Rating Rationale
May 14, 2020 | Mumbai
M. K. Proteins Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.13 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed the 'CRISIL A-/Stable' rating on the long-term bank facility of M. K. Proteins Limited (MKPL; part of the Shree Ganesh group).

Measures taken by the government of India towards containment of Covid-19, which include temporary closure of non-critical establishments and interstate transportation as well as advisory against travel and visiting areas of mass gatherings, may impact the business of the Shree Ganesh group, thus impacting its credit quality.
 
Shree Ganesh Group manufactures raw material for essential commodities, such as personal care products, and is also involved in processing of edible oil. As it is a part of the supply chain of essential commodities, the group is allowed to operate its manufacturing units to ensure supply of raw materials for essential products. However, manufacturing activities have been scaled down and the units are operating at part capacity.
 
While, most of the governments' measures are applicable till May 17, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of Covid-19. A sustained long period of closure can weaken the credit risk profile of the group. On the other hand, faster reversal to normalcy may contain the extent of deterioration likely in credit quality. That said, the ability of the business to revert to operational stability and relief measures provided by the government will be key monitorables, and CRISIL will continue monitoring these events.
 
The group started operations at its new plant in Kolkata in March 2020, and fiscal 2021 will be the first year of operations. The group's entry into eastern market should help improve geographical diversity, increase scale, and reduce customer concentration, strengthening the business risk profile. With ramp-up of the new plant, the return on capital employed (RoCE) is expected to improve over the medium term. RoCE declined to 10.7% in fiscal 2019 from above 15% earlier because of capital expenditure (capex) for the new plant. Absence of large, debt-funded capex over the medium term should also support improvement in RoCE. Performance of the new plant and subsequent improvement in RoCE will remain monitorable and rating sensitivity factor.
 
The rating continues to reflect the extensive experience of the promoters in the industry and healthy financial risk profile. These strengths are partially offset by low pricing power, intense price competition in the end user segment, and modest profitability.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of MKPL, Shree Ganesh Fats Pvt Ltd (SGFPL), Kamla Organics Pvt Ltd (Kamla Organics; formerly Shivalik Steels and Alloys Pvt Ltd), Kamla Oleo Pvt Ltd (KOPL), and SGF Industries Pvt Ltd (SGFIPL), collectively referred to as the Shree Ganesh group, as they have similar business, common management, business synergies, fungible cash flow, and common promoters. CRISIL has combined the business and financial risk profiles of these companies to arrive at the group rating. MKPL's rating has been arrived at by equating it to the group's rating.

CRISIL has treated unsecured loans from the promoters as 75% equity and 25% debt, as they are expected to remain in the business for long time.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Extensive experience of the promoters in the industry and strong relationships with customers
The promoters have more than 25 years of experience in the soap noodles business. Also, the group has strong relationships with customers, resulting in repeat orders. The group is a major supplier to Hindustan Unilever Ltd (HUL; 'CRISIL AAA/Stable'), which accounts for around 70% of its direct and indirect sales. The group has a plant close to HUL's soap manufacturing unit in Baddi, Himachal Pradesh. It also caters to HUL's vendors. Other customers include ITC Ltd (ITC; 'CRISIL AAA/Stable/CRISIL A1+'), Reckitt Benckiser India Ltd, Godrej Consumer Products Ltd ('CRISIL A1+'), and local cosmetic manufacturers.
 
* Healthy financial risk profile
Gearing is estimated to be comfortable at 0.59 time as on March 31, 2020, driven by sizeable networth of around Rs 200 crore. The capital structure is expected to remain above average over the medium term because of steady accretion to reserve and modest debt of Rs 100-120 crore. Debt protection metrics of the group are expected to remain comfortable, with interest coverage above 3 times and net cash accrual to total debt ratio around 20% over the medium term.
 
Weaknesses:
* Exposure to intense price competition in the end user segment
Intense competition in the fast-moving consumer goods (FMCG) industry has led to limited pricing power of players, which in turn percolated to the vendors of FMCG players such as the Shree Ganesh group. However, longstanding relationships and presence of plant in the vicinity of the customer's plant provide competitive advantage to the group. These factors, along with contract-based pass on of raw material price movements to the customers should help the group maintain its operating performance over the medium term. Established relationships with customers should also help the company achieve ramp-up of the new plant.
 
* Modest profitability and small scale of operations
Intense competition in the soap intermediaries industry limits the group's bargaining power. However, it is insulated from volatility in raw material rates as pricing is mostly linked to raw material price movements. Thus, the group should be able to maintain its operating profitability in the current range of 4-6% over the medium term.
Liquidity Adequate

The Shree Ganesh group has adequate liquidity, driven by expected cash accrual of Rs 20-25 crore and moderately utilised bank lines against debt obligation of around Rs 10 crore per fiscal and modest capex over medium term. The group had cash and equivalents of above Rs 40 crore as on December 31, 2019. The bank limits of the group were moderately utilised at 30% on average during the 12 months through March 2020.

Outlook: Stable

CRISIL believes the Shree Ganesh group will continue to benefit from its established relationships with key customers. The business risk profile will be supported by improving geographical diversity and reducing customer concentration.

Rating Sensitivity factors
Upward factors
* Considerable improvement in profitability and scale of operations
* Further diversification of the customer profile and product mix, with no single customer accounting for more than 50% of revenue
 
Downward factors
* Large, debt-funded capex, weakening the capital structure
* Decline in profitability or reduced offtake by key customers, weakening the debt protection metrics, with interest coverage below 3 times
* Weakening of operating performance, leading to reduction in RoCE below 10%
About the Group

Set up in 1994, the Shree Ganesh group manufactures distilled fatty acid (DFA) and soap noodles.

SGFPL is based in Baddi, Himachal Pradesh, and has two units: one unit manufactures hard oil and the other unit manufactures DFA and glycerine. Each unit has a capacity of 150 tonne per day (tpd).

Kamla Organics, based in Baddi, Himachal Pradesh, manufactures soap noodles and has a capacity of 150 tpd.
KOPL, based in Baddi, Himachal Pradesh manufactures DFA with a capacity of 100 tpd and soap noodles with a capacity of 50 tpd.

MKPL, based in Ambala (Haryana), manufactures vegetable refined oil for vanaspati mills with a capacity of 25 tpd.

SGFIPL, Based in Kolkata, West Bengal, produces toilet soap noodles with capacity of 375 tpd , refined glycerine with capacity 40 TPD and lauric/myristic acid with capacity of 52 TPD.

Key Financial Indicators - Consolidated Shree Ganesh Group
Particulars Unit 2019 2018
Revenue Rs. Cr. 495 539
Profit after tax (PAT) Rs. Cr. 16 19
PAT margins % 3.3 3.5
Adjusted debt/adjusted networth Times 0.59 0.26
Interest coverage Times 15.63 11.04

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Rating assigned 
with outlook
NA Cash Credit* NA NA NA 13 CRISIL A-/Stable
*Fully interchangeable with Letter of Credit
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Shree Ganesh Fats Pvt Ltd Full common management, business synergies, and common promoters
Kamla Organics Pvt Ltd Full common management, business synergies, and common promoters
M K Proteins Ltd Full common management, business synergies, and common promoters
Kamla Oleo Pvt Ltd Full common management, business synergies, and common promoters
SGF Industries Pvt Ltd Full common management, business synergies, and common promoters
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  13.00  CRISIL A-/Stable      27-02-19  CRISIL A-/Stable      24-11-17  CRISIL A-/Stable  CRISIL A-/Stable 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 13 CRISIL A-/Stable Cash Credit* 13 CRISIL A-/Stable
Total 13 -- Total 13 --
*Fully interchangeable with Letter of Credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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