Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Supple Tek Industries Private Limited (STIPL) to 'CRISIL A/Stable' from 'CRISIL A-/Stable'

 

The upgrade reflects the company's improved business risk profile, driven by ~55% year-on-year growth in operating income in fiscal 2022; the growth is supported by healthy growth in volume sales and better price realisation, and this was further supported by geographically diversified operations with customer presence in more than 60 countries. There was a healthy demand from exports; revenue from exports grew from Rs.2735 crore in fiscal 2021 to Rs.4336 crore in fiscal 2022. Furthermore, the revenue has grown ~61% to Rs.3199 crore in the first half of fiscal 2023, against Rs 1981 crore in the corresponding period of the previous fiscal, supported by its strong position in the export market.  Consequently, revenue is projected to be over Rs 5000 crore in fiscal 2023. Despite the increase in freight cost and paddy prices, the operating margin of the company was 5.2% in fiscal 2022 (as against 4.6-6.0% in FY20 and FY21) and is expected to be around 5.5-6.0% in the current fiscal, supported by stabilization of freight cost, increasing contribution from branded products, and discontinuation of sale of broken rice (which was sold at lower realization) to China in current fiscal.

 

The rating also factors in the continuous improvement in the financial risk profile and liquidity profile of the company. The financial risk profile continues to remain healthy with robust networth and comfortable capital structure in the absence of any term loans. Networth was Rs.582 crore as on March 31, 2022 and expected to be around Rs.785 crore as on March 31, 2023. Gearing and total outside liabilities to tangible networth (TOLTNW) ratio were 1.4 times and 1.7 times, respectively, as on March 31, 2022 and are expected to be around 1.0-1.1 times and around 1.4 times as on March 31, 2023. Liquidity is supported by robust cash accruals (expected to be around Rs 220-235 crore per fiscal going ahead) and healthy unencumbered cash and bank balance.

 

The rating reflects STIPL's established presence as India's largest exporter of basmati rice, supported by improved demand from international markets. The rating also factors in the efficient working capital management, improving contribution from branded products and a strong financial risk profile. These strengths are partially offset by high customer and geographical concentration and susceptibility to fluctuations in raw material and regulatory changes.

Key Rating Drivers & Detailed Description

Strengths:

Established presence as India's largest exporter of basmati rice: STIPL has been India's largest exporter of basmati rice over the six fiscals through 2022, reflecting in its strong position in the export market. STIPL achieved export sales of Rs 4336 crore in fiscal 2022 as STIPL has been focussing on penetrating new geographies for managing sustainable growth in sales over the medium term. STIPL has strong relationships with over 600 customers spanning more than 60 countries; sales from export market contributed to ~95% of total sales in fiscal 2022. CRISIL Ratings believes healthy customer relationships should continue to support STIPL's market position as the country's largest basmati rice exporter.

 

Efficient working capital management: Gross current asset (GCA) days were 98 days as on March 31, 2022 (110 days a fiscal earlier) despite stocking up of paddy and rice during the peak season of procurement, which begins in the third quarter of every fiscal. Usually, STIPL has inventory of 2-3 months which is lower compared to that of other large players in the industry because STIPL offers quick payment to farmers and thus procures sizeable quantities during the start of the season. Accordingly, STIPL's payables have been low at 8 days as on March 31, 2022 (17 days a fiscal earlier). For its export orders, 50% of the order value is remitted in the form of an advance payment at the time of booking and the balance 50% at the time of handing over the export documents to the buyer. The practice of securing advances for export shipments ensures that STIPL's receivables net of advances received are negligible even during peak periods of exports. CRISIL Ratings thus believes that STIPL's working capital management will remain efficient. However, any material changes in the terms of credit will continue to be a key monitorable.

 

Improving contribution from branded products: Since its inception, STIPL has been focusing on supplying in bulk to various private labels. However, over the last 3-4 years, the company has been focussing on increasing sales contribution from its own brands - Zeeba, Loloh and Punjab Kingg. Revenue contribution from its own brands was 5% of total revenue in fiscal 2022. CRISIL Ratings believes that contribution from branded products will improve going ahead.

 

Strong financial risk profile: Networth stood at Rs 582 crore as on March 31, 2022 and is expected to be around Rs 785 crore as on March 31, 2023. STIPL's capital structure has been healthy because of low reliance on external funds, leading to low total outside liabilities to tangible networth ratio of 1.71 times as on March 31, 2022 and the same is expected to be around 1.4 times as on March 31, 2023. STIPL's debt protection metrics have also been strong because of low leverage and healthy profitability. Interest coverage and net cash accrual to adjusted debt ratios were 10.4 times and 0.22 time, respectively, in fiscal 2022 and are expected to be around 10.8 times and 0.28 time in fiscal 2023. In the absence of any major debt-funded capital expenditure (capex), the metrics should remain healthy over the medium term. Company does not plan to undertake any large debt funded capex going ahead. Any large, debt-funded capex will be a key rating sensitivity factor.

 

Weaknesses:

High customer and geographical concentration risk: India exports around 80% of its basmati rice to Middle Eastern countries. STIPL too, being the largest exporter, gets the majority share of its export revenue from Middle Eastern countries, reflecting in significant geographical concentration. Trade and commerce in some of the Middle Eastern countries are vulnerable to various geopolitical developments which include economic sanctions and embargos among other forms of trade restrictions. On account of the criticality of its sales to the Middle Eastern region, the business profile of STIPL has geographical risks which will be a monitorable over the medium term. To reduce the risk of payments from customers based in these countries, STIPL has a payment term of 50% of value of the order to be remitted in the form of an advance payment at the time of booking itself and the balance 50% at handing over the export documents to the buyer.

 

Moreover, the region has a few dominant countries which contribute a sizable proportion of sales to the Middle East region; the revenue share from a single country remains moderately high at around 55-60% of the total revenue, the payments are secured (as products are dispatched after receiving 100% payment in advance), thereby resulting in low debtor days. Moreover, STIPL books orders directly with its customers, however, the payments are remitted by international traders based in the UAE. Furthermore, STIPL has been focussing on improving its revenue share from other geographies in the export market.

 

Susceptibility to fluctuations in raw material prices and regulatory changes: Raw material (paddy) constitutes 80-85% of the sales, and its prices directly impact profitability. Paddy, being a kharif crop, is harvested only during September to December. The water requirement for basmati is high, and though the rice-growing states (Haryana, Uttar Pradesh, Uttarakhand and Punjab) have good irrigation systems, there is dependence on monsoon. Hence, the company is exposed to the risk of limited availability of raw material during a weak monsoon. Moreover, government regulations directly impact raw material availability through minimum support price and procurement policies. Operating margin was 4.5-6.0% during the three fiscals through 2022 and is expected to be around 6% going ahead because of increasing contribution from branded products.

Liquidity: Strong

Strong liquidity profile is indicated by expected healthy cash accrual of Rs 220-235 crore in fiscals 2023, 2024 and 2025 against nil debt repayment obligations. Bank limit utilisation averaged at 60% for the 12 months through Oct'22. Liquidity is supported by unsecured loans (of Rs 103 crore as on March 31, 2022) from the promoters. Current ratio was 1.67 times as on March 31, 2022 and is expected to be around 1.7-1.8 times as on March 31, 2023. STIPL accumulates cash and keeps it in the form of fixed deposits with banks. Company has unencumbered cash & bank balance and FDRs of around Rs 80 crore at present, which supports the liquidity profile and would be utilized to fund the paddy procurement.

Outlook: Stable

CRISIL Ratings believes STIPL's credit risk profile will continue to benefit from its established market position and strong financial risk profile.

Rating Sensitivity Factors

Upward factors

• Improvement in business risk profile driven by diversification in customer profile
• Sustenance of revenue at around Rs.5000 crore and an operating margin of over 7% on a sustained basis

 

Downward factors

• Any sharp increase in customer or geographical concentration in total sales, with more than 60% of the revenue being derived from one geography
• Any sharp reduction in net cash accruals or any large debt-funded capex or significantly higher-than-anticipated inventory levels impacting the capital structure and liquidity profile

About the Company

STIPL is the largest exporter of basmati rice in India since the last six years as per the records of the Agricultural and Processed Food Products Export Development Authority (APEDA). STIPL was incorporated in 2013 and is promoted by Mr Ramneek Singh. The company is engaged in milling, processing and exporting of basmati rice under both private labels and its owned brands - Zeeba, Loloh and Punjab Kingg. The company operates in three locations - Punjab, Haryana, and Gujarat; with installed capacity of 18.25 lakh MTPA in Gujarat, 1.80 lakh MTPA in Punjab and 0.44 lakh MTPA in Haryana.

Any other information: Not applicable