Detailed Rationale

CRISIL Ratings has downgraded the ratings on the long-term bank facilities of Namdhari Agro Fresh Pvt Ltd (NAFPL) to ‘CRISIL BBB-/Stable’ from 'CRISIL BBB/Stable'.

 

The rating downgrade reflects the higher than expected losses and increase in debt following addition of store space. The rating action also follows similar rating action on the parent company, Namdhari Seeds Private Limited (NSPL; downgraded to ‘CRISIL BBB+/Stable/CRISIL A2)’ from ‘CRISIL A-/Stable/CRISIL A2+).

 

The operating losses in NAFPL were Rs 23 crore in fiscal 2021 and are estimated at Rs 28 crore in fiscal 2022, which is more than double the earlier expectations. Despite closing down certain unviable small stores, losses have increased due to significant addition to store space from ~50000 sq ft in fiscal 2020 to >100000sq ft in fiscal 2022 through new stores, which are yet to achieve break-even scale of operations. As the company plans focus on growth and accordingly add new stores in Bengaluru and Hyderabad over the medium term, losses will also continue. However, losses should reduce gradually as earlier opened stores scale up. NAFPL is now expected to achieve operational break-even in late fiscal 2024, contrary to the earlier expectation fiscal 2023. Higher than expected losses have also impacted the consolidated performance of NSPL.

 

NAFPL is likely to undertake capital expenditure (capex) of Rs 20-25 crores per annum over the medium term towards store expansion, part of which will be debt funded. Continuing losses and part-debt-funding of capex will keep debt protection metrics below average over the medium term. The company will however continue to receive need-based financial support from NSPL and promoters.

 

The rating continues to reflect the extensive experience of the promoters in the agriculture-based food industry and the operational synergies with, and financial support from, NSPL and related companies. These strengths are partially offset by small scale of operations, exposure to competition from established peers, and below-average financial risk profile.

Analytical Approach

For arriving at the rating, CRISIL Ratings’ has factored in operational and financial support from the parent, Namdhari Seeds Private Limited (NSPL).

Key Rating Drivers & Detailed Description

Strengths:

Extensive industry experience of the promoters: The promoters have been operating in the agriculture (seeds, and fruits and vegetables) industry for over 30 years. Through NAFPL, the promoters ventured into the niche segment of retailing exotic fruits and vegetables, largely sourced from NSPL. Their extensive industry experience should continue to support the business risk profile.

 

Operational synergies with, and financial support from, NSPL and related entities: NAFPL derives about 40% of its revenue from sale of fruits and vegetables, of which about 50% is sourced from NSPL. All products are collected and then processed at the centralised distribution centre and distributed to the retail outlets across Bengaluru. NSPL has its own farms and has access to contract farm produce, and NAFPL does not face any challenges of dealing with the farmer-broker-wholesaler-retailer chain. The company also receives continuous financial support from the promoters and NSPL through unsecured loans and equity infusion. It received equity of Rs 1.1 crore and Rs 2.2 crore in fiscals 2014 and 2015, respectively, ICDs of Rs 34.8 crore from SJS Healthcare Ltd in fiscal 2020 and support from parent, NSPL which has infused about Rs.50 crores over the past 3 years

 

Weaknesses:

Small scale of operations and limited value addition: NAFPL has 30-35 retail outlets and operations are restricted to Bengaluru. Revenues have remained modest at <140 crores. Besides, the company had a net loss of Rs 33 crore in fiscal 2021 and losses are likely to continue over the medium term. The company is undertaking initiatives to expand operations. It rebranded itself in fiscal 2020 as Simpli Namdharis from Namdhari Fresh with focus on the ‘mass premium segment’.

 

Opening of new stores and increased focus on e-commerce have also resulted in higher costs and net losses. The management is focussed on growth and will continue to open new stores. New stores take at least 18 months to scale up and break even, and hence, losses are expected to continue over the medium term, thereby constraining the operating metrics of the Namdhari group. Addition of stores in Bengaluru, potential expansion to other cities, and leveraging e-commerce should support faster growth and increase revenue visibility over the long term. Nevertheless, the scale of operations will likely remain small compared with the organised retail industry, while profitability will remain subdued due to limited value addition.

 

Exposure to competition from established peers: The company faces competition from large national players such as Reliance Fresh, Nilgiris, and Big Bazaar, which have multiple stores across India and a larger product mix. Furthermore, with organised retail penetration being moderate, at about 12%, players face intense competition from the unorganised segment, which operates in various addressable markets. NAFPL is partly protected from this risk as it retails exotic fruits and vegetables sourced from NSPL. Besides NAFPL is positioning itself in the mass premium segment. Nevertheless, it will remain susceptible to competition from established peers.

 

Below-average financial risk profile: Networth was negative Rs 64 crore as on March 31, 2021, due to losses. Debt protection metrics are subpar; interest coverage ratio was negative in fiscal 2021 due to operating loss and is expected to remain constrained over the medium term due to continued losses. However, the financial risk profile benefits from funding support from the Namdhari group. Till fiscal 2022, majority of the long term debt on the books of NAFPL were from group entities, however over the medium term NAFPL is expected to fund capex through external funding.

Liquidity: Adequate

NAFPL has adequate liquidity. It is driven by expectation of ongoing and need based support mainly from the parent, NSPL, and other group companies, in case of exigencies. On a standalone basis, it has stretched liquidity. It will continue to report losses over the medium term, though the losses are expected to gradually reduce. Losses and capex have been supported by fund infusion from group companies in the past. At present, NAFPL has no debt obligations as the loans from group entities which is expected to continue in the business over the medium term. The company plans capex of Rs 20-25 crores over the medium term which will be funded through debt. The company has access to fund based limits of Rs 25 crore (enhanced from Rs.10 crores in September 2021), which was utilised ~90% on average over the twelve months ended February 2022.

Outlook Stable

NAFPL is expected to reduce its losses over the medium term, as recently opened stores scale up, and due to better operating leverage. The company’s mainly debt-funded expansion plans will result in continued weak debt protection metrics. However, the Namdhari group is likely to provide timely financial support. NAFPL’s rating will remain sensitive to the credit risk profile of NSPL.

Rating Sensitivity factors

Downgrade factors

• Downward change in the credit risk profile of NSPL by 1 or more notches could have a similar rating change on NAFPL
• Any change in the support philosophy of NSPL that may lead to a downward revision in the quantum and timing of support and hence the ratings of NAFPL
• Higher than expected losses and increase in debt, weakening financial risk profile further

 

Upgrade factors

• Upward change in the credit risk profile of NSPL by 1 or more notches could have a similar rating change on NAFPL
• Significant improvement in revenues and profitability, and financial risk profile

About the Company

NAFPL, set up in 2005 and based in Bengaluru, is promoted by Mr Uday Singh. It primarily retails fresh fruits and vegetables and other essential groceries. The company rebranded itself in fiscal 2020 as Simpli Namdharis from Namdhari Fresh, targeting the mass premium segment, and increased focus on becoming an omni-channel retail provider. At its retail stores, it primarily sells exotic vegetables such as red cabbage and broccoli as well as common vegetables procured from NSPL. NAFPL has 29 stores in Bengaluru.

 

About the parent

NSPL is also based in Bengaluru and promoted by Mr Uday Singh. Set up in 1985, it produces and trades in fruits, flowers, field crops, and vegetable seeds. In fiscal 2008, the Namdhari group started institutional sales and export of fruits and vegetables under Namdhari Farm Fresh Pvt Ltd (since merged with NSPL), and retailing of food products, and fruits and vegetables under NAFPL. The company has farmland at Udhagamandalam in Tamil Nadu, in Punjab, and in some parts of Karnataka.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	5.32	NA	CRISIL BBB-/Stable
NA	Proposed cash credit limit	NA	NA	NA	2.68	NA	CRISIL BBB-/Stable