| Lotus Chocolate Company Limited | ||||
| Ratings upgraded to 'CRISIL BB+/Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facility of Lotus Chocolate Company Limited (LCCL) to ‘CRISIL BB+/Stable’ from ‘CRISIL BB/Stable’.
The upgrade reflects LCCL’s improved business and financial risk profile marked by nil term debt, minimal reliance on external borrowing for working capital requirement and support from the promoters in the form of non-interest bearing unsecured loans. Furthermore, the rollover of Rs 7.4 crore - 10% redeemable cumulative preference shares (RCPS) with the redemption period of 10 years had received NCLT approval in July 2019.
Revenue moderated to Rs 48 crore in fiscal 2021 (Fiscal 2020: Rs 70 crore) due to the pandemic induced disruption in manufacturing and supply chain. However, operating margin improved to 5% in fiscal 2021 from 2.24% in fiscal 2020 driven by gross margin (which improved by 375 bps) with the company sourcing raw material from Kerala and Andhra Pradesh through long term contracts compared to sourcing from spot markets earlier. Also realizations for the products were higher in fiscal 2021.
Post normalization of business environment, company’s performance has improved substantially with Rs. 60.81 crore of revenue being recorded during the first nine months of fiscal 2022. Gross margins during the period has further improved by 281 bps owing to better realizations leading to operating margin of over 7% for the period.
LCCL is expected to exceed Rs 80 crore in revenue for fiscal 2022 driven by steady demand while operating margin would be maintained around 7%.
The rating continues to reflect LCCL’s long track record in the cocoa industry and the promoters’ ongoing financial support. These strengths are partially offset by modest scale of operations, low networth and susceptibility to volatility in cocoa bean prices. |
Analytical Approach For arriving at its rating, CRISIL Ratings has considered the standalone business and financial risk profiles of LCCL. Unsecured loans of Rs 11.63 crore (as on March 31, 2021) from promoters have been treated as neither debt nor equity as the loans do not bear interest. Of the Rs 7.4 crore, 10% RCPS with a redemption period of 10 years, issued in fiscal 2019, 75% has been treated as equity and 25% as debt, as these are from the promoters and are expected to 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 same is also expected going forward. Unsecured loans from them stand at Rs. 11.63 crore as on March 31, 2021. Hence, despite cash losses in the past, the company has been able to meet capex and incremental working capital requirement without resorting to bank borrowing.
Weaknesses:
Despite having commenced operations in 1988, LCCL remains a moderate-sized player in the cocoa and chocolate industry; revenue has been at Rs 55-65 crore over the last 7 fiscals through March 2020. The seasonal nature of key raw material, cocoa beans, and 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 existing capacity utilisation, revenue is expected to grow at a steady pace over the medium term. Revenues are expected to cross Rs. 80 crore during fiscal 2022. Scale may, nevertheless, remain modest.
Operating margin is susceptible to volatility in cocoa beans price. This is compounded by inability to fully pass on any cost hike to clients due to intense competition and modest scale. Hence, operating profitability has remained low at 2-4% over the past five fiscals. However, with improvement in realizations, change in method of product sourcing and better operating leverage owing to increasing scale, margins have improved to around 7% during the first nine months of fiscal 2022. However, margins will remain susceptible to input price volatility and limited pricing power.
Financial risk profile is modest marked by low net worth 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 reserves. However, dependence on external debt is expected to be nominal owing to modest capex and continued funding support from promoters. Hence, interest coverage and net cash accrual to total debt ratios are expected to be healthy at over 10 times and 0.50 times, respectively 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. |
Outlook: Stable CRISIL Ratings believes 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. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1988 and promoted Mr Prakash Pai (managing partner of Puzzolana Machinery Fabricators and his brother, Mr Ananth Pai, LCCL processes cocoa beans into cocoa powder and cocoa butter, and also sells chocolates under the Lotus brand. Head office is in Hyderabad and manufacturing unit in Medak, Andhra Pradesh.
In the first nine months of fiscal 2022, net profit after tax was Rs 4.02 crore on net sales of Rs 60.81 crore, against a net profit of Rs 1 crore on net sales of Rs 30 crore ring the previous corresponding period. |
Key Financial Indicators
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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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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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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