Rating Rationale
July 24, 2019 | Mumbai
KSE Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.63 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
 
Rs.10 Crore Fixed Deposits FA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed ratings on the bank facilities of KSE Limited (KSE) at 'CRISIL A-/Stable/CRISIL A2+' and on its fixed deposits at 'FA/Stable'.
 
KSE's financial risk profile remains strong, despite weaker operating performance during fiscal 2019. Operating margin has declined to around 1.2% for fiscal 2019, from 8.4% for fiscal 2018, as the company was unable to fully pass on the hike in prices of key inputs, primarily maize. Financial risk profile was still marked by a strong capital structure and robust debt protection metrics, as working capital expenses were funded internally.

Total outside liabilities to tangible networth (TOLTNW) ratio was low at 0.53 time as on March 31, 2019.  Low bank limit utilisation and steady accretion to reserves should support key financial metrics over the medium term.

The ratings also reflect KSE's established regional market position in the cattle feeds industry. These strengths are partially offset by susceptibility of operating margin to volatility in raw material prices, and intense competition.  

Key Rating Drivers & Detailed Description
Strengths
* Established market position:
KSE is a leader in the cattle feeds segment, with a strong market share in Kerala. Exclusive distribution network of over 600 dealers, high-quality products, and efficient customer support through services such as on-call veterinary doctor, should help the company maintain its market position. Revenue is likely to grow at a steady pace, aided by the strong market position and entry into new markets.

* Healthy financial risk profile: Financial risk profile is marked by a sizeable networth and low TOL/TNW ratio of Rs 129 crore and 0.53 time, respectively, as on March 31, 2019. Capital structure may remain strong in the absence of any major capital expenditure plans. Debt protection metrics are healthy, reflected by interest coverage at 15.8 times in fiscal 2019.

Weaknesses:
* Susceptibility of operating margins to volatility in raw material prices:
Operating margin has fluctuated between 1.2% and 8.4% over the five fiscals through March 2019, driven by volatility in key raw material prices. State governments indirectly regulate milk prices via co-operatives, and typically hesitate to hike prices, considering the social aspect of milk and its effect on food inflation. An increase in input cost for the dairy farmer, via higher cattle-feed prices, without a commensurate increase in milk realisations, will discourage cattle feed purchase, especially from premium players like KSE. Therefore, the ability to improve volume and realisations remains critically dependent on prices of milk and raw materials such as maize, rice bran, wheat and coconut oil cake. Improvement in operating profitability will be a key monitorable over the medium term.

* Exposure to intense competition: KSE faces intense competition from state-run players such as Kerala Feeds Ltd and Kerala Co-operative Milk Marketing Federation Ltd, and other small, unorganised players. The company may also face competition from strong players in markets where it plans to expand its reach.
Liquidity

Liquidity remains healthy, marked by low bank limit utilisation healthy cash and bank balances and marketable securities, in the absence of any maturing debt. Bank limit of around Rs 60 crore was utilised marginally, around 4.75% over the 12 months through May 2019. Cash accrual should be in the range of Rs 15-18 crore per annum, over the medium term, against no major debt. Cash and bank balances were healthy around Rs 11 crore and marketable securities stood at Rs 45 crore, as on March 31, 2019. Current ratio was healthy at 2.3 times as on the same date.

Outlook: Stable

CRISIL believes KSE will maintain its established market position in Kerala, over the medium term .The outlook may be revised to 'Positive' if sustained improvement in revenue and stable operating margin strengthen the business risk profile. The outlook may be revised to 'Negative' if revenue, profitability and cash accrual decline, or if a stretch in the working capital cycle, weakens the financial risk profile.

About the Company

KSE (formerly, Kerala Solvent Extractions Ltd) was set up by the late Mr K L Francis, the late Mr T O Paul, the late Mr P V Devassy, and Mr M C Paul in 1963, as a closely-held public limited company. It manufactures cattle feed, and undertakes milk-processing and solvent-extraction. The company is the leader in the cattle feeds industry in Kerala, with presence in Tamil Nadu and Karnataka.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 1211 1304.1
Profit After Tax (PAT) Rs crore 9.35 69.63
Profit After Tax Margin % 0.8 5.3
Adjusted Debt/Adjusted Net worth Times 0.31 0.31
Interest coverage Times 15.9 78.8

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
Rating Assigned
with Outlook
NA Cash Credit NA NA NA 60.00 CRISIL A-/Stable
NA Cash Management Service NA NA NA 1.5 CRISIL A2+
NA Proposed Long Term
Bank Loan Facility
NA NA NA 1.5 CRISIL A-/Stable
NA Fixed Deposits  NA NA NA 10 FA/Stable
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits  FD  10.00  FA/Stable      30-08-18  FA/Stable  31-08-17  FA/Stable  05-10-16  FA/Negative  FA/Stable 
Fund-based Bank Facilities  LT/ST  63.00  CRISIL A-/Stable/ CRISIL A2+      30-08-18  CRISIL A-/Stable/ CRISIL A2+  31-08-17  CRISIL A-/Stable/ CRISIL A2+  05-10-16  CRISIL A-/Negative/ CRISIL A2+  CRISIL A-/Stable/ CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 60 CRISIL A-/Stable Cash Credit 60 CRISIL A-/Stable
Cash Management Service 1.5 CRISIL A2+ Cash Management Service 1.5 CRISIL A2+
Proposed Long Term Bank Loan Facility 1.5 CRISIL A-/Stable Proposed Long Term Bank Loan Facility 1.5 CRISIL A-/Stable
Total 63 -- Total 63 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt

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