Rating Rationale
August 21, 2023 | Mumbai
Lotus Chocolate Company Limited
Rating upgraded to 'CRISIL A+/ Stable'; Removed from 'Watch Positive'; Rating Withdrawn
 
Rating Action
Total Bank Loan Facilities RatedRs.8 Crore
Long Term RatingCRISIL A+/Stable (Upgraded from ‘CRISIL BB+’; Removed from 'Rating Watch with Positive Implications'; Rating Withdrawn)
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 removed its rating on the long-term bank facility of Lotus Chocolate Company Ltd (LCCL) from ‘Rating Watch with Positive Implications’ and upgraded it to ‘CRISIL A+’ from ‘CRISIL BB+’, while assigning a 'Stable' outlook and subsequently withdrawn the rating at the request of the company and on receipt of no-objection certificate from the lenders. The rating action is in line with the CRISIL Ratings policy on withdrawal of bank loan ratings.

 

The rating action follows the conclusion of discussion with Reliance Retail Ventures Ltd (RRVL; ‘CRISIL AAA/Stable/CRISIL A1+’) ascertaining the stance of support to be provided to LCCL. The credit risk profile of LCCL will benefit from the strong operational, managerial, and financial support from its new parent (RRVL), which has a diversified business risk profile, supported by a healthy market position and robust financial risk profile.

 

CRISIL Ratings had placed the long-term rating on ‘Watch positive’ on January 5, 2023, following an announcement made by LCCL on December 29, 2022, regarding approval from the board for execution of a shareholder agreement between LCCL and Reliance Consumer Products Ltd (RCPL; a wholly owned subsidiary of RRVL) to acquire 51% stake in LCCL for Rs 74 crore. The board approved allotment of preference shares worth Rs 50.79 crore to RCPL and the promoter family; this amount will be utilised to fund acquisition of 100% stake in a promoter-owned company, Soubhagya Confectionery Pvt Ltd, and for meeting working capital requirement. On May 25, 2023, LCCL announced that RCPL has acquired 51% stake and became the sole control of the company with effect from May 24, 2023, and concluded all the above-mentioned transactions.

 

The rating continues to reflect long track record of LCCL in the cocoa industry. These strengths are partially offset by modest scale of operations, exposure to volatility in cocoa bean prices, and low networth.

Analytical Approach

CRISIL Ratings has applied its parent notch-up criteria to factor in the financial, operational, and managerial support expected from RRVL. RRVL (through its wholly owned subsidiary, RCPL) is the sole controller and promoter of LCCL, owning 51% stake in the company.

Key Rating Drivers & Detailed Description

Strengths:

  •  Continued strong operational and financial support from RRVL: LCCL will continue to benefit from the strong operational, managerial and financial support extended by RRVL. Despite cash loss in fiscal 2023 (and in the past), the company has been able to meet capital expenditure (capex) and incremental working capital requirement without resorting to bank borrowing owing to the funding support extended by the erstwhile promoters. The current promoter (RRVL) is also likely to extend timely, need-based funds to aid financial flexibility.

 

  •  Longstanding presence in the cocoa and chocolate products industry: LCCL has been in the cocoa and chocolate products industry for about three decades. It has established strong relationship with reputed customers such as Amul (Kaira District Co-operative Milk Producers’ Union Ltd), Mother Dairy Fruit & Vegetable Pvt Ltd, and Parle Products Pvt Ltd.

 

Weaknesses:

  •   Modest scale of operations: Despite having commenced operations in 1988, LCCL remains an average-sized player in the cocoa and chocolate industry; revenue stood at Rs 63 crore in fiscal 2023. The seasonal nature of the key raw material (cocoa beans) and the conservative stance towards debt for building cocoa bean reserve in the off-season led to low capacity utilisation. However, post-acquisition of 51% stake by RRVL and foray into the fast moving consumer goods sector, revenue is likely to improve owing to expansion into new product segments and gradual improvement in the existing capacity utilisation.

 

  •   Limited pricing power and susceptibility to volatile input prices: Operating margin is likely to remain exposed to volatility in input price. This is compounded by the inability to fully pass on any cost hike due to intense competition and modest scale. However, there has been an improvement in realisations, a change in the method of raw material sourcing and better operating leverage. The margin turned negative during fiscal 2023 due to higher input cost.

 

  •   Modest financial risk profile: The financial risk profile currently is weak, marked by low networth due to accumulated losses in the past. However, networth may improve over the medium term with an increase in operating profitability.  Debt protection metrics are expected to remain healthy given low dependence on external debt, with interest coverage ratio projected at more than 5.0 times and net cash accrual to total debt ratio at 0.5 times over the medium term.

Liquidity: Adequate

In the absence of any repayment obligation over the medium term, the entire cash accrual -- projected at Rs 3-4 crore per annum – will aid financial flexibility. Bank limit utilisation was less than 30% for the 12 months through February 2022. Liquidity will also benefit from the timely, need-based funding support to be extended by the parent.

Outlook: Stable

LCCL will continue to benefit from its long track record in the industry, established relationship with key customers, forthcoming promoter support and low reliance on external debt. Also, strong operational and financial support from RRVL is likely to persist.

Rating Sensitivity factors

Upward factors:

  • Revenue growth of more than 15% per annum on a sustained basis with healthy improvement in the operating margins, resulting in higher-than-expected cash accrual
  • Improvement in networth and healthy debt protection metrics

 

Downward factors:

  • Sizeable increase in debt due to large capex or working capital requirement, leading to interest coverage ratio less than 1.5 times and stretch in liquidity.
  • Steep decline in revenue and profitability, resulting in lower-than-expected cash accrual
  • Revision in rating of the parent, RRVL resulting in similar rating action on LCCL, or any change in the support stance from RRVL.

About the Company

LCCL, incorporated in 1988, processes cocoa beans into cocoa powder and cocoa butter, and sells chocolates under the Lotus brand. Its head office is in Hyderabad and manufacturing unit at Medak in Andhra Pradesh. Mr Prakash Pai (managing partner of Puzzolana Machinery Fabricators) and his brother, Mr Ananth Pai, are the promoters.

 

RCPL (a wholly owned subsidiary of RRVL) acquired 51% stake and took sole control of the company with effect from May 24, 2023

Key Financial Indicators

Particulars

Unit

2023

2022

Revenue

Rs crore

63

87

Profit after tax (PAT)

Rs crore

(7)

6

PAT margin

%

(11.1)

6.9

Adjusted debt/adjusted networth

Times

6.64

7.34

Interest coverage

Times

(13.77)

21.39

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Cash credit NA NA NA 8 NA CRISIL A+/Stable (Rating upgraded, Removed from
 'Watch Positive', Rating Withdrawn)
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 8.0 CRISIL A+/Stable (Rating Upgraded,Removed from 'watch positive' Rating Withdrawn) 05-06-23 CRISIL BB+/Watch Positive 15-03-22 CRISIL BB+/Stable   -- 30-12-20 CRISIL BB/Stable CRISIL BB/Stable
      -- 05-04-23 CRISIL BB+/Watch Positive   --   --   -- --
      -- 05-01-23 CRISIL BB+/Watch Positive   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 8 Canara Bank CRISIL A+/Stable (Rating Upgraded, Removed From 'Watch positive',Rating Withdrawn)
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Fast Moving Consumer Goods Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Understanding CRISILs Ratings and Rating Scales

Media Relations
Analytical Contacts
Customer Service Helpdesk

Aveek Datta
Media Relations
CRISIL Limited
M: +91 99204 93912
B: +91 22 3342 3000
AVEEK.DATTA@crisil.com

Prakruti Jani
Media Relations
CRISIL Limited
M: +91 98678 68976
B: +91 22 3342 3000
PRAKRUTI.JANI@crisil.com

Rutuja Gaikwad 
Media Relations
CRISIL Limited
B: +91 22 3342 3000
Rutuja.Gaikwad@ext-crisil.com


Aditya Jhaver
Director
CRISIL Ratings Limited
B:+91 22 3342 3000
aditya.jhaver@crisil.com

Rabindra Man Verma
Associate Director
CRISIL Ratings Limited
B:+91 22 3342 3000
Rabindra.Verma@crisil.com

Latika Shyam Lala
Senior Rating Analyst
CRISIL Ratings Limited
B:+91 22 3342 3000
Latika.Lala@crisil.com		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited, an S&P Global Company)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ('CRISIL Ratings') is a wholly-owned subsidiary of CRISIL Limited ('CRISIL'). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 
 



About CRISIL Limited

CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better. 

It is India’s foremost provider of ratings, data, research, analytics and solutions with a strong track record of growth, culture of innovation, and global footprint.

It has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers through businesses that operate from India, the US, the UK, Argentina, Poland, China, Hong Kong and Singapore.

It is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL's privacy policy please visit www.crisil.com.



DISCLAIMER

This disclaimer is part of and applies to each credit rating report and/or credit rating rationale ('report') that is provided by CRISIL Ratings Limited ('CRISIL Ratings'). To avoid doubt, the term 'report' includes the information, ratings and other content forming part of the report. The report is intended for the jurisdiction of India only. This report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the report or of the manner in which a user intends to use the report. In preparing our report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the report is not intended to and does not constitute an investment advice. The report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind to enter into any deal or transaction with the entity to which the report pertains. The report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold or sell any securities/instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. The rating contained in the report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the report should rely on their own judgment and take their own professional advice before acting on the report in any way. CRISIL Ratings or its associates may have other commercial transactions with the entity to which the report pertains.

Neither CRISIL Ratings nor its affiliates, third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, 'CRISIL Ratings Parties') guarantee the accuracy, completeness or adequacy of the report, and no CRISIL Ratings Party shall have any liability for any errors, omissions or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the report. EACH CRISIL RATINGS PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. Public ratings and analysis by CRISIL Ratings, as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any), are made available on its website, www.crisilratings.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and/or relies on in its reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html.

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public website, www.crisilratings.com. For latest rating information on any instrument of any company rated by CRISIL Ratings, you may contact the CRISIL Ratings desk at crisilratingdesk@crisil.com, or at (0091) 1800 267 1301.

This report should not be reproduced or redistributed to any other person or in any form without prior written consent from CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings is a wholly owned subsidiary of CRISIL Limited.
 

 

CRISIL Ratings uses the prefix 'PP-MLD' for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011, to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: https://www.crisil.com/en/home/our-businesses/ratings/credit-ratings-scale.html