Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established regional market presence, market expansion in to new geographies and extensive experience of the promoters: Milky Mist's established market presence in Tamil Nadu and Karnataka is supported by healthy brand recall and diverse product portfolio comprising of paneer, cheese, curd, ghee and buttermilk, among other products. The company is promoted by Mr Sathish Kumar and his wife, who have over two decades of experience in the dairy industry. Further, Milky Mist is managed by professionals with extensive industry experience. Longstanding industry presence has enabled the promoters to establish a strong understanding of the nuances in the industry and expand their product portfolio. CRISIL Ratings expects Milky Mist to continue to benefit from its established regional presence and extensive promoter experience over the medium term. The company is expanding into new geographies in West india, North india and North east India. The company is also increasing their export sales.

Healthy operating efficiencies: Milky Mist has reported healthy operating efficiency resulting from its established presence in the value-added products segment. Operating profitability was in excess of 11.5% and gross current assets (GCAs) were efficient at around 62 days over the three fiscals through 2024. Return on capital employed (RoCE) was healthy at 10.7% in fiscal 2024, driven by economies of scale and experienced management.

Comfortable debt protection metrics: Interest coverage and net cash accrual to total debt (NCATD) ratios were 2.62 times and 12%, respectively, for fiscal 2024. With expectation of sustained operating performance, the debt protection metrics are expected to remain comfortable over the medium term.

Weaknesses:

Project implementation risk: Milky Mist is in the process of undertaking capital expenditure (capex) of Rs 607 crore for setting up paneer plant, cheddar cheese and whey powder which will be funded through term loan of Rs.455 crore and balance though internal accruals. Company is exposed to implementation risks since Paneer and cheddar will be operational from next year onwards. However, demand risk is moderate since the company is already operating at more than 90 percent capacity and other two products are backward integration. The company’s track record of timely completion of projects without any major cost overrun partially offsets the implementation risk.

Aggressive TOLTNW despite steady improvement: Milky Mist has average financial risk profile, as reflected in high gearing. Consequent to its large capex programme in the past, the company’s TOLTNW and gearing were high at 6.55 times and 5.21 times, respectively, as on March 31, 2024. Despite expected improvement in capital structure, it is expected to be remain leveraged over the medium term on account of ongoing capex.

Susceptibility to changes in environmental conditions and risks related to exploring new geographies: Susceptibility to volatility in milk prices and failure in milk production, because of external factors such as cattle diseases, may impact the business. Milky Mist plans to further expand to northern and northeastern states. Since capital investment is required across divisions, marketing costs and other manufacturing overheads could be high. Furthermore, intense competition from established players operating in these new geographies may constrain scalability, pricing power and profitability.