Key rating drivers & detailed description

Strengths:

Extensive experience of the promoters: The Terai group, incorporated in 1973, is a partially integrated player in the tea segment. Over the years, the group acquired seven tea estates, mostly sick units, and demonstrated its ability to turn them around into profitable entities. The promoters have incurred regular capital expenditure (capex) towards acquiring new plantations, and refurbishing old machinery. This has helped the group establish a strong position in the tea industry and maintain substantial growth in revenue.

Continued funding support from the promoters: The promoters have extended significant financial support to the group, via unsecured loans and convertible debentures to facilitate capex, and cover working capital and debt obligations. Their ability to provide need-based funding support enhances the group's financial flexibility.

Moderate working capital management: Gross current assets have been at 160-195 days over the three fiscals ended March 31, 2020, driven by moderate debtor and inventory days and advances to suppliers.

Weaknesses:

Susceptibility to volatile tea prices and changing weather conditions: Tea is a seasonal product and its yield depends on weather conditions. Production could be hampered significantly in case of any variation in rains, humidity, and temperature. In case of poor weather conditions, deterioration in production levels and quality leads to volatile realisations. Moreover, plantation operations are fixed-cost in nature with labour accounting for 50-60% of total costs. Presence of several labour laws and unions ensure that manpower cannot be reduced easily. Such inflexibility in cost reduction means that in case of lower production or realisations, the group may witness a drop in profitability.

Average financial risk profile: Financial risk profile is constrained by weak debt protection metrics, with interest coverage and net cash accrual to total debt ratios of 1.81 times and 0.08 time, respectively, in fiscal 2020 albeit low gearing of 0.65 time.

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