Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/Stable/CRISIL A1' ratings on the bank facilities of RNGalla Family Private Limited (RFPL).

 

Debt cover for RFPL has improved from 4.2 times to 5.0 times owing to  increase in market value of underlying stake in Amara Raja Batteries Limited (ARBL, rated ‘CRISIL AA+/Stable/CRISIL A1+’ ), in which RFPL holds 28.1% as on March 31st 2023. ARBL’s share price has risen by over 20% between May 2022 to May 2023 on account of steady business performance of ARBL, and its solid financial risk profile. Besides, RFPL’s credit risk profile has also benefitted from high sales of mango pulp, following a good mango season, steady profitability, and good working capital management.

 

The ratings continue to reflect RFPL’s healthy financial flexibility by being part of the Amara Raja group and majority shareholding in ARBL, which has a strong market reputation and established market position in the storage batteries segment. These strengths are partially offset by exposure to market-related risks on shares held in ARBL and moderate reliance on dividend from operating entities of the group.

 

The rating factors the strong intent of the promoters to maintain a conservative financial policy with respect to incremental debt for RFPL. In line with management policy to gradually release the corporate guarantees given to group companies, RFPL had withdrawn the corporate guarantee given to one of its subsidiary, Amara Raja Power Systems Ltd (ARPSL, rated ‘CRISIL BBB+/Stable’) during fiscal 2023. Following this, over 90% of corporate guarantees extended by RFPL pertains to another subsidiary, Mangal Industries Ltd (MIL. rated ‘CRISIL A/Watch Developing/CRISIL A1'). However, here too, as part of ongoing scheme of demerger of plastic component business of MIL to ARBL, debt to extent of Rs.100 crore will be moved to books of ARBL and hence corporate guarantee to extent of Rs.100 crore is expected to be withdrawn by RFPL. When withdrawn, debt cover will further increase.

 

RFPL’s revenue rose by 46% in fiscal 2023 aided by higher mango pulp and beverage volumes, which registered growth of 18% and 27% respectively on year basis following  demand from key export markets of the company. Further, operating profitability improved significantly to ~24% in fiscal 2023 from 11% in fiscal 2022, on account of better realization for mango pulp and competitively sourced raw mango, which resulted in favourable spreads. Steady state operating margins are expected at 10-12% over the medium term, which too will result in healthy cash generation, given rising business levels, including from beverage segment, where material capacity addition is underway.

 

RFPL’s total indebtedness (including corporate guarantees) is expected to remain at or below Rs 600 crore over the medium term (RFPL indebtedness is 395 crs only including CGs and USL). Any fall in the cover below 4-4.5 times due to decline in the market value of stake in ARBL or increase in debt exposure (including on balance sheet or off-balance sheet debt and excluding inter-corporate deposits from group companies) due to support to group companies or sizable acquisitions, will remain key rating sensitivity factors. RFPL’s financial risk profile is healthy with a comfortable gearing of less than 0.3 times and interest cover of over 8 times estimated as on March 31st 2023 and will continue to remain healthy with steady business performance.

Analytical Approach

CRISIL Ratings has followed the holding company approach for analyzing the credit risk profile of RFPL, based on its equity stake in its key operating company, ARBL. For the purpose of its analysis, CRISIL Ratings has included the standalone debt of RFPL, including bank limits of its food business, and corporate guarantees (existing and future) by RFPL to its subsidiaries/joint ventures and group companies. For computation of debt cover, CRISIL Ratings has considered overall debt cap of Rs.600 crore (including on-balance sheet and off-balance sheet exposure and excluding inter-corporate deposits, if any, from group companies or promoters), and actual outstanding against the debt cap, with the market value of the company’s 28.1% stake in ARBL. Unsecured loan from promoters of Rs.50 crore has been considered as debt of RFPL.

Key Rating Drivers & Detailed Description

Strengths

• Healthy financial flexibility by being part of Amara Raja group: RFPL’s healthy financial flexibility results from the market value of 28.1% stake held in ARBL. The current market value of RFPL's stake in ARBL is about Rs 2977 crore against the total adjusted debt of Rs~346 crore, including corporate guarantees of Rs.233 crore extended to group companies. Adjusted debt has reduced on account of withdrawal of corporate guarantee and repayment of term loans by subsidiaries. Adjusted debt is expected to reduce further with withdrawal of corporate guarantee to extent of Rs.100 crore extended to MIL post the completion of ongoing scheme of demerger of plastic component business of MIL to ARBL

 

The financial risk profile is supported by market value of shares of ARBL which can be pledged/sold to refinance debt in RFPL’s books indicating higher refinancing ability. The steady dividend income from its group companies, estimated to be Rs 20-25 crore per annum, is expected to support RFPL to meet its interest and modest debt repayment obligations.

 

• Majority shareholding in ARBL, which has an established presence in domestic storage batteries segment:

RFPL holds 28.1% stake in ARBL, which has an established presence in the domestic storage batteries segment catering to the automotive and industrial sectors. Its strong market position is supported by an established market position in both the automotive and industrial end markets and a healthy and sustainable operating performance over the years. ARBL's net cash accruals is estimated at over Rs.1000 crore for fiscal 2023; annual accruals are expected to remain over Rs.1100-1200 crore over the medium term driven by steady monetization of expanded capacities. While ARBL is taking sizeable capex projects, including to set up a GigaWatt Storage Battery unit, the expansion programme is well phased out over 9-10 years, which will enable leverage metrics to remain comfortable.

 

• Maximum debt undertaking and likely support from the promoters: RFPL has undertaken to maintain maximum total debt (off-balance sheet and on-balance sheet excluding inter-corporate loans from group companies) at or below Rs 600 crore. The company is in discussions with lenders to  gradually release part of the corporate guarantees issued to group companies which will reduce the adjusted debt levels below Rs.300 crore over the medium term. Already, sizeable guarantees extended to subsidiaries were released in fiscal 2023, CRISIL Ratings also takes comfort from the management discipline, conservative financing policies for funding large projects and timely support from promoters for supporting group companies; however any adverse movement in the share price and subsequent impact on the cover will remain a key monitorable.

 

Weakness

• Exposure to market-related risks and reliance on dividend inflows for debt-servicing: Exposure to market-related risks may persist, as financial flexibility in terms of cover available will, to some extent, depend on prevailing market sentiments and share prices. Any increase in systemic risks, leading to a sharp fall in the share prices of ARBL is a key rating sensitivity factor. Furthermore, the financial risk profile is moderated by high dependence on dividend inflows from other operating entities of the group (Rs.20-25 crore annually) to service debt; the food business of RFPL is seasonal and margins can be volatile.

Liquidity: Adequate

RFPL has an adequate liquidity driven by estimated net cash accruals of Rs.~50-60 crore over medium term which will be  adequate to service the annual term loan obligations of Rs.15-17 crore and moderate capex requirements. CRISIL Ratings believes that RFPL has adequate financial flexibility from its shareholdings in ARBL valued at ~Rs 2977 crore as on May 8th, 2023. RFPL’s outstanding debt (on-balance sheet and off-balance sheet and excluding inter corporate deposits from group companies) is expected to remain at or under Rs 600 crore and with cover of about 5.0 times as of May 8, 2023. RFPL does not have any large investment plan over the near-to-medium term as overall business risk profile of the subsidiaries have steadily improved over the years and will require modest capex spend for scaling up existing operations in the medium term. Bank limits for RFPL’s food business were also moderately utilised at ~70% for the 10 months ending March 2023.

 

Further regular support from promoters in the form of equity infusion and unsecured loans is expected in times of need. RFPL is unlikely to see significant increase in debt in future with  majority of capex to be met from internal accruals over the medium term.

Outlook: Stable

CRISIL Ratings believes RFPL will continue to benefit from its healthy financial flexibility on account of its 28.1% holding in ARBL, steady cash accruals from the food business, dividend inflows from its group companies and funding support from promoters in case of exigencies.

Rating Sensitivity factors

Upward factors

• Reduction in adjusted debt levels (including corporate guarantees) or material increase in share price of ARBL, sustenance of debt cover at over 6-7 times
• Improvement in the credit profile of ARBL

 

Downward factors

• Significant reduction in cover below 4-4.5 times, due to steep correction in market price of ARBL, or higher than expected debt levels
• Material deterioration in the credit profile of ARBL

About the Company

RFPL was incorporated in February 2017 as a partnership firm and later converted into a holding company on July 11, 2017. As part of the group restructuring in Amara Raja Group companies, Galla Foods Limited (GFL) Foods Division of Mangal Industries Limited (rated ‘CRISIL A/CRISIL A1/Watch developing’) was transferred to RFPL in fiscal 2019.

 

GFL, situated at Chittoor in Andhra Pradesh, produces tropical fruit purees, concentrates and beverages. The business serves select international marquee customers and leading juice majors in about 40 countries like Iraq, UK, Japan, UAE, Libya etc. RFPL also provides group management services, has a group innovation center, incubates new group businesses, houses the food division and manages investments in group companies.

About the Group

Amara Raja group, founded in 1985 by Dr. Galla Ramachandra Naidu, is a $550 million conglomerate with diversified interests from batteries, electronics, industrial services, foods processing and infrastructure. The Group companies are in the business of power products, construction, engineering, packaged foods, power transmission & distribution projects and facility management services

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Cash credit (Rs 8 Cr)/ WCDL (Rs 8 Cr) & Forex forward limits (2.00 cr) are Sub Limits to Export credit facility

@100% Interchangeability between BG and LC limits

**Interchangeable with PCFC and EPC