| Kothari Fermentation And Biochem Limited | ||||||
| Long-term rating downgraded to 'CRISIL BB / Stable'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed rationale CRISIL Ratings has downgraded its rating on the long-term bank facilities of Kothari Fermentation and Biochem Ltd (KFBL) to ‘CRISIL BB/Stable’ from ‘CRISIL BB+/Stable’; further, CRISIL Ratings has reaffirmed its ‘CRISIL A4+’ rating on the short-term bank facilities of the company.
The downgrade reflects a belief that the business risk profile of KFBL may continue to weaken over the medium term. The operating margin dropped to 8.00% in fiscal 2023 from 10.52% in fiscal 2022; further, the margin remained negative at -1.81% in the first quarter of fiscal 2024 owing to high expenses and material cost. However, the margin may improve over the medium term, with order visibility owing to the new yeast-based product expected to start production from January 2025. Timely stabilisation and commencement of commercial production and its impact on profitability, shall remain key rating sensitivity factors.
Cash accrual is likely to remain insufficient against the repayment obligation in fiscal 2024. Consequently, liquidity has been stretched, reflected in bank limit utilisation of about 94% for the 12 months through August 2023.
The ratings continue to consider strong market presence of KFBL in the yeast manufacturing segment, above-average financial risk profile and efficient working capital management. These strengths are partially offset by modest scale of operations and exposure to volatility in input prices. |
Key rating drivers and detailed description Strengths Established market position The promoters have around two decades of experience in the yeast industry; their strong understanding of market dynamics and healthy relationships with customers (leading players in the bakery industry) and suppliers should continue to support the business. The company has established a reputed brand recall in the northern region. Above-average financial risk profile The financial risk profile should remain supported by the absence of any large, debt-funded capital expenditure (capex). Networth stood adequate at Rs 60.85 crore and gearing comfortable at 0.74 time on March 31, 2023; the capital structure is expected at similar levels in fiscal 2024. Debt protection metrics were moderate, with interest coverage ratio of 3 times in fiscal 2023 and projected at 2-3 times for fiscal 2024.
Efficient working capital management Gross current assets (GCAs) were 121 days as on March 31, 2023, driven by modest receivables of 26 days and moderate inventory of 81 days. A credit of 20-40 days is offered to customers and payment realisation is on time. GCAs are projected at 100-120 days over the medium term, led by inventory of 70-80 days.
Weaknesses Modest scale of operations Despite being in the business for nearly two decades, KFBL has subdued scale, as reflected in net sales of Rs 110 crore in fiscal 2023 and Rs 97 crore in fiscal 2022. The improvement in scale during fiscal 2023 was driven by higher realisation; revenue is estimated at Rs 25.62 crore till June 2023 of the current fiscal. Despite being an established brand name, volumetric sales have been declining. KFBL has limited scope to pass on any cost hikes to customers because of intense competition. However, with ramp up in operations of the yeast-based product, scale should improve over the medium term.
Exposure to volatility in key raw material prices KFBL remains vulnerable to moderate price risk because of fluctuations in input cost and limited variations in consumer prices. The industry is dependent on the raw material prices, domestic production of sugar cane and annual rainfall. Thus, the operating margin has been declining over the years. |
Liquidity: Stretched Cash accrual is projected at Rs 3-4 crore per annum, insufficient to meet the yearly maturing debt of Rs 4-5 crore over the medium term. Bank limit utilisation was around 94% for the 12 months through August 2023. Current ratio was moderate at 1.12 times on March 31, 2023. |
Outlook: Stable KFBL will continue to benefit from its established presence and healthy relationship with key customers. |
Rating sensitivity factors Upward factors
Downward factors
|
About the company KFBL, incorporated in 1990, produces yeast and its derivatives at its plant in Sikandrabad, Uttar Pradesh, with installed capacity of 2,000 tonne per month. Mr Moti Lal Kothari and Mr Pramod Kothari are the promoters. |
Key financials
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of instrument(s)
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
|
Criteria Details
|