raw material prices. Margins are expected to improve post fiscal 2022 as raw material prices go down over the medium term. HFIPL is expected to generate cash accrual of Rs 400-550 crore per annum going forward.

 

The company has robust capital structure, free cash flow generation and healthy debt protection metrics, with expected gearing of 0.11 time and net cash accrual to total debt ratio of 1.7 times for fiscal 2022. The company plans capital expenditure (capex) of Rs 150-200 crore per annum over the next three years for capacity expansion and increasing retail store presence. Liquidity remains comfortable with unutilised bank limits and likely build up in cash reserves, over the medium term. As on date, HFIPL maintains cash and equivalent of over Rs 500 crore.

 

The rating continues to reflect the HFIPL group's strong market position in the high-growth savoury snacks segment in west and south India, backed by its longstanding presence, established brand - Haldiram, and the extensive experience of the promoters, ensuring strong efficiency in operations. The rating also factors in the group's comfortable financial risk profile and liquidity position, as reflected in healthy cash accrual and minimal dependence on external debt. These rating strengths are partially offset by susceptibility of profitability to volatility in raw material prices and increasing competition in the savoury snacks segment as well as consumers moving towards more healthy options.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of HFIPL and its wholly-owned subsidiary, Hariomkar Food Products Pvt Ltd and group companies, Oam Industries India Pvt Ltd, Vevek Ethnic Foods Pvt Ltd and Harrshiv Healthy Foods & More Pvt Ltd. These companies are an integral part of HFIPL's operations. All these companies are together referred to as the HFIPL group.

 

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:

• Strong market position in the savoury snacks segment

The HFIPL group has a strong position in the savoury snacks segment with market leadership in the namkeen snacks segment – the largest sub-segment of savoury snacks. The namkeen or traditional snacks segment, which accounted for 55% of the group’s turnover, is one of the largest categories (market size of around Rs 8,000 crore) within the savoury snacks segment and expected to grow about 20% over the medium term.

 

The group’s solid market position in the namkeen segment is underpinned by strong brand equity and longstanding presence of its flagship brand - Haldiram, and extensive industry experience of the promoters. Furthermore, the group’s strong presence, ability to localise taste of products and brand equity acts as entry barriers and insulates the group from downturns in the fast-moving consumer goods (FMCG) sector. Also, as a result of strong product portfolio which is diversified across other savoury snacks categories, such as extruded, frozen food and chips, the HFIPL group is one of the largest players in the savoury snacks industry. In addition, the group has strong market position in traditional sweets and has ventured into value-added dairy products. CRISIL Ratings expects product diversity to gradually improve with strong scale up of newer product segments. The company also plans to expand their retail presence aggressively.

 

The group has diversified geographical presence in over 11 states in west and south India with distribution reach of more than 15 lakh retail outlets. Healthy growth prospects for the namkeen industry, strong growth in other snacks segments and regular new product launches are likely to help sustain healthy annual growth of over 15% over the medium term.

 

• Healthy operating efficiency

The promoters are third generation entrepreneurs with strong involvement and sound understanding of business. They closely monitor the procurement, cost and working capital position of the company. This has helped maintain healthy operating efficiency, as reflected in return on capital employed (RoCE) of around 22% for fiscal 2021. Furthermore, the company has been able to drive growth with its strong network of around 3,500 distributors and 127 super stockists, providing retail reach of about 15 lakh outlets. The group also benefits from its cost effective and well-established sourcing strategy for its raw materials. The HFIPL group has been able to report strong growth despite low advertising cost of 1.5% of sales during fiscal 2021, which is among the lowest compared with its peers. Furthermore, the group’s working capital cycle is efficiently managed, as reflected in historically healthy receivables of 8-10 days and inventory of 30-35 days.

 

• Robust financial risk profile

The group’s robust financial risk profile is driven by healthy and increasing cash generation (Rs 400-550 crore) and minimal dependence on external borrowings, translating to healthy credit metrics. Gearing is expected to be below 0.15 time and debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio below 0.45 time over the medium term.

 

The HFIPL group has completed sizable capex of around Rs 400 crore over the past few years for capacity expansion and addition of retail stores and is expected to spend Rs 150-200 crore per annum, over the medium term, on capacity expansion as well as for further expanding their retail presence. The capex will be primarily funded through internal accrual, with some mix of debt. Liquidity is also strong, as reflected in minimal utilisation of the working capital bank limit and liquid surplus of over Rs 500 crore as on March 31, 2021. Over the next few years, strong cash accrual of Rs 400-550 crore per annum is expected, which will be sufficient to fund planned capex and incremental working capital requirement. 

 

Weaknesses:

• Susceptibility of operating margin to raw material price volatility

The cost of key raw materials - palm oil, pulses, sugar, besan and packaging material form over 60% of cost. Their prices depend on geo-climatic conditions, international prices and domestic demand-supply situation. Hence, the operating margin is partially susceptible to fluctuations in raw material prices. A focus on cost efficiencies and its continued price leadership should help mitigate the impact of volatility in raw material prices on the operating margin.

 

• Exposure to increasing competition in the packaged foods industry:

Large companies with deep pockets in the food segment are enhancing investments in the savoury snacks segment, impacting the operating margins of players. Intense competition constraints the ability of players to pass on any increase in raw material prices. Therefore, players such as HFIPL need to regularly introduce innovative products, differentiators and refreshes and build on their reach and distribution to sustain market share and profitability. While the company has fairly been able to maintain its market position and pricing in the industry, CRISIL Ratings believes the competitive intensity will continue to be high with new product launches from regional players and large companies.

Liquidity: Strong

Liquidity should remain strong in the medium term. Expected cash accrual of Rs 500-600 crore in fiscals 2022, should more than suffice to cover annual capex needs of Rs 150-200 crore. Bank limits remained largely unutilized for the past 9 months ended November 30, 2021. The company also has cash surplus of over Rs 500 crore in the form of bank deposits and investments as on fiscal 2021.

Outlook: Stable

CRISIL Ratings believes the HFIPL group will maintain its healthy market position in the savoury snacks industry, over the medium term, backed by strong brand and healthy growth outlook. With cash accrual more than sufficient to cover capex, the financial risk profile is expected to remain robust.

Rating Sensitivity factors

Upward factors

• Significant improvement in scale and sustenance of healthy operating efficiencies while maintaining operating margin above 25%, leading to cash accrual over Rs 1,000 crore
• Improvement in diversity with market share gain in new categories and geographies
• Sustenance of the robust financial risk profile and substantial increase in liquid surplus

 

Downward factors

• Substantial decline in operating margin to below 13% and moderation in market share
• Large, debt-funded capex or acquisition affecting the financial risk profile

About the Group

HFIPL, incorporated in 1987, is part of the Haldiram Nagpur group. It manufactures sweets, namkeen, extruded snacks, frozen food, dairy and baked items under the brand name of Haldiram. The company started out as a namkeen company and, over the years, has diversified into other product categories. HFIPL currently has more than 100 products that are marketed across west and south India and in more than 40 countries. HFIPL has a manufacturing facility at Nagpur, Maharashtra. HFIPL operates its dairy business in the Nagpur region and has retail stores in Nagpur. 

 

Currently, namkeen contributes 55% to revenue, while other products such as sweets, dairy products, other savory snacks and chips contribute around 13%, 5%, 10% and 5%, respectively. The company is owned and managed by Mr Shivkishan Agrawal and his three sons, Mr Rajendrakumar Agrwal, Mr Sushilkumar Agrawal and Mr Kamal Agrawal.

 

For the nine months ending December 31, 2022, the company reported net sales of around Rs 3,295 crore and profit after tax (PAT) of around Rs 302 crore.

Key Financial Indicators

Particulars	Units	2021	2020
Revenue	Rs crore	3208	2941
PAT	Rs crore	380	315
PAT margin	%	11.9	10.7
Adjusted debt/adjusted networth	Times	0.13	0.08
Interest Coverage	Times	47.75	33.41

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Cr)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	90	NA	CRISIL AA+/Stable

*Fully Interchangeable with Working Capital Demand Loan, Working Capital Loan

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Hariomkar Food Products Pvt Ltd	100%	Subsidiary
Oam Industries india Pvt Ltd	100%	Group company
Vevek Ethnic Foods Pvt Ltd	100%	Group company
Harrshiv Healthy Foods & More Pvt Ltd	100%	Group company