| Heritage Foods Limited | ||||||
| Ratings reaffirmed at 'CRISIL A / Positive / CRISIL A1 ' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
CRISIL Ratings has reaffirmed its ‘CRISIL A/Positive/CRISIL A1’ ratings on the bank facilities of Heritage Foods Ltd (HFL; a part of the Heritage group).
The ratings continue to reflect the strong market position of the Heritage group in the dairy business, well-established distribution network, prudent working capital management and healthy financial risk profile. These strengths are partially offset by exposure to volatility in milk prices, geographic concentration in revenue and regulatory changes 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 the trusts controlled by it - Heritage Farmers Welfare Trust (HFWT) and Heritage Employees Welfare Trust (HEWT). This is because all these entities, are under the same management and the operations are controlled by HFL’s management. CRISIL Ratings has also proportionately consolidated HFL’s joint venture, 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 - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key rating drivers and detailed description Strengths:
HFL is one of the largest private dairies in South India and has processing capacity of 2.7 million litre per day. It enjoys significant presence in Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. The company has a wide product portfolio, which it has been expanding with product launches, which are marketed through agents/distributors and through its exclusive Heritage Distribution Centres and Heritage Parlours. The 27-year-long experience of the promoters and their healthy relationships with the customers and farmers should continue to support the business.
Gross current assets (GCAs) were low at 37 days as on March 31, 2021, driven by inventory and receivable of 33 and 2 days, respectively. GCAs are expected at 30-40 days over the medium term.
Networth, gearing and total outside liabilities to tangible networth (TOLTNW) ratio stood at Rs 590 crore, 0.11 time and 0.48 time, respectively, as on March 31, 2021 (against Rs 454 crore, 0.67 time and 1.16 times, respectively, a year earlier). Total debt is expected to remain below Rs 50-60 crore with gearing ratio of less than 0.1 time on March 31, 2022. Debt protection metrics remained strong, as indicated by interest coverage and net cash accrual to total debt ratios of 13.2 times and 2.86 times, respectively, in fiscal 2021. The financial risk profile should continue to remain strong despite the large capex undertaken every year supported by healthy cash accrual.
Weaknesses:
Profitability remains susceptible to volatility in milk prices, and realisations are further impacted by fluctuations in global skim milk powder prices. Given the intense competition, the company's ability to pass on the increase in prices is limited. Also, though HFL has presence in 11 states, 75-85% of its revenue accrues from 4-5 states, thus exposing the company to high geographical concentration.
Milk prices are sensitive to any adverse changes in government policies and environmental conditions, which have a direct impact on the operating margin of dairy product manufacturers. Dairies are also vulnerable to risks of failure in milk production on account of external factors, such as incidents of epidemics affecting cattle. |
Net cash accrual, expected at Rs 120-140 crore per fiscal, will sufficiently cover yearly debt obligation of Rs 28 crore and Rs 4 crore, respectively, in fiscals 2022 and 2023. Bank limit utilisation was almost NIL over the 7 months ended July, 2021. The company always maintains sizeable cash and bank balance to ensure timely payments to milk suppliers. |
Outlook: Positive The credit risk profile of the Heritage group has improved because of substantial reduction in debt, expected to sustain over the medium term. |
Rating sensitivity factors Upward factors
Downward factors
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About the group HFL was incorporated in 1992 by Mr Nara Chandra Babu Naidu. The Hyderabad-based Heritage group sells milk and dairy products under the Heritage brand. The group also has captive solar and wind power plants with installed capacity of 10.4 megawatt. The group had ventured into organised retail in 2006 by opening stores under the Heritage Fresh brand. On March 31, 2017, the group demerged its retail business undertakings consisting of retail (136 stores spread across 4.81 lakh square feet), agricultural and bakery divisions to Future Retail Ltd (FRL). After the demerger, HFL held a 3.65% stake in FRL, which was entirely liquidated in fiscal 2021.
HNL was incorporated 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 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 648.05 crore and Rs 30.3 crore, respectively, over the three months through June 2021 against Rs 638.81 crore and Rs 29.23 crore, respectively, in the corresponding period of the previous fiscal. |
Key financial indicators
*CRISIL Ratings-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 | ||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 20-Oct-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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