Rating Rationale

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 in the 4 years ended fiscal 2020, reflecting its strong position in the export market. STIPL achieved export sales of Rs. 3375 crore in fiscal 2020, which is estimated to have dipped to an estimated Rs. 2735 crore in fiscal 2021 as STIPL tried to concentrate on developing new geographies for managing sustainable growth in sales over the medium term. STIPL has relationship with over 600 customers spanning 63 countries, out of which 36 customers and 10 countries were added in fiscal 2021. CRISIL Ratings believes that healthy customer relationships should continue to support STIPL’s market position as the country’s largest basmati rice exporter.

Efficient working capital management: Working capital management is efficient as reflected in gross current assets estimated at 110 days as on March 31, 2021 (105 days a year 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 other large players in the industry because STIPL offers quick payment to farmers and thus procure sizeable quantities during the start of the season. Accordingly, STIPL’s creditor levels have always been low at 4 days and 14 days as on March 31, 2020 and 2019 respectively.

For its exports order, STIPL has payment terms of 50% of the order value to be 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. Practice of securing advances for export shipments ensures that STIPL’s debtors levels net of advances received are negligible even during peak periods of exports. As on December 31, 2020, STIPL had customer advances of Rs 294 crore against debtors of Rs 173 crore. 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 2 years, the company has aimed to increase contribution from its own brands Zeeba, Elate, Punjab King, etc. Accordingly, contribution from own brands has increased to 14% of total sales in the first 9 months of fiscal 2021 compared to 9% in fiscal 2020 and a mere 2% in fiscal 2019. CRISIL Ratings believes that contribution from branded products will continue to improve at a healthy rate.

Comfortable financial risk profile: Capital structure has improved exponentially as is reflected by total outside liabilities to tangible networth (TOLTNW) ratio improving from 14.8 times as on March 31, 2017 to 2.53 times as on March 31, 2020 and estimated to be less than 1.4 times as on March 31, 2021. The improvement in TOLTNW is marked by significant improvement in networth over the years which improved from Rs 42 crore as on March 31, 2017 to an estimated Rs 420 crore as on March 31, 2021. In last 3 fiscals ending, STIPL has added around Rs 100 crore annually. The improvement in TOLTNW is further aided by no debt funded capital expenditure (capex) since fiscal 2017 and continuous efficient working capital management by the company resulting in reduced dependence on debt.

STIPL is funding Rs 50 crore worth of capex for expansion in Kandla entirely through internal accruals. STIPL is expanding its packaging and warehousing capacities at Kandla from 12 lakh MT per annum currently to 14 lakh MT per annum. The construction of owned plant, expected to be completed by August, 2021, will also help save annual rental costs of Rs 3.32 crore being incurred by the company. CRISIL Ratings expects any future capex plans to also be funded through cash generated by the company. Any large debt funded capex plans will be a key rating sensitivity factor.

Debt protection metrics are also healthy as reflected by estimated interest coverage and net cash accrual to adjusted debt (NCAAD) ratios of 6.6 times and 0.2 time, respectively, for fiscal 2021 (4.6 times and 0.1 time, respectively, for fiscal 2020). With likely improvement in operating profit and reduced reliance on working capital borrowings, debt protection metrics are expected to remain healthy over the medium term.

Weakness:

High customer and geographic concentration risk: India exports around 80% of Basmati rice to Middle Eastern countries (82.7% in FY20 and 76.4% for first 9 months of FY21). STIPL too, being the largest exporter, has its majority share of export revenues to Middle Eastern countries (91.3% and 88.1% of total sales in FY20 and first 11 months of FY21 respectively), reflecting in a significant geographic concentration. Despite concentration of sales in Middle Eastern region, STIPL has significantly improved on the diversification of sales among the countries in the Middle East. However, the region has a few dominant countries which contribute a sizable proportion of sales to the Middle East region.

Trade and commerce in some of the Middle Eastern countries are vulnerable to various geopolitical developments which include economic sanctions, embargos among other form of trade restrictions. Owing to criticality of its sales to Middle East 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. Practice of securing advances for export shipments ensures that STIPL’s debtors levels net of advances received are negligible even during peak periods of exports

Although STIPL books orders directly with its customers, however, the payments are remitted by international traders based in UAE. STIPL’s top five customers (including traders) contributed 78% of total exports sales in the first 9 months of fiscal 2021. The concentration in payments from its top 5 customers (including traders) has only increased in last 2 fiscals. In fiscal 2019, this concentration was at 39% of export revenues of STIPL and in fiscal 2020, this increased to 71%. High dependency of export remittances on key traders will continue to be a key monitorable.

Susceptibility to fluctuations in raw material prices and regulatory changes: Raw material (paddy) constitutes 85-90% of the sales, and its prices directly impact profitability. Paddy, being a kharif crop, is harvested only in September-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 the monsoons. Hence, the company is exposed to the risk of limited availability of raw material during a weak monsoon, resulting in low operating income and subdued profitability.

Moreover, government regulations directly impact raw material availability through minimum support price and procurement policies. Profitability was 3-5% in the three fiscals through 2020 but are estimated to be over 5% from fiscal 2021 owing to increasing contribution from branded products and expected reduction in rental cost post completion of ongoing construction of owned plant at Kandla, Gujarat.