| Lotus Chocolate Company Limited | ||||
| Rating continues 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 continues its rating on the long-term bank facility of Lotus Chocolate Company Limited (LCCL) on ‘Rating Watch with Positive Implications’.
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 Reliance Retail Ventures Ltd [RRVL; ‘CRISIL AAA/Stable/CRISIL A1+’]) – to acquire 51% stake in LCCL for Rs 74 crore. The board has also 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 working capital requirement. On May 25, 2023, LCCL announced that RCPL has acquired 51% stake and became the sole controller of the company with effect from May 24, 2023, and also concluded all the above-mentioned transactions.
CRISIL Ratings is trying to engage with the management of RRVL to understand the operational, financial & managerial support (to LCCL) and the synergy benefits that may emerge. CRISIL Ratings will remove the rating from watch and take a final rating action once it has clarity on these parameters.
The rating continues to reflect long track record of LCCL in the cocoa industry. These strengths are partially offset by modest scale of operations, low networth and exposure to volatility in cocoa bean prices. |
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 Longstanding presence in the cocoa and chocolate products industry 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.
Access to need-based financial support extended by promoters The promoters have been providing timely, need-based funding support to the company; this trend may be continued by RVVL as well, though clarity on this is awaited. 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 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, with expansion into new product segments and gradual improvement in the existing capacity utilisation, revenue growth should remain steady over the medium term. Scale may, nevertheless, continue to be modest.
Limited pricing power and susceptibility to volatile input prices Operating margin is exposed to volatility in cocoa beans 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, change in the method of raw material sourcing and better operating leverage owing to increasing scale. The margin turned negative during fiscal 2023 due to higher input cost. Vulnerability to input price volatility and limited pricing power will persist.
Modest financial risk profile Financial risk profile may continue to be weak, marked by low networth due to accumulated losses in the past. Networth is likely to remain low because of modest scale and limited accretion to reserve. However, dependence on external debt is expected to be nominal owing to limited capex and continued funding support extended by the promoters. Hence, debt protection metrics should be healthy, with interest coverage ratio projected at more than 5.0 times and net cash accrual to total debt ratio at 0.5 time over the medium term. |
Liquidity: Adequate Liquidity is adequate, 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. |
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 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
*Abridged financials |
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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This Annexure has been updated on 05-June-23 in line with the lender-wise facility details as on 05-Apr-23 received from the rated entity.
Criteria Details
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