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April 2, 2008 |
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GUJARAT SPICES: Weak Risk Profile Cues CRISIL's BB+ Ratings CRISIL has assigned bank loan ratings of ‘BB+/Stable/P4’ to Gujarat Spices and Oilseeds Growers Co-operative Union’s bank facilities: INR153 Million Cash Credit Limits BB+/Stable INR300 Million Term Loans BB+/Stable INR67 Million Working Capital Demand Loan P4 INR1200 Million Letter of Credit Limits P4 INR130 Million Bank Guarantee P4 The ratings reflect the Union’s weak financial risk profile, and low profit margins due to the commoditised nature of the edible oil refining business, and high working capital requirements. These weaknesses are, however, partially mitigated by incentives provided by the government, favourable location of GSOGCU’s manufacturing facility, and healthy growth in revenues. The consolidated financial risk profile of GSOGCU and Vimal Oil and Foods Ltd is weak, marked by low profitability and net worth, high working capital requirements and gearing, and below average debt protection indicators. For arriving at the rating, CRISIL has combined the financials of GSOGCU and VOFL owing to the extension of guarantees (aggregating INR1.5 billion) by VOFL for loans taken by GSOGCU. The net profitability has been around 1 per cent since 2003-04 (refers to financial year, April 1 to March 31), resulting in a low net worth of INR286 million as on March 31, 2007. Short term borrowings (used to fund working capital levels) have been increasing in line with higher business levels, resulting in adverse gearing levels of nearly 4 times as on March 31, 2007. The net cash accruals to total debt and interest coverage ratios were below average at around 0.11 times and 2.21 times, respectively in 2006-07. In addition, the Union’s financial flexibility is constrained as reflected in its limited ability to raise resources at competitive rates. Also, GSOGCU’s edible oil business is exposed to availability (inputs), regulatory and pricing risks. GSOGCU, however, benefits from sales tax concessions. The Union’s manufacturing facility is strategically located in Kutch (Gujarat), which helps it lower transportation cost of inputs and distribution cost of end products. GSOGCU-VOFL’s combined revenues have registered a healthy compounded annual growth of 35 per cent in the 2004-05 to 2006-07 period, supported by its well diversified geographical presence across Gujarat, Rajasthan Uttar Pradesh, Himachal Pradesh and Assam. The Union proposes to leverage its established brand in these states, and further expand its reach in northern and north-eastern states of India. CRISIL believes that these initiatives, along with healthy demand prospects for branded edible oils, will enable sustenance of healthy growth in revenues over the medium term. Outlook: Stable GSOGCU’s business growth is likely to remain healthy, although the operating margins will remain weak over the medium term. The consolidated financial profile is also expected to remain weak over the medium term, though gearing levels will witness a moderate improvement to about 1.5 times due to better accruals and an equity infusion in 2007-08. The outlook may be revised to ‘Negative’ in case of substantial deterioration in the overall credit profile. Conversely, the outlook may be revised to ‘Positive’ in case of substantial improvement in the overall credit profile. About GSOGCU Gujarat Spices and Oilseeds Growers Co-operative Union is a state-level co-operative federation set up in August 2003 in order to avail of the benefits available under the Gujarat Earthquake Relief Programme. The Union, located in Gujarat is engaged in the business of edible oil refining. It has an installed capacity of 270,000 tonnes per annum for oil refining. GSOGCU’s products are sold under the brand names Shreeji (soya oil), Oscar (palm oil), Lijjat (vanaspati), and Shreehari (palmolein). The Union uses Vimal Oil and Foods Ltd’s marketing network for its sales and pays a proportionate share of the marketing manpower cost. It also has its own small marketing network in states where VOFL does not have a presence. For 2006- 07, the GSOGCU-VOFL combine’s consolidated profit after tax stood at INR92.45 million (INR40.22 million in the previous year) on net sales of INR8.60 billion (INR7.22 billion). |
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