Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of Surya Food and Agro Limited (SFAL).

 

The ratings reflect SFAL's established market position in India's fast-moving consumer goods (FMCG) industry via its reputed brand ‘Priyagold’. The ratings also takes into consideration its prudent working capital management and healthy capital structure. These strength are partially offset by its exposure to intense competition in the FMCG industry, susceptibility of profitability 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

To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of SFAL along with SGFPL, together referred to as ‘Surya Group’. This is because SFAL is the holding company, and is expected to have common management with SGFPL and SFAL has given corporate guarantee to SGFPL’s bank debt for the proposed capital expenditure.

 

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

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in India's fast-moving consumer goods (FMCG) industry: 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. Also, it has strong brands across its product portfolio including Priyagold, Butter Bite, CNC, Snacks Zig Zag & Marie Lite. The product range enables the company to capture larger audience by targeting consumers across different income groups and catering to different tastes and preferences. With own research & development wing, new food products addition is a continuous endeavour.

 

The Company has diversified its production risk by installing multiple factories thereby substantially reducing market servicing cost, input / capital cost of inventory, quicker deliveries etc.

 

The strong market position is also supported by a wide distribution network in both rural and urban areas. Group achieved an operating income of Rs 969 crore for fiscal 2020 and Rs 602 crore till Nov 30, 2020 in fiscal 2021. The growth in revenue remained muted over the last few fiscals on account of demonetization and implementation of Goods & Services Tax (GST) which however is expected to improvement over medium term with addition of new products and increased reach to untapped markets.

 

• Prudent working capital management: Gross current assets were at 36 days as on March 31, 2020. GCA has remained low on account of moderate inventory of around 15-10 days and receivables cycle of around 5-10 days over the years. Efficient working management along with healthy cash generating ability of around Rs 60-80 crores over the last three fiscals has led to comfortable liquidity position with surplus cash reserve of around Rs 364 crore as on Nov 30, 2020. Although, operations are expected to become moderately working capital intensive post the stabilisation of the new plant of BOPP/BOPET and metallic film manufacturing.

 

• Healthy capital structure: Group’s capital structure have been at healthy level due to lower reliance on external funds yielding gearing and total outside liabilities to adj tangible networth (TOL/ANW) of less than 1 time for last 5 years ending on 31st March 2020. Group’s debt protection measures have also been at healthy level due to leverage and healthy profitability. The interest coverage and net cash accrual to total debt (NCATD) ratio are at 44.9 times and 0.45 times for fiscal 2020. However, gearing and TOL/TNW are expected to increase on account of large debt based capex plans in SGFPL. 

 

Weaknesses:

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

 

• Susceptibility of profitability to fluctuations in raw material prices: The prices 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 efficiencies and continued price leadership should help mitigate the impact of volatility in input prices, ability to pass on any hike in the rates to consumers, while maintaining market share, will remain a key rating sensitivity factor.

 

• Risk related to the large debt funded project: Group is diversifying into new business and is setting up a Flexi-Poly Films Plant to manufacture BOPP, BOPET, Metallised films and other specialty poly films in Greater Noida, Uttar Pradesh. The entire project is split into two phases.  First phase to be undertaken over the next two years with total project cost of approx. Rs 650 crore for phase I (to be debt funded to the tune of 51%). 40 acres of land has been acquired. Possession is expected to be received by Feb 2021 and building construction to start post that. Order for machinery to be imported has been placed. Operations are expected to start from April 2022.

 

Group has hired experienced professionals to manage the project. Years of research and understanding of the market should help mitigate the technological risk. However, the construction has yet not started and hence the implementation risk is high. To add, packaging is one of the fastest growing industries, owing to the rising population, increasing income levels, changing lifestyles, increased media penetration through internet and television and growing economy. Although stiff competition from existing players and no major tie ups as on date to ensure optimum capacity utilisation has led to high demand risk. Funding risk though is moderate since holding company (SFAL) already has surplus cash reserve to fund the capex.

Liquidity: Strong

Liquidity profile of the company is strong as reflected by negligible utilisation of its fund based bank limits, averaging 1-2% over the last 12 months ended November 2020. Bank limit utilisation remained low on account of efficient working capital management, as reflected in GCA of 36 days as on March 31, 2020. Cash accruals are expected to be over Rs 65 crore annually, which are sufficient against term debt obligation of Rs 23 crore in FY 2021 and Rs 1 crore in FY 2022. In addition, it will act as cushion to the liquidity of the company and aid the funding requirement for the proposed capex. Current ratio was comfortable at 1.4 times on March 31, 2020.

 

Furthermore, constant building up of free cash and bank balance lend comfort to liquidity, with free reserve of around Rs 365 crore by way of bank balance/liquid investments as on Nov 30, 2020, which are expected to be utilised over the next two years to fund the capex in the subsidiary. Low gearing and moderate net worth support its financial flexibility, and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believe Surya Group will continue to benefit from the extensive experience of its promoters, established brand presence and strong distribution network.

Rating Sensitivity factors

Upward factor

• Improvement in operating margins to 9% and scale by 15% on a sustainable basis, leading to higher cash accruals.
• Timely stabilisation of the planned capex with no major cost overruns.

Downward factor

• Decline in operating profitability by over 100 basis points on a sustainable basis or decline in scale of operations by more than 10%.
• Stretch in working capital cycle with GCA of over 60 days, exerting pressure on liquidity.
• More than expected debt-funded capital expenditure or any further diversion of funds into group companies, weakens capital structure

About the Company

SFAL: Incorporated in 1994, SFAL is engaged in manufacturing various types of biscuits, cookies, cakes, confectionaries, beverages etc. SFAL is owned & managed by Mr. Ballabh Prasad Agarwal and his sons. SFAL market its products under various brand names ‘Priyagold’, ‘Butter Bite’, ‘CNC’, ‘Snacks Zig Zag’ & ‘Marie Lite’. SFAL has five manufacturing facilities located in Greater Noida, Lucknow, Jagdishpur and Surat with an installed capacity of 500 MT of biscuits each day.

 

SGFPL: Incorporated in May 2020, SGFPL is setting up a new flexi-poly films plant to manufacture various poly films. Company has its registered office and plant in Noida and SFAL hold 99.99% shares under SGFPL. Initial set up would contain 1 plant each of BOPET, BOPP and metallised films with capacities of 43,200, 40,000 and 16,000 MTPA respectively. Fiscal 2022-23 is expected to be the first year of commercial operations.

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Operating income	Rs crore	969.03	996.27
Reported profit after tax	Rs crore	64.63	56.93
PAT margins	%	6.02	8.57
Adjusted Debt/Adjusted Net worth	Times	0.41	0.42
Interest coverage	Times	34.71	69.10

 

Any other information: Not applicable

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	Cash Credit	NA	NA	NA	45.0	NA	CRISIL A-/Stable
NA	Overdraft Facility	NA	NA	NA	20.0	NA	CRISIL A-/Stable
NA	Letter of Credit	NA	NA	NA	5.0	NA	CRISIL A2+
NA	Bank Guarantee	NA	NA	NA	141.0	NA	CRISIL A2+

 

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Surya Food and Agro Limited	Fully consolidated	Holding company
Surya Global Flexifims Pvt Ltd	Fully consolidated	Sunsidiary company