Rating Rationale
March 26, 2020 | Mumbai
Zeal Aqua Limited
Ratings downgraded to 'CRISIL BB+/Negative/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.88 Crore
Long Term Rating CRISIL BB+/Negative (Downgraded from 'CRISIL BBB-/Stable')
Short Term Rating CRISIL A4+ (Downgraded from 'CRISIL A3')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Zeal Aqua Limited (ZAL) to 'CRISIL BB+/Negative/CRISIL A4+' from 'CRISIL BBB-/Stable/CRISIL A3'.
 
Ratings action reflects stretched liquidity position on account of elongation in working capital cycle driven by increased receivables estimated at around 110-120 days in March 2020 (from 92 days as on March 31 2019) and as reflected in fully utilised bank lines. CRISIL had earlier expected the working capital cycle to improve in fiscal 2020. The rating action also follows measures taken by various state and central governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to impact the business profile of the company as it is likely to impact the demand and disrupt the supply chain, leading to lower than expected revenue and stretch in inventory & further stretch in receivables; and thereby may have a further impact on its credit quality, especially liquidity position. While, these measures are applicable till April 14, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19. A sustained long period of closures can result in significant deterioration in credit profile of the company. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely in credit quality of the company. That said, the ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.
 
The ratings continue to reflect ZAL's established position in shrimp farming, processing and trading. The ratings also factor in the company's moderate financial risk profile. These strengths are partially offset by large working capital requirement, susceptibility to volatility in shrimp prices and changes in government regulations, supplier and geographic concentration risks, and competition.

Key Rating Drivers & Detailed Description
Strengths: 
* Extensive experience of the promoters in the shrimp business
ZAL's promoters have more than 25 years of experience in shrimp farming. Mr Pradeep Navik started with a small farm. In 2009, he tied up with Mr Shantilal Patel to form ZAL. The company has healthy growth because of its diversified revenue from shrimp and satellite farming. ZAL has developed a strong network of farmers for satellite farming, and a strong sourcing channel for shrimps and seeds. The company commenced its shrimp processing unit in fiscal 2018, capitalizing on its exiting captive and satellite farming facilities, strengthening its operating efficiency.
 
* Moderate capital structure and debt protection metrics
The company's capital structure is marked by moderate net worth and gearing of Rs. 47.7 cr and 1.85 times as on March 31, 2019. Its interest coverage and net cash accruals to total debt ratio were 2.8 times and 0.18 times. Financial risk profile is expected to remain moderate over the medium term in the absence any major debt funded capex.
 
Weaknesses:
* Increasing working capital requirements
With increasing shrimp processing revenues, the working capital requirements of company have increased. As against the past gross current assets (GCA) of 3 months, the GCAs are around 6 to 7 months; the rise being driven by increase in the stocking of processed shrimps and stretched receivables. The company had inventory and debtors of around 3 months each as on March 2019. Debtor cycle is expected to stretch in fiscal 2020 as evident in debtors outstanding of around Rs.90 crores as on date. Operations are expected to remain working capital intensive over the medium term. GCA is expected to increase to around 216 days in fiscal 2020; likely to remain over 200 days over the medium term.
 
* Exposure to risks associated with price fluctuations, geographic concentration, and competition
ZAL, a Gujarat-based player, operates on the north Gujarat sea coast near Surat. Though Gujarat is a primary producer of shrimps in India, its contribution is only 9%. Andhra Pradesh is the leader in shrimp farming, and gives tough competition to other states. As all activities of ZAL are centered in Gujarat, it is susceptible to regional specific events impacting the business. Furthermore, the company's performance is vulnerable to volatility in the price and availability of shrimp. Any change in export or import regulations may also adversely impact the company's performance.
Liquidity Stretched

Liquidity is stretched with almost fully utilized bank lines at present on account of increase in working capital requirements, leaving low cushion for any further stretch in working capital cycle. Net Cash Accruals (NCA) expected between Rs. 12 to 15 crore per annum for fiscal 2021 and fiscal 2022, against repayment obligations of around Rs. 3 to 5 crore per annum. Current ratio was low at 1.14 times as on March 31, 2019. Company is undergoing capex of around Rs. 3 to 5 crores per annum, which will be funded by internal accruals. Company had unencumbered cash and bank balance of around Rs.4 crores as on ending March 31, 2019.

Outlook: Negative

CRISIL believes ZAL's business risk profile will remain under pressure because of slowdown in demand and disruption in the supply chain.

Rating Sensitivity factors
Upward factors
* Sustained revenue growth of 15-20% per annum and operating margins above 11%
* Sustained improvement working capital cycle and liquidity profile as evidenced by GCA of less than 180 days and BLU below 85%
 
Downward factors
* Decline revenue by 15-20% per annum and operating margins below 9%
* Stretch in working capital cycle or large debt funded capex leading to weakening financial risk profile and further stretch in liquidity
About the Company

Incorporated in 2009, ZAL is an aquaculture company promoted by Mr Shantilal Patel and Mr Pradeep Navik, which farms and trades in white shrimps, and deals in shrimp seeds, feed, and probiotics. In July 2017, the company started processing shrimp.
It is listed on Bombay Stock Exchange under the small and medium enterprises segment.

Key Financial Indicators
As on / for the period ended March 31   2019 2018
Operating income Rs crore 237.5 177.81
Reported profit after tax (PAT) Rs crore 7.5 4.19
PAT margin % 3.2 2.4
Adjusted debt/Adjusted networth Times 1.85 2.19
Interest coverage Times 2.76 2.61
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Rating assigned
with outlook
NA Cash Credit NA NA NA 70 CRISIL BB+/Negative
NA Long Term Loan NA NA Aug-2023 16.79 CRISIL BB+/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA 0.21 CRISIL BB+/Negative
NA Bank Guarantee NA NA NA 1.00 CRISIL A4+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  87.00  CRISIL BB+/Negative      05-04-19  CRISIL BBB-/Stable  29-03-18  CRISIL BBB-/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  1.00  CRISIL A4+      05-04-19  CRISIL A3  29-03-18  CRISIL A3    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 1 CRISIL A4+ Bank Guarantee 1 CRISIL A3
Cash Credit 70 CRISIL BB+/Negative Cash Credit 70 CRISIL BBB-/Stable
Long Term Loan 16.79 CRISIL BB+/Negative Long Term Loan 16.79 CRISIL BBB-/Stable
Proposed Long Term Bank Loan Facility .21 CRISIL BB+/Negative Proposed Long Term Bank Loan Facility .21 CRISIL BBB-/Stable
Total 88 -- Total 88 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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