| Heritage Foods Limited | ||||||
| Ratings reaffirmed at 'CRISIL A / CRISIL A1 '; outlook revised to 'Positive' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Heritage Foods Ltd (HFL; a part of the Heritage group) to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A'. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1'.
The revision in outlook factors in the expected improvement in HFL’s financial risk profile, driven by prepayment of term debt and significant improvement in operating performance. HFL sold its entire stake in Future Retail Ltd and Praxis Home Retail Ltd and the proceeds from the same (of around Rs 136 crore) is being utilised for reduction of long-term debt. Further, operating performance improved significantly in fiscal 2021 because of sharp increase in spread between milk procurement prices and realisations; this also brought down working capital debt to almost nil. Going forward, the operating margin may moderate with increase in milk procurement prices. Nevertheless, the financial risk profile should remain strong as the cash accrual will be sufficient to fund the incremental capital expenditure (capex) and working capital requirement. Sustenance of improved capital structure will remain a key rating sensitivity factor.
The ratings also reflect the Heritage group's established market position in the dairy business, strong distribution network, prudent working capital management, comfortable financial risk profile and the extensive experience of its promoter. These strengths are partially offset by exposure to volatile milk prices, geographic concentration in revenue, and susceptibility to changes in government regulations and epidemic-related factors, inherent in the dairy industry. |
Analytical approach For arriving at the ratings, CRISIL Ratings has considered the consolidated financials of HFL, its wholly-owned subsidiary, Heritage Nutrivet Ltd (HNL; formerly known as Heritage Foods Retail Ltd) and Heritage Farmers Welfare Trust (controlled by HFL). This is because all these entities, collectively referred to as the Heritage group, are under the same management and have significant business and financial linkages. CRISIL Ratings has also proportionately consolidated its joint venture (JV), Heritage Foods Novandie Pvt Ltd (HFNPL), and its associate SKIL (Raigam) Power India Ltd (SKIL), to the extent of its shareholding in these entities, to reflect the support required to the extent of its interests in these businesses.
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 * Established market position HFL is one of the largest private dairies in South India, with processing capacity of 26.7 lakh litre per day and enjoys significant market share in Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. HFL also has over 29 products in its portfolio, which are marketed through 1.5 lakh retailers and 942 exclusive franchisee parlours under the brand, Heritage. The promoter's experience of over 27 years and healthy relations with customers and suppliers should continue to support the business.
* Prudent working capital management The working capital cycle is likely to remain efficiently managed over the medium term. Gross current assets (GCAs) were low at 36 days on March 31, 2021, driven by inventory and receivables of 20 days and 3 days, respectively. GCAs are projected at 35-40 days over the medium term.
* Strong financial risk profile Financial risk profile is expected to remain strong. Networth, gearing and total outside liabilities to tangible networth ratios should improve to Rs 559 crore, 0.15 time and 0.51 time, respectively, as on March 31, 2021, from Rs 454 crore, 0.67 time and 1.16 times a year ago. Debt protection metrics will also continue to be robust, with interest coverage and net cash accrual to total debt ratios expected at 12.38 times and 1.99 times, respectively, for fiscal 2021.
Weaknesses * Exposure to volatile milk prices and high geographic concentration in revenue Profitability remains susceptible to volatility in milk prices and the realisations of the players are also impacted by volatility in global skim milk powder prices. Given the intense competition in the business, the company's ability to pass on the increase in prices is limited. Also, though HFL operates in 11 states, 75-80% of its revenue accrues from 3-4 states, thereby exposing it to high geographical concentration.
* Susceptibility to changes in government regulations and epidemic-related factors Milk prices are sensitive to any adverse changes in government policies and environmental conditions that have a direct impact on the operating margin of dairy product manufacturers. Dairies are also vulnerable to risks of failure in milk production due to external factors such as incidents of epidemics affecting cattle. |
Liquidity: Strong Liquidity is expected to remain healthy. With the prepayment of term debt, cushion between cash accrual and repayment obligation is expected to improve significantly. Cash accrual is projected at Rs 120-168 crore per annum over the medium term, more than sufficient to cover yearly maturing term debt of Rs 12-15 crore. Bank limit utilisation was low and averaged around 31% during the 12 months through November 2020. |
Outlook: Positive The Heritage group’s credit risk profile should improve over the medium term because of substantial reduction of debt. |
Rating sensitivity factors Upward factors * Reduction of debt by almost Rs 200 crore and sustenance of improved capital structure * Revenue growth of 15-20% per annum along with higher revenue contribution from value-added products, leading to steady increase in profitability
Downward factors * Continuous large, debt-funded capex, resulting in gearing increasing to 0.8 time * Significant decline in operating margin, with sharp reduction in cushion between cash accrual and maturing debt |
About the Heritage group HFL was established in 1992 by Mr Nara Chandrababu Naidu. The Hyderabad-based group sells milk and dairy products under the brand, Heritage. The group also has captive solar and wind power plants, with installed capacity of 10.3 megawatt. The group ventured into organised retail business in 2006 by opening stores under the brand, Heritage Fresh. On March 31, 2017, the group demerged its retail business undertakings, consisting of retail (136 stores with 4.81 lakh square feet), agricultural and bakery divisions to Future Retail Ltd (FRL). After the demerger, HFL held 3.65% stake in FRL, which was entirely liquidated in fiscal 2021.
HNL was established in 2008; however, there were no operations until 2016. In November 2016, HFL transferred its retail undertakings (retail, agriculture and bakery) and veterinary care businesses to HNL. On March 31, 2017, the retail undertakings were demerged from HNL and were transferred to FRL. HNL currently manufactures and sells cattle feed.
SKIL is an affiliate of HFL and is in the process of implementation and completion of a hydel power project. HFNPL was incorporated as a 50:50 JV between HFL and Novandie SNC, France in November, 2017. The JV was set-up to manufacture value-added products, particularly yogurt. The company is in the process of setting-up a new unit in Maharashtra.
The Heritage group reported consolidated revenue and profit after tax (PAT) of Rs 1853.75 crore and Rs 123.9 crore, respectively for the nine months through December 2020 as against Rs 2073.25 crore and Rs 40.49 crore for the corresponding period of previous fiscal. |
Key Financial Indicators
*CRISIL adjusted numbers |
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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Bank Guarantee | Andhra Bank | 2.34 | CRISIL A1 |
| Bank Guarantee | Bank of Baroda | 5 | CRISIL A1 |
| Cash Credit | Andhra Bank | 25 | CRISIL A/Positive |
| Cash Credit | Bank of Baroda | 40 | CRISIL A/Positive |
| Cash Credit | ICICI Bank Limited | 35 | CRISIL A/Positive |
| Letter of Credit | Andhra Bank | 1.56 | CRISIL A1 |
| Letter of Credit | Bank of Baroda | 3.6 | CRISIL A1 |
| Proposed Long Term Bank Loan Facility | Not Applicable | 264.5 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 28.25 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 20 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 12 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 11 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 10 | CRISIL A/Positive |
| Rupee Term Loan | HDFC Bank Limited | 10 | CRISIL A/Positive |
| Rupee Term Loan | Kotak Mahindra Bank Limited | 35.25 | CRISIL A/Positive |
This Annexure has been updated on 8-Sep-2021 in line with the lender-wise facility details as on 25-Aug-2021 received from the rated entity.
Criteria Details
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