| Lotus Chocolate Company Limited | ||||
| Rating placed on 'Watch Positive' | ||||
| Rating Action | ||||
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| 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 placed its rating on the long-term bank facility of Lotus Chocolate Company Limited (LCCL) on ‘Rating Watch with Positive implications’.
The rating action follows 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 Reliance Retail Ventures Ltd (RRVL; ‘CRISIL AAA/Stable/CRISIL A1+’) – to acquire 51% stake in LCCL for Rs 74 crore. As a part of the transaction, RRVL will be coming up with an open offer to acquire an additional 26% from the public shareholders. The board has also approved allotment of preference shares to RCPL and existing promoter family amounting to Rs 50.79 crore, which will be utilised to fund acquisition of 100% stake in a promoter-owned company, Soubhagya Confectionery Pvt Ltd and working capital requirement. The acquisition is subject to required regulatory approvals.
CRISIL Ratings believes LCCL will receive significant operational, managerial and financial benefits from RRVL once the acquisition is completed. CRISIL Ratings will continue to monitor the transaction and will remove the rating from watch and take a final rating action once the transaction is concluded.
The rating continues to reflect long track record of LCCL in the cocoa industry and the ongoing financial support extended by the promoters. These strengths are partially offset by modest scale of operations, low networth and exposure to volatility in cocoa bean prices.
Revenue improved to Rs 87 crore in fiscal 2022 (from Rs 48 crore in fiscal 2021) owing to uplifting of the Covid-19 pandemic-related restrictions. Also, the operating margin rose to 7.4% in fiscal 2022 from 5.0% in fiscal 2021 due to the company sourcing the raw material from Kerala and Andhra Pradesh through long-term contracts, as against from spot markets earlier. Further, the company recorded revenue of Rs 37 crore in H1FY2023 (Rs 38 crore in H1FY2022). |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of LCCL.
Unsecured loans (Rs 5.96 crore as on March 31, 2022) extended by the promoters have been treated as neither debt nor equity as the loans do not bear any interest. Of Rs 7.4 crore, 10% redeemable cumulative preference shares with a redemption period of 10 years, issued in fiscal 2019, 75% has been treated as equity and 25% as debt as these loans are from the promoters and should remain in the business over the medium term. |
Key Rating Drivers & Detailed Description Strengths:
LCCL has been in the cocoa and chocolate products industry for 25 years, 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.
The promoters have provided need-based support to the company in the past and may continue doing so going forward as well. Hence, despite cash loss in the past, the company has been able to meet capital expenditure (capex) and incremental working capital requirement without resorting to bank borrowing.
Weaknesses:
Despite having commenced operations in 1988, LCCL remains an average-sized player in the cocoa and chocolate industry; revenue stood at Rs 87 crore in fiscal 2022 and Rs 37 crore for the first half of fiscal 2023. The seasonal nature of the key raw material (cocoa beans) and the conservative stance towards debt for building cocoa bean reserves in the off-season have resulted in low-capacity utilisation. However, with expansion into new product segments and gradual improvement in the existing capacity utilisation, revenue should grow at a steady pace over the medium term. Scale may, nevertheless, remain modest.
Operating margin is exposed to volatility in cocoa beans price. This is compounded by the inability to fully pass on any cost hike to clients due to intense competition and modest scale. However, with improvement in realisations, change in the method of raw material sourcing and better operating leverage owing to increasing scale, the margin grew to around 7.4% during fiscal 2022. However, vulnerability to input price volatility and limited pricing power will persist.
Financial risk profile is modest, marked by low networth due to accumulated losses in the past. Networth is likely to remain low over the medium term because of modest scale and limited accretion to reserve. However, dependence on external debt is expected to be nominal owing to modest capex and continued funding support extended by the promoters. Hence, debt protection metrics should be healthy, with interest coverage ratio projected at more than 10.0 times and net cash accrual to total debt ratio at 0.5 time over the medium term. |
Liquidity: Adequate Liquidity is adequate, driven by promoter support which has enabled the company to manage operations and fund losses, nil long term debt obligations and low external debt. Going forward, cash accrual is expected at around Rs 3-4 crore per annum over the medium term against which the company has no term debt obligation. Bank limit utilisation was low at less than 30% for the 12 months through February 2022. Liquidity is likely to remain adequate supported by largely unutilised bank lines and continued promoter support. |
Rating Sensitivity factors Upward factors
Downward factors
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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 in Medak, Andhra Pradesh. Mr Prakash Pai (managing partner of Puzzolana Machinery Fabricators) and his brother, Mr Ananth Pai, are the promoters. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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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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Criteria Details
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