| Agro Tech Foods Limited | ||||||
| Rating outlook revised to 'Negative'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Agro Tech Foods Limited (Agro Tech) to 'Negative' from 'Stable', while reaffirming the ratings at 'CRISIL AA-/CRISIL A1+'.
The outlook revision follows a similar rating action by S&P Global Ratings (S&P) on Agro Tech's parent entity, Conagra Brands Inc (Conagra). S&P has revised its outlook on Conagra to 'Negative' from 'Stable', while reaffirming the issuer credit rating at 'BBB-/A-3' given recent underperformance in profit in the current inflationary cycle, leading to deterioration in adjusted leverage.
Agro Tech’s operating income was Rs 915 crore with operating margin of 5.9% during fiscal 2022 compared to Rs 892 crore and 6.5%, respectively in fiscal 2021. Revenue growth was mainly driven by the foods business while revenue from the Premium oil business remained flat and degrowth in Mass oil due to Franchising of Crystal and realignment of other mass oils business. Operating margin was subdued due to input cost inflation, which was only partly offset by price hikes. The impact of further input price inflation on the company’s operating margin going forward will remain a key monitorable.
The ratings continue to reflect Agro Tech’s established position in the branded edible oils market, growing contribution from the relatively high-margin foods business, support from Conagra and strong financial risk profile. These strengths are partially offset by exposure to inherent risk pertaining to agro-based nature of product offerings and modest profitability with significant sales derived 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. CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to Agro Tech from its parent, Conagra.
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:
Agro Tech’s established market position and improving revenue diversity will continue to support the business risk profile. Agro Tech’s edible oil brand, Sundrop, has high recall, allowing it to enjoy a pricing premium. However, the company has been focused on increasing the revenue share of its food business over the last 2-3 fiscals, driven by an expanding product portfolio. Operating income from the foods business grew 15% year-on-year during fiscal 2022, backed by strong growth in ACT II products (in the ready-to-cook snacks business) and newer business, such as chocolates. As a result, revenue share of the foods business increased to 44% in the same period, compared to 39% in the previous fiscal. The share of the foods business is expected to increase further, supported by new product launches and pruning of volumes in the mass oils business.
The financial risk profile is supported by large adjusted networth of Rs 447 crore and low debt of Rs 39 crore as on March 31, 2022. Cash accrual was Rs 40 crore during fiscal 2022, resulting in comfortable debt protection metrics. Adjusted interest coverage ratio was more than 22 times during this period. Gearing should remain minimal while interest coverage ratio should remain strong, over the medium term, in the absence of long-term debt or significant capital expenditure (capex).
Access to Conagra’s branded foods portfolio, including ACT II (popcorn), have helped Agro Tech to steadily improve its own branded foods portfolio in India. Continued focus on its ACT II product portfolio and steady addition of food products under the Sundrop brand have resulted in strong growth in revenue contribution of the food business.
Weaknesses:
The edible oil business remains susceptible to risks pertaining to availability of oil, high regulations and pricing. Availability of oil, both in the domestic and international markets, is linked to oilseed production, which in turn remains 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. In order 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 imports of sunflower and palm oil, which may impact sourcing.
Around 56% of revenue was derived from the competitive edible oils business in fiscal 2022. Though the company commands a pricing premium on edible oils by virtue of its strong brand, profit margin is lower than that of integrated branded oil manufacturers. Consolidated operating margin declined to 5.9% in fiscal 2022, compared to 6.5% in the last fiscal, given steep rise in input prices. Over the medium term, operating margin will remain sensitive to movements in commodity prices, flexibility in taking price hikes, and level of sales promotion and advertising expenditure required to support the increasing scale of operations in the branded foods business. |
Liquidity: Strong Cash equivalent stood at Rs 1.53 crore as on March 31, 2022. Furthermore, fund-based limits of Rs 167 crore remained largely unutilised for the 12 months through March 31, 2022. The company does not have major long-term debt obligation, with nil term debt as on March 31, 2022. Capex is expected to remain moderate during fiscals 2023 and 2024, with yearly cash accrual of Rs 40-50 crore, which should suffice to meet the capex and dividend requirement. |
Outlook: Negative CRISIL Ratings believes support available to Agro Tech from parent, Conagra, may decline, in case of weaker-than-expected performance of the parent company. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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About About Agro Tech: Incorporated in 1986, Agro Tech has an established market position in the edible oils and branded foods business in India, and 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 and reduce dependence on low-margin trading businesses. Agro Tech 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 About Conagra: With annual revenue of USD 11.2 billion (for fiscal 2021), Conagra is one of the leading food companies in North America. It held a majority stake of 51.77% in Agro Tech as on March 31, 2022.
For the fiscal 2022, Agro Tech reported operating income of Rs 917 crore and profit after tax (PAT) of Rs 26 crore, against Rs 892 crore and Rs 31 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
* Fully interchangeable between fund-based facility and non-fund based facility # Interchangeable between working capital loan and cash credit |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||
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