Rating Rationale
July 06, 2020 | Mumbai
SLMG Beverages Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.894 Crore (Enhanced from Rs.380 Crore)
Long Term Rating CRISIL BBB-/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB-/Stable' rating on the long-term bank loan facilities of SLMG Beverages Private Limited (SLMG).
 
The rating continues to reflect the extensive experience of SLMG's promoters in the non-alcoholic beverages industry, support from group companies, benefits from the acquisition of additional territories in UP, and improved market position post acquisition, aided by franchisee agreement with The Coca-Cola Company (Coca-Cola; 'A+/Negative/A-1' by S&P Global Ratings). These strengths are partially offset by the highly leveraged capital structure, change in consumer preferences, and susceptibility to adverse regulatory changes.

Analytical Approach

An unsecured loan of Rs 330 crore as on March 31, 2020, from the promoters and related parties has been treated as 75% equity and 25% debt, as it is subordinate to bank debt and likely to remain in the business for the entire tenure of debt facilities availed by the company.

Key Rating Drivers & Detailed Description
Strengths: 
* Extensive experience of the promoters in the non-alcoholic beverages industry and support from group companies: The promoters' extensive experience of around 3 decades, strong understanding of market dynamics, and healthy relationships with Coca-Cola support the business. Also, support from group companies, Amrit Bottlers Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+'), Brindavan Bottlers Pvt Ltd ('CRISIL BBB+/Stable'), Brindavan Agro Industries Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+'), and Brindavan Beverages Pvt Ltd, in terms of both revenue and shareholding mitigates demand risk. This also provides a steady revenue stream.
 
* Improved market position post acquisition, aided by franchisee agreement with Coca-Cola:
Post acquisition, the company caters to entire UP and the Uttarakhand region for CSD, juices, among others, on an exclusive basis. This makes SLMG one of the largest bottlers for Coca-Cola in India. Furthermore, with the proposed change in business model, under which all group companies will sell to SLMG on pre-determined cost plus margin basis, and SLMG will in turn sell to distributors, the market position of SLMG in the region will strengthen significantly.
Although beverages have been classified as essentials and SLMG's plant has restarted operations, volume has been low on account of lower offtake during the lockdown. Recovery in demand and volume over the medium term will be key monitorable.
 
* Moderate operating efficiency, expected to improve on the back of addition in territories, synergy benefits, and support from Coca-Cola:
Blended operating margin is expected at 10-10.5% over the medium term, resulting in healthy cash accrual of Rs 100-110 crore in the current fiscal and improve to Rs 165-170 crore in fiscal 2022. Moreover, Coca-Cola is likely to support its bottlers amid the lockdown by providing them a higher proportion of reimbursement of promotion expenses and discount on concentrate pricing, which is a key input cost.
 
Weaknesses:
* Highly leveraged capital structure:
The financial risk profile reflects a leveraged capital structure, with TOLTNW ratio estimated at more than 3 times as on March 31, 2020, despite considering goodwill as a tangible asset. High leverage is on account of the debt-funded acquisition in fiscal 2020. However, with increased outreach in the acquired territories and higher utilisation of capacities, there should be a significant increase in cash accrual and accretion to reserve, resulting in significant improvement in the capital structure over the medium term.
 
* Change in consumer preferences:
With consumers increasingly turning health-conscious, CSDs are losing market share to non-carbonated drinks. SLMG faces stiff competition from PepsiCo India and other beverage manufacturers in the CSD segment. Incremental sales growth will, therefore, depend on the success of non-carbonated products.
 
* Susceptibility to adverse regulatory changes:
SLMG is vulnerable to any unfavorable government regulation over the contents of aerated drinks, and rising environmental concerns in the country regarding water depletion and discharge of effluents by bottling plants. Furthermore, evolving concerns related to disposal of plastic may impact the beverages industry.
Liquidity Adequate

Utilisation of the cash credit limit of Rs 94 crore averaged 32% for the 3 months through December 2019. Liquidity is supported by the unsecured loan of Rs 330 crore as on March 31, 2020, from the promoters. Cash and bank balance is expected at Rs 20-30 crore over the medium term. Letter of comfort from the group companies also supports liquidity. Term loan repayments are spaced out and will commence from May 2020. Net cash accrual is expected at Rs 107-169 crore against debt obligation of Rs 53-57 crore in fiscals 2021 and 2022.

Outlook: Stable

CRISIL believes SLMG's business risk profile will continue to benefit from the extensive experience of its promoters and improved market position.

Rating Sensitivity factors
Upward factors:
* Improvement in the financial risk profile, with a healthy capital structure and leverage below 2.5 times
* Revenue of around Rs 1,600 crore on annual basis and blended operating margin of more than 11%
 
Downward factors:
* Revenue below Rs 1,000 crore on account of subdued demand, leading to lower-than-expected cash accrual and poor liquidity
* Weakening of the financial risk profile, especially the capital structure
About the Company

SLMG was incorporated in April 2017 and operations commenced in May 2019. It is promoted by Mr Prakash Ladhani, Mr Paritosh Ladhani, Mr Rakesh Ladhani, and Mr Vivek Ladhani. The company recently completed setting up a CSD and juice manufacturing plant in Barabanki district, UP. It will be marketing its products under the Coca-Cola brand.

Key Financial Indicators
As on/For the period ended March 31 Unit 2019 2018
Operating income Rs.Crore NA NA
Reported profit after tax (PAT) Rs.Crore NA NA
PAT margin % NA NA
Adjusted debt/Adjusted networth Times 3.10 0.25
Interest coverage Times NA NA

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
 ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Complexity Levels Rating assigned with outlook
NA Term Loan NA NA Jun-2026 804 NA CRISIL BBB-/Stable
NA Cash Credit NA NA NA 90 NA CRISIL BBB-/Stable
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  894.00  CRISIL BBB-/Stable  07-05-20  CRISIL BBB-/Stable  13-12-19  CRISIL BBB-/Watch Developing    --    --  -- 
        13-03-20  CRISIL BBB-/Watch Developing  14-11-19  CRISIL BBB-/Stable           
            22-10-19  CRISIL BBB-/Stable           
            06-09-19  CRISIL BBB-/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 90 CRISIL BBB-/Stable Term Loan 380 CRISIL BBB-/Stable
Term Loan 804 CRISIL BBB-/Stable -- 0 --
Total 894 -- Total 380 --
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 Fast Moving Consumer Goods Industry
CRISILs Bank Loan Ratings
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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