Non-cooperation by issuer

Due to inadequate information and in line with the Securities and Exchange Board of India guidelines, CRISIL Ratings had migrated its ratings on the bank facilities of Surya Food and Agro Ltd (SFAL; a part of the Surya group) to 'CRISIL BB+/Stable/CRISIL A4+; Issuer not cooperating'. However, SFAL has subsequently started sharing requisite information for carrying out a comprehensive review of the ratings. Consequently, CRISIL Ratings is migrating its ratings on the bank facilities of SFAL to 'CRISIL A-/Stable/CRISIL A2+'

 

The ratings reflect the established market position of the Surya group in the fast-moving consumer goods (FMCG) industry via its reputed brand, Priyagold. The ratings also consider prudent working capital management and healthy financial risk profile. These strengths are partially offset by exposure to intense competition in the FMCG industry, susceptibility to fluctuations in raw material prices and risks related to the large, debt-funded project in its wholly owned subsidiary, Surya Global Flexifilms Pvt Ltd (SGFPL).

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of SFAL and its four subsidiaries -- Surya Processed Foods Pvt Ltd (SPFPL), SGFPL, Surya Baked Foods Pvt Ltd (SBFPL) and Surya Agrotech Infrastructure Ltd (SAIL), collectively referred to as the Surya group. This is because SFAL is the holding company and is expected to have common management with its subsidiaries; further, SFAL has given corporate guarantee to the loan availed of by SGFPL for the proposed capital expenditure (capex).

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths

• Established market position in the FMCG industry

The Surya group is one of the leading players in the northern India biscuit industry. The company has a diversified portfolio of biscuits across categories: cookies, cream, glucose, crackers, digestive, along with other diversified products such as cakes, confectionaries, and beverages. It also has strong brands across its product portfolio including Priyagold, Butter Bite, CNC, Snacks Zig Zag and Marie Lite. The product range enables the group to service a large audience by targeting consumers across diverse income groups and catering to different tastes and preferences. With an in-house research and development wing, addition of new food products is a continuous endeavor.

 

Production risk is mitigated by installing multiple factories, thereby reducing market servicing cost, input/capital cost of inventory, and quicker deliveries.

 

The strong market position is also supported by a wide distribution network in both rural and urban areas. Operating income was Rs 1229.87 crore in fiscal 2022 and stood at Rs 698.00 crore till September 30, 2022 of this fiscal. Revenue growth may improve over the medium term, as operations of SGFPL commenced from December 2022.

 

• Prudent working capital management

Gross current assets (GCAs) were comfortable at 64 days as on March 31, 2022, driven by moderate inventory of around 21 days and receivables of around 6 days. Efficient working capital management and healthy cash-generating ability of around Rs 110 crore over the past three fiscals led to comfortable liquidity; surplus cash and bank balance stood at Rs 7.38 crore as on March 31, 2022. Although operations may become moderately working capital intensive post stabilisation of the new biaxially oriented polypropylene films/biaxially oriented polyethylene terephthalate (BOPP/BOPET) plant and metallic film manufacturing, GCAs should remain below 100 days (at a consolidated level) over the medium term.

 

• Healthy financial risk profile

Financial risk profile should remain comfortable, despite the capex undertaken by the group. Networth was strong at more than Rs 900 crore, while lower reliance on external funds led to gearing and total outside liabilities to adjusted networth ratios less than 1 time for the five fiscals ended March 31, 2022. Debt protection metrics have been supported by leverage and steady profitability; interest coverage ratio was 6.57 times and net cash accrual to total debt ratio was 0.31 time in fiscal 2022.

 

Weaknesses

• Exposure to intense competition in the FMCG industry

Intense competition reduced the ability of players to pass on any increase in raw material prices. While the Surya group has fairly been able to maintain its competitive position and pricing in the industry, low revenue growth over the past few years is reflective of intense competition. It is a mid-sized regional player in the biscuit and bakery industry, which is dominated by players such as Britannia Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+'), ITC Ltd, and Parle Products Pvt Ltd. Large players benefit from economies of scale, sizeable portfolio, and an aggressive marketing strategy, leading to higher pricing power with distributors. Despite significant competition, the group has been able to maintain its scale (in the biscuit division) in its area of operations owing to direct marketing initiatives, promotional tie ups and attractive prices points, standard quality and taste of products, as well as leveraging and engaging through the distribution network.

 

• Susceptibility to fluctuations in raw material prices

Cost of key raw materials (wheat, sugar, and palm oil) depend on geo-climatic conditions, international prices, and domestic demand-supply situation. Though focus on cost efficiency and continued price leadership should mitigate the impact of volatility in input prices, ability to pass on any hike in the rates, while maintaining market share, will remain a key rating sensitivity factor.

 

• Risk related to the large, debt-funded project

The group is diversifying into a new business and is setting up a flexible polyfilms plant to manufacture BOPP, BOPET, metallised films and other specialty polyfilms in Greater Noida, Uttar Pradesh. The project is split into two phases. Phase I has commenced operations from December 2022, with cost overrun of Rs 170 crore and delay in production by around eight months. Phase II is yet to be implemented, with estimated project cost of Rs 650 crore; it may start only after operations at Phase I stabilise.

 

The group has hired experienced professionals to manage the project. Years of research and understanding of market dynamics should help mitigate the technological risk. With construction already completed and operations for Phase I commenced, project risk remains moderate for Phase II. Further, packaging is one of the fastest growing industries owing to the rising population, increasing income levels, changing lifestyles, augmented media penetration through internet and television, and growing economy. Although stiff competition may persist, demand risk should be moderate owing to tie ups with suppliers and customers already in place for the initial production capacity. Funding risk though is low since funding for Phase I has been disbursed and Phase II is expected to be funded internally.

Liquidit: Strong

Cash accrual is projected at more than Rs 100.00 crore per annum, against term debt obligation of Rs 36.53 crore in fiscal 2023. Unencumbered cash and bank balance were Rs 7-8 crore and unencumbered investment was Rs 100 crore out of total investment above Rs 400 crore. Balance investments given as margin money will be released with annual repayment of the loan availed of from Uttar Pradesh Financial Corporation. Although the fund-based bank limit was highly utilised at 92.36% for the 12 months through November 2022, additional sanction facility of Rs 30 crore in SGFPL will support liquidity. Comfortable cash and bank balance will aid in funding the Phase II capex. Current ratio was healthy at 1.9 times on March 31, 2022.

 

Furthermore, free cash and bank balance of Rs 100-110 crore, by way of bank balance/liquid investments as on September 30, 2022, are expected to be utilised over the medium term to fund the capex in the subsidiary. Low gearing and moderate networth also support financial flexibility.

Outlook: Stable

The Surya group will continue to benefit from the extensive experience of the promoters along with its established brand presence and strong distribution network.

Rating sensitivity factors

Upward factors

• Operating margin steady at above 9% and revenue more than Rs 1,800 crore on a sustainable basis, leading to higher-than-expected cash accrual
• Timely stabilisation of the planned capex with no major cost overruns

Downward factors

• Operating profitability dropping below 6% on a sustainable basis or revenue declining by more than 10%
• Continuing, sizeable support to group companies, or any large, debt-funded capex

About the group

SFAL, incorporated in 1994, manufactures various types of biscuits, cookies, cakes, confectionaries, and beverages. The products are marketed under various brand -- Priyagold, Butter Bite, CNC, Snacks Zig Zag and Marie Lite. It has five manufacturing facilities in Greater Noida, Lucknow, Jagdishpur and Surat with installed capacity of 500 metric tonne of biscuits each day. The company is owned and managed by Mr Manoj Agarwal, Mr Navin Agarwal and Mr Shekhar Agarwal.

 

SPFPL has its unit in Haridwar and manufactures biscuits and confectioneries such as candies, wafers, bar chocolates, snakker under the brand, Priyagold.

 

SGFPL, established in May 2020, is setting up a new flexible polyfilms plant to manufacture various polyfilms. Initial set up would contain one plant each of BOPET (with capacity of 43,200 metric tonne per annum), BOPP (40,000) and metallised films (16,000). Fiscal 2023 is expected to be the first year of commercial operations. The company has a registered office and plant in Noida; 99.99% of its shares are held by SFAL.