Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of and commercial paper of Mother Dairy Fruit And Vegetable Private Limited (MDFVPL).

 

Revenue grew by 15.8% to Rs 14,530 crore in fiscal 2023 compared to previous year, driven by higher revenue in both the dairy (20.2%) and edible oil segments (4.5%) year-on-year. The improvement was driven by volume growth of 12.6% and 8% respectively, in the dairy and edible oil segments. While average realisation of the dairy segment grew by 6.4% in fiscal 2023, edible oil segment witnessed a moderation of 2.8%. Revenue growth for fiscal 2024 is expected to remain stable at 9-11% driven by healthy demand for milk and milk products.

 

Despite revenue growth, the company registered operating loss of Rs 31.5 crore in fiscal 2023 given high milk procurement cost, and retail price hikes not being commensurate with increase in inputs costs. Milk procurement prices rose sharply mainly due to rise in fodder cost and low milk availability as the yields were impacted due to cattle disease. Nevertheless, MDFVPL's performance is likely to recover in fiscal 2024 with operating margin to remain muted at ~1.5% considering gradual softening of procurement prices and full year impact of past price hikes.

 

Debt protection metrics have moderated as losses booked by MDFVPL in fiscal 2023 resulted in decline of net worth to Rs 351 crore as of March 31, 2023, from Rs 514 crore as of March 31, 2022. The gearing and total outside liabilities to tangible net worth (TOL/TNW) increased to 2.96 times and 7.16 times respectively as of March 31, 2023, against 2.01 times and 4.07 times, respectively, as on March 31, 2022.

 

The ratings continue to reflect MDFVPL's dominant market position in the Indian dairy industry, backed by well-established brands, diverse product portfolio, robust distribution network and improving procurement network. The ratings also factor in need-based and timely financial and technical support required from the parent, National Dairy Development Board (NDDB). These strengths are partially offset by MDFVPL's modest financial risk profile and exposure to risks related to fluctuations in farm-gate milk prices and intense competition. Operating profitability also remains vulnerable to changes in government regulations, epidemics and environmental factors that influence the agro-based sector.

Analytical Approach

CRISIL Ratings has applied its criteria for notching up ratings to factor in the need-based operational, technical, managerial and financial support provided to MDFVPL by NDDB.

Key Rating Drivers & Detailed Description

Strengths

• Dominant market position in the dairy industry: As India’s second-largest milk brand, MDFVPL enjoys superior brand equity. Its two other brands, Dhara and Safal, are well-established in the edible oil and horticulture businesses, respectively. Products are sold through almost 1,600 exclusive retail outlets (bulk-vending booths) across the National Capital Region and around 3,50,000 retail outlets across India. The company also sells through mobile units and modern retail outlets. Backed by these factors, revenue recorded compound annual growth rate of 11.7% in last three years through fiscal 2023. CRISIL Ratings expects revenue growth of 9-11% in fiscal 2024, with improvement in profitability. Furthermore, the second half of the fiscal is expected to see robust demand, especially for value-added products during the festive periods.

 

• Improving procurement network: The procurement network has improved significantly, with around 95% of requirement now sourced directly from farmers (via dairy producer companies). MDFVPL has a network of around 15,000 village collection centres, which cover over 5 lakh farmers as on March 31, 2023.

 

• Support from NDDB: Being a wholly-owned subsidiary of NDDB, MDFVPL drives the latter’s objective to help farmers. NDDB provides need-based technical, managerial and funding support to MDFVPL. It also provides similar funding assistance to dairy cooperatives, as per its policy. NDDB had extended Rs 400 crore of working capital loan to MDFVPL in fiscals 2020 and 2021 to meet company’s working capital requirements. MDFVPL repaid most of NDDB’s working capital borrowing in fiscal 2022 and reduced its exposure to Rs 50 crore. However, the limit was enhanced to Rs 200 crore in May 2023, of which Rs 100 crore is utilised as on date. Further, any incremental need-based funding support is likely to be available from the parent.

 

Weaknesses

• Exposure to risks related to fluctuations in farm-gate prices of milk, rising input costs and intense competition: Being a subsidiary of NDDB, MDFVPL operates in accordance with the former’s objective of improving dairy farming as an occupation in India and ensures fair returns to the farmers in terms of procurement prices paid. Hence, the company’s profitability remains low. MDFVPL faces intense competition from other established brands in the organised market and from unorganised dairy players. While MDFVPL has followed the industry in hiking liquid milk prices by ~8.8% in fiscal 2023, significant increase in procurement prices have resulted in operating losses during the year.

 

• Moderate financial risk profile: The financial risk profile has moderated with credit metrics weakening sharply in fiscal 2023. While the operating loss has resulted in negative cash accruals and interest coverage, decline in net-worth has resulted in deterioration in debt protection metrics. These metrics are likely to remain modest, albeit improvement, in fiscal 2024, with higher working capital needs and funding capex. Improvement in the net worth and other credit metrics, driven by revival in operating performance and profitability will remain a key monitorable.

 

• Susceptibility to changes in government regulations, and to environmental conditions: MDFVPL, like all dairy players, remains susceptible to government regulations, such as a ban on skimmed milk powder exports and removal of export incentives. It also remains vulnerable to shortage in milk production on account of external factors, such as cattle diseases.

Liquidity: Strong

Liquidity is supported by average bank limit utilisation of 47% over last 15 months ended June 30, 2023. Capex is expected to be funded by a combination of debt and internal accrual, but unutilised fund-based limits and steady annual cash accruals of over Rs 130 crore should be sufficient to cover the debt obligations in fiscals 2024-2026. Need-based funding support is expected to come from NDDB, as demonstrated in the past.

Outlook: Stable

CRISIL Ratings believes MDFVPL will continue to benefit from its dominant market position in the dairy industry and strong milk procurement network, over the medium term. Revenue is likely to register healthy growth, with good demand prospects for dairy products, profitability is expected to improve with gradual softening of input costs. The financial risk profile will continue to remain moderate; debt levels are expected to rise from fiscal 2023 levels, in line with company’s higher working capital needs.

Rating Sensitivity factors

Upward factors

• Sustained healthy double-digit revenue growth, and improved operating profitability, resulting in cash accruals of more than Rs 275-300 crore
• Improvement in the leverage metrics, with TOL to TNW ratio below 3.5 times
• Continued and timely need-based support from NDDB

 

Downward factors

• Weakened business performance and profitability, resulting in cash accruals of Rs 75-90 crore on a sustained basis
• Any large, debt-funded capex or stretch in the working capital cycle, weakening the financial risk profile
• Change in stance of support from NDDB or delay in support, or significant weakening in the credit quality of NDDB by more than one notch

About the Company

MDFVPL was commissioned in 1974 as a wholly owned subsidiary of NDDB. It was an initiative under Operation Flood, the dairy development program launched to make India a milk-sufficient nation. The company was incorporated as a public limited company in March 2000 and converted into a private limited company in November 2003. It manufactures, markets and sells milk and milk products, including cultured products, ice cream, paneer and ghee under the ‘Mother Dairy’ brand.

 

The company also has a diversified portfolio, with edible oils sold under the Dhara brand, and fruits and vegetables, frozen vegetables, pulses and processed foods (such as fruit juices and jams) sold under the Safal brand. MDFVPL is International Organisation for Standardisation (ISO) 9001:2008 (QMS)-, ISO 22000:2005 (FSMS)-, and ISO 14001:2004 (EMS)-certified organisation. It also has a Certificate of Approval from the Export Inspection Council of India.

About NDDB

NDDB was founded by Dr Verghese Kurien in 1965. It was later merged with the erstwhile Indian Dairy Corporation by the Parliament (NDDB Act, 1987) effective October 12, 1987, and was declared an institution of national importance. NDDB’s objective is to promote, finance and support producer-owned and controlled organisations. Its programmes and activities seek to strengthen farmer cooperatives and support national policies that are favourable to the growth of such institutions.

Key Financial Indicators (MDFVPL)*

Particulars	Unit	2023	2022
Revenue	Rs crore	14,552	12,568
Profit After Tax (PAT)	Rs crore	-133	100
PAT Margin	%	-0.9	0.8
Adjusted debt/adjusted networth	Times	2.96	2.01
Adjusted interest coverage	Times	-0.31	7.94

*CRISIL Ratings adjusted figures

Any other information: Not applicable