Detailed Rationale

CRISIL Ratings has upgraded its rating on bank facilities of Viaton Energy private Limited (VEPL) to ‘CRISIL A-(CE)/Stable’ from 'CRISIL BBB+(CE)/Stable'

 

The rating action follows similar rating action on its parent, 3F Industries Limited (3F, rated ‘CRISIL A-/Stable/CRISIL A2+’).The ratings reflects the strength of the unconditional, irrevocable, and continuing corporate guarantee provided by 3F covering the entire principal and interest payments on the rated bank facilities, including but not restricted to the entire principal and interest amount. The rating is supported by an additional undertaking by 3F covering the entire debt obligations, and by the payment mechanism that ensures debt obligations on the rated facilities will be met on time, without any set off

Analytical Approach

For arriving at the rating, CRISIL Ratings has factored in the strength of the corporate guarantee provided by 3F, covering the entire principal and interest repayments on the rated bank facilities.

Key Rating Drivers & Detailed Description

• Unconditional, irrevocable, and continuing guarantee from 3F, covering the rated facilities:

The ratings reflect the strength of the unconditional, irrevocable, and continuing corporate guarantee provided by Viaton’s parent, 3F, covering the entire principal and interest payments on the rated bank facilities, including but not restricted to the entire principal and interest amount. The rating is supported by an additional undertaking by 3F, securing the entire debt obligation and a payment mechanism to ensure that debt obligations are fulfilled in a timely manner.

 

• Payment structure designed to ensure full and timely payment to investors:

3F has provided the corporate guarantee for bank facilities of Viaton to Axis Bank. The guarantee covers the entire principal and interest payment obligations on the guaranteed bank facility. Under the guarantee, in the event of default on interest or principal by Viaton relating to the term loan, the Guarantor will make the necessary payments not later than six calendar days from the due date, irrespective of the lender bank invoking the guarantee. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan. It is irrevocable in nature.

 

• Credit profile of Guarantor: 3F has established market position and integrated operations in the edible oil value chain

3F has established integrated manufacturing operations from sourcing of raw materials, extraction and refining of crude palm oil to manufacturing of value added products like vanaspati, speciality fats for confectionaries and bakeries and by-products like fatty acids, shea fats, oleins, glycerine etc. The by products from the edible oil refining serve as the key raw material for the speciality fats segment, thereby providing additional cost benefits. The power generated through biomass plants is used for captive consumption and lowers the power and steam costs.

 

3F has an established market position in about six to seven product verticals in the speciality fats segment. The value-added products have an established customer profile in large FMCG companies as well as in exports (about 35-40% of the segment revenues during fiscal 2021), wherein the price volatility is much lower compared to edible oil refining segment. Profitability in specialty fats segment is much higher than the edible oil business and has higher capability to pass on the increase in prices to customers due to higher value addition. Increasing contribution from value-added downstream products and established standing in the industry will support sustenance of the company’s performance over the medium term.

 

Financial risk profile although improving remain average; total outside liabilities to tangible networth (TOL/TNW) has reduced to 2.8 times as on March 31,2021 compared to 3.5 times as on March 31,2020. Ratio remains higher, despite healthy networth at Rs 476 crore as on March 31, 2021, mainly due to the working capital intensive nature of the business and funding of the same through bank debt and payables. Interest coverage and net cash accrual to adjusted debt ratio have improved to around 4 times and 0.35 times in fiscal 2021 compared to 2.1 times and 0.15 times in fiscal 2020. Steady reduction of debt from improving accruals is expected to lead to improvement in debt metrics over the medium term.

Liquidity: Adequate

Viaton's standalone liquidity is modest, but overall liquidity is adequate, largely driven by the expectation that its parent, 3F will provide ongoing and need based support, in case of exigencies. On standalone basis, cash accruals are expected to be inadequate at Rs 4-5 Cr against repayment obligations of Rs 5-7 crore per annum over the next three years. Liquidity also benefits from timely promoter loans for both working capital and debt repayment. Working capital requirements are met from bank limits of Rs 15 crores which have been utilized 10% on average, over the last 6 months ended October 2021.

 

Liquidity of 3F remains adequate driven by expected cash accruals of more than Rs. 150 crore per annum over the medium term and unencumbered cash of ~Rs.150 crores as on October 31,2021. 3F also has access to fund-based limits of Rs. 215 crores, which have been utilized at 15% over the last 12 months ended October 2021. The non-fund based limits have been fully utilized, while part of the  cash surplus has been deployed as margin money for additional ad-hoc limits. The company has long-term debt obligations of Rs 45-50 crores respectively in fiscal 2022 and fiscal 2023. Capex is expected to be limited to 20 crore per annum mainly towards maintenance capex for the next two years, which can be fully met through internal accruals. Incremental working capital requirements are also expected to be met entirely through internal accruals thereby restricting debt addition

Outlook: Stable

Rating on Viaton’s guaranteed bank facilities reflects the financial and business strength of the parent, 3F. Hence, the rating and outlook on Viaton’s bank facilities may be revised in case of a revision in the rating or outlook on 3F.

Rating Sensitivity Factors

Upward Factors:

• Upward change in the credit risk profile of 3F or revision in its outlook, could result in similar rating action on Viaton.

 

Downward factors:

• Downward revision in the credit risk profile of 3F or revision in outlook, could result in similar rating action on Viaton.
• Change in stance of support from 3F.
• Non adherence to the terms of transaction structure/payment mechanism, and delays in receipt of funds for servicing debt obligations
• Sharp decline in business performance, due to delay in ramp up of capacity any operational issues, leading to decline in operating profitability and further weakening of debt metrics

Adequacy of credit enhancement structure

CRISIL Ratings has fully consolidated the business and financial risk profiles of Viaton under 3F’s credit profile. The guarantee provided by 3F is unconditional, irrevocable, and continuing corporate guarantee and covers the entire rated amount for bank loans. 3F has shared an undertaking to monitor the timely payment of the interest and principal obligations for rated facilities.

Unsupported ratings: CRISIL BBB-

CRISIL Ratings has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

The unsupported rating on the bank loan facility of Viaton does not factor in credit enhancement arising from the corporate guarantee from 3F.  The unsupported rating takes into account standalone business and financial risk profile and notched up for the financial and managerial support from parent 3F, based on CRISIL Ratings’ parent notch-up framework.

About the Company

Viaton Energy Private Limited, incorporated in 2009, operates a 10 MW biomass based power project in Mansa, Punjab. 3F holds the majority 62% shareholding (as of November 30,2021) in the entity, while the remaining stake is held by Creative Group

About the parent, 3F

3F, promoted by Mr. B K Goenka in 1960 in Tadepalligudem in Andhra Pradesh is an integrated manufacturer in the edible oil value chain. 3F has an installed edible oil refining capacity of 289,500 MTPA and specializes in a wide range of products covering bakery fats, specialty fats, lauric fats, shea stearin and oleo chemicals. 3F operates a captive 6 MW capacity biomass power plant and 3.30 MW windmills.

List of covenants

The material covenants of the instruments are as follows:

1. The corporate guarantee shall be irrevocable and enforceable against the Guarantor not withstanding any dispute between Bank and the Borrower.
2. With respect to credit facilities having a specified payment/repayment schedule and with respect to credit facilities which does not stipulate any specific payment/ repayment schedule, Guarantor shall monitor whether Borrower has made the necessary payments under the above mentioned credit facilities on the due dates as per the terms of the underlying facility agreements or terms of the facility. And in case the Borrower is unable to make payment of the same, Guarantor shall make the necessary payments not later than 06 (Six) Calendar days after the due date stipulated, irrespective of the Lender bank invoking the Guarantee.

Status of noncooperation with previous CRA

Viaton has not cooperated with CARE Ratings which has classified it as non-cooperative vide releases dated January 28, 2021 and July 27,2021. The reason provided by CARE Ratings is non-furnishing of information for monitoring of ratings

Any other information: Not applicable