| Sarveshwar Foods Limited | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL ratings on the bank facilities of Sarveshwar Foods Limited (SFL; part of the Sarveshwar group) continue to reflect the Sarveshwar group's increased presence in organic farming, backed by quality certification, and healthy growth prospects for the rice industry. The ratings also take into account the extensive experience of the management and favourable location of the facilities. These strengths are partially offset by high dependence on monsoon, exposure to the risk of adverse changes in government policies, stretched working capital cycle, and low operating margin. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SFL, Sarveshwar Overseas Ltd (SOL), Himalayan Bio Organic Foods Pvt Ltd (HBOP), and Natural Global Foods DMCC (NGFD), collectively referred to as the Sarveshwar group. SFL holds 99% stake in SOL. Furthermore, SFL and SOL have significant business and financial fungibility, and are in the same business and under the same management. HBOP and NGFD have been carved out of SFL and SOL, respectively, to focus on the organic business and UAE operations. Both HBOP and NGFD are wholly owned subsidiaries of SFL. |
| Key Rating Drivers & Detailed Description |
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Strengths * Increased presence in organic farming with quality certification The Sarveshwar group ventured into organic farming in 2014 and started building a network of farms, which took around three years to get certified as organic farms. The group selected a number of products, including garlic, red chillies, saffron, soybean, tea, tomatoes, walnut, and turmeric powder, to begin farming. It has already received certification from both the National Programme for Organic Production and National Organic Programme for processing and trading in organic foods. Both the plant and products are approved by US Food and Drug Administration. The group is also registered with the Agricultural and Processed Food Products Export Development Authority, which was established by the Government of India under the Agricultural and Processed Food Products Export Development Authority Act passed by the Parliament in December 1985. Organic farming is estimated to contribute around 10% to the overall revenue in fiscal 2019. * Experience of the management and healthy growth prospects for the rice industry Benefits from the promoters' experience of over six decades and healthy relationships with suppliers and customers should continue to support business risk profile. Furthermore, the group has installed fully automated German machinery; this has helped increase capacity and achieve higher operating income. Further, the healthy growth prospects in the rice industry has helped the company grow. Operating income of the group is (estimated at Rs 550-560 crore in fiscal 2019). * Locational advantage Operations are based in Jammu and Kashmir, which has diverse physiographic features, agro-climatic variations and cold arid temperature, and inter-mediate and sub-tropical zones that are naturally conducive for cultivating basmati and non-basmati rice. Focusing the company's philosophy to the Himalayas, the products are cultivated using the fertile and mineral-rich soil, organic manure, and the snow-melted waters of River Chenab. This helps the group charge a premium for its products. Weaknesses * High dependence on monsoon and exposure to adverse changes in government policies Water requirement for paddy is high, and despite good irrigation systems in paddy-growing regions, the group depends heavily on monsoon. This exposes the group to the risk of limited availability of raw material if the monsoon is weak. Furthermore, export of agricultural commodities, including rice, which is a staple diet in India, is highly regulated. Non-basmati rice caters to masses, and meets around 95% of the global demand. Furthermore, the government's policies governing rice export, including basmati rice, which caters to just 5% of the domestic demand, are volatile. * Large working capital requirement The group recorded gross current assets of 301 days as on March 31, 2018, driven by high inventory at 233 days. Debtors were 74 days and creditors were 85 days. Operations are estimated to remain in similar ranges in FY 19. * Low operating margin Operating margin remained low at 5.8% in the first half of 2019 vis-a-vis 8.9% in fiscal 2018 and 9.2% in fiscal 2017. The margin declined on account of increase in selling expenses for organic products, writing off of packing material, and costs incurred post initial public offering. |
| Liquidity |
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Liquidity is adequate. Net cash accrual'expected at Rs 15-20 crore per annum over the medium term'should comfortably cover yearly debt obligations of around Rs 3 crore. Utilisation of bank lines of SFL of Rs 80 crore averaged 90% in the 12 months through December 2018, and SOL's bank lines of Rs 105 crore averaged 94% in the 12 months through September 2018. Current ratio was comfortable at 1.4 times for the group as on March 31st 2018. |
| Outlook: Stable |
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CRISIL believes the Sarveshwar group will continue to benefit from its established market position in the basmati rice industry in India, supported by its established brand, Sarveshwar. The outlook may be revised to 'Positive' if total outside liabilities to tangible networth ratio improves, on a consolidated basis, due to higher cash accrual or equity infusion, while business risk profile remains stable. The outlook may be revised to 'Negative' if lower-than-expected cash accrual, large debt-funded capital expenditure, or an increase in working capital requirement weakens key credit metrics. |
| About the Company |
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SFL, incorporated in 2004, mills and processes basmati rice, mainly PUSA 1121, at its plant in Jammu. It has milling and sorting capacity of 6 tonne of rice per hour. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||
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| Annexure - List of Entities Consolidated | |||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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