Detailed Rationale

CRISIL Ratings’ rating on the long-term bank facilities of Agro Tech Foods Ltd (Agro Tech) continues on ‘Rating Watch with Negative Implications'. Also, the rating on short-term bank facilities of Agro Tech has been reaffirmed at ‘CRISIL A1’.

 

The ratings had been placed on watch with negative implications’ on March 11, 2024 following the announcement that Convergent Finance LLP and Samara Capital have jointly signed a definitive agreement for acquisition of a 51.77% stake in Agro Tech from a subsidiary of Conagra Brands Inc (Conagra; rated 'BBB-/Stable/A-3' by S&P Global Ratings), CAG Tech Mauritius Limited. As per the latest update, the transaction has received all customary regulatory approvals and open offer has been closed on July 25, 2024. As per the management discussion, the transaction is under process and is expected to be completed by the end of August 2024.

 

Presence of a strong parent (Conagra) and its expertise in same line of business provides benefit to the credit profile of Agro Tech. CRISIL Ratings will continue to monitor the progress of the transaction and take appropriate rating action post completion of the transaction and receiving clarity on the stance of support from the new parent.

 

Operating performance moderated during fiscal 2024 with decline in operating income by 10.6% on-year mainly due to decline in volumes and prices of oil business. While the foods business registered marginal growth of 2% in fiscal 2024, the oil business registered a decline of 23% in fiscal 2024. The company has achieved operating income of Rs. 181 cr in Q1FY25. Going forward, the food business is expected to show healthy growth with launch of new high margin products driving overall revenue over the medium term.

 

Operating margin moderated to 4.5% in fiscal 2024 (5.4% in fiscal 2023) owing to lower realisations from oil business leading to lower gross margins and lower fixed cost absorption. The company has reported operating margins of 3.4% in Q1FY25 and same is expected to improve in the medium term with increase in share in foods business. Overall operating performance will remain a key rating sensitivity factor.

 

The financial risk profile continues to remain healthy with nil long-term debt and healthy networth of Rs. 486 crore as on March 31, 2024. As on March 31, 2024, adjusted gearing stood at 0.07 times (0.10 times as on March 31, 2023) and adjusted interest coverage was 12.4 times during fiscal 2024 (14.6 times during previous fiscal). Further, the financial risk profile is expected to remain strong with adjusted gearing and adjusted interest coverage expected to remain below 0.1 times and above 10 times respectively over medium term with moderate capex plans.

 

The ratings continue to reflect the established position of the company in the branded edible oil business with growing contribution in the high-margin food business, support from Conagra and a strong financial risk profile. These strengths are partially offset by exposure to inherent risks in agro-based business and modest profitability, with significant sales coming from the competitive, low-margin edible oil business.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Agro Tech and its subsidiaries. Also, CRISIL Ratings has applied its parent notch-up framework to factor in the business and financial support available to Agro Tech from its parent, Conagra.

 

CRISIL Ratings will reassess its analytical approach once the transaction is closed and there is clarity on the business strategy and support philosophy of the new parent.

 

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 branded edible oils, with continued growth in the food business: Agro Tech’s established market position and improving revenue diversity will continue to support the business risk profile. Its edible oil brand, Sundrop, has high recall and enjoys premium pricing. However, the company has been focusing on increasing the revenue share of its food business over the past several years driven by an expanding product portfolio. Operating income from the food business marginally grew by 2% on-year in fiscal 2024 backed by growth in the ACT II products (in the ready-to-eat snacks business) and other new businesses, such as chocolates confectionery and breakfast cereals. As a result, the revenue share of the food business increased to 60% in fiscal 2024 from 51% in fiscal 2023. The share of the foods business will increase further supported by new product launches while the edible oil business will continue.

 

Strong financial risk profile: The financial risk profile stood healthy, supported by nil long term debt and adjusted networth of Rs 486 crore as on March 31, 2024. As on March 31, 2024, adjusted gearing stood at 0.07 times (0.10 times as on March 31, 2023) and adjusted interest coverage was 12.4 times during fiscal 2024 (14.6 times during previous fiscal). The financial risk profile will remain comfortable over the medium term in the absence of any long-term debt or any significant capital expenditure (capex) with adjusted gearing and adjusted interest coverage expected to remain below 0.1 times  and above 10 times respectively.

 

Support from the parent: Access to Conagra’s branded foods portfolio, including ACT II (popcorn), has helped Agro Tech to steadily improve its branded foods portfolio in India. Continued focus on ACT II product portfolio and steady addition of food products under the Sundrop brand have resulted in higher revenue contribution from the food business. However, as the divestment of its 51.8% stake by Conagra in company is expected to be completed in the medium term, the impact of the same on business risk profile of the company will remain a key monitorable.

 

Weaknesses:

Susceptibility to risks associated with agro-based business: The edible oil business remains susceptible to risks pertaining to availability of oil, regulatory changes and pricing. Availability of oil, both in the domestic and international markets, is linked to oilseed production, which in turn is vulnerable to factors such as monsoon, acreage under cultivation and yield. The edible oil and packaged food industries also face significant intervention from the government, given the commoditised nature of products. To ensure remunerative prices to farmers, the government fixes the minimum support price on oilseeds periodically. Moreover, recent geopolitical tensions have resulted in disruption in import of sunflower and palm oils, which may impact sourcing.

 

Modest operating profitability amid intense competition: Around 40% of the revenue came from the edible oil business in fiscal 2024. Though the company commands premium prices on edible oils by virtue of its strong brand, profit margin is lower than that of integrated branded oil manufacturers. Operating margin moderated to 4.5% in fiscal 2024 (5.4% in fiscal 2023) owing to lower realisations from oil business leading to lower gross margins and lower fixed cost absorption. In the medium term, the operating margin will remain sensitive to movements in commodity prices, limited pricing flexibility amid intense competition, and level of sales promotion and advertising expenditure required to support the increasing scale of operations in the branded foods business.

Liquidity: Strong

Cash and equivalents stood at Rs. 14 crore as on March 31, 2024. Fund-based limit utilisation (limits of Rs 157 crore as on June 30, 2024) remained low at 12% for the last 12 months through June 2024. The company has nil long term debt as on March 31, 2024. Annual cash accruals of Rs 25-30 crore, existing cash & equivalents and unutilized bank lines should be adequate for meeting the moderate capex requirement and incremental working capital requirements.

Rating Sensitivity Factors

Upward Factors

• Significant and sustained improvement in operating performance with growth in both business segments along with improvement in operating margins to more than 7-8%.
• Sustenance of financial risk profile backed by strong liquidity

 

Downward Factors

• Weakening of operating performance with decline in revenue and/or operating margin sustaining below 4-5% on a sustained basis
• Large, debt-funded capex or acquisition weakening the financial risk profile.
• Any adverse impact on business risk profile of the company post the completion of divestment of stake by existing parent, Conagra

About Agro Tech

Incorporated in 1986, Agro Tech has an established market position in the edible oil and branded food business in India; its primary brands are Sundrop, Crystal and ACT II. Over the past few years, the company has diversified its portfolio to focus on high-margin, value-added products. It has strengthened its position in the branded foods market by introducing new products such as sweet corn, chocolate spreads, hummus, extruded breakfast cereals, granola cereals and chocolate confectionery.

About Conagra

With annual revenue exceeding USD 12.1 billion as on March 31, 2024, Conagra is one of the leading food players in North America. It held majority stake of 51.77% in Agro Tech as on March 31, 2024.

Key Financial Indicators*

As on/for the year ended March 31	Unit	2024^	2023
Operating Income	Rs crore	760	850
Profit after tax (PAT)	Rs crore	10	15
PAT margin	%	1.37	1.76
Adjusted debt/adjusted networth	Times	0.07	0.11
Adjusted interest coverage	Times	12.39	14.63

*CRISIL Ratings’ adjusted numbers

^based on abridged financials disclosed the company in stock exchange

Any other information: Not Applicable