Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of Agro Tech Foods Ltd (Agro Tech) on ‘Rating Watch with Developing Implications’.

 

The ratings have been put on watch with developing implications’ following the announcement that Board of Directors of Agro Tech have approved the acquisition of 100% of the issued and outstanding equity shares of Del Monte Foods Pvt. Ltd. (DMFPL) from their existing shareholders. Post the completion of the transaction, DMFPL will become a wholly owned subsidiary of Agro Tech. The transaction is expected to be closed in another 3-4 months post the completion of regulatory approvals. CRISIL Ratings will continue to monitor the developments in relation to the completion of this acquisition and will take the appropriate rating action post the completion.

 

Agro Tech’s operating performance moderated in fiscal 2024 with a 10.6% on-year decline in operating income owing to lower volume and prices in the oil business. While the food business registered marginal growth of 2%, the Staple business registered decline of 23% in fiscal 2024. The company has achieved operating income of Rs 387 crore in the first half of fiscal 2025. The food business is expected to show healthy growth in high-margin products which will drive overall revenue over the medium term.

 

Operating margin moderated to 4.5% in fiscal 2024 from 5.4% in fiscal 2023 with lower realisation in the oil business, leading to reduced gross margin and fixed cost absorption. The company reported operating margin of 3.2% in the first half of fiscal 2025, which is expected to improve over the medium term with increase in share of the food business. The operating performance will remain a key rating sensitivity factor over the medium term.

 

The financial risk profile remains healthy with nil long-term debt and networth of Rs 486 crore as on March 31, 2024. Adjusted gearing was 0.07 time as on March 31, 2024 (0.10 time a year earlier) and adjusted interest coverage ratio was 12.4 times during fiscal 2024 (14.6 times during the previous fiscal). The financial risk profile will likely remain strong, with adjusted gearing and adjusted interest coverage ratio expected below 0.1 time and above 10 times, respectively, over the medium term amid moderate capital expenditure (capex).

 

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

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Agro Tech and its subsidiaries to arrive at the ratings.

 

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, and continuous 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 benefits from premium pricing. The foods portfolio of the company comprises of five fast growing categories – Ready to Cook Snacks, Ready to Eat Snacks, Spreads, Breakfast Cereals and Chocolates. The company has registered a consistent compounded annual growth rate (CAGR) of 17% over the last 17 years through selective entry into these categories. Operating income from the food business grew 2% on-year in fiscal 2024 backed by growth in ACT II products (in ready-to-eat snacks segment) and new segments, such as chocolate 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. Continued access to Conagra’s branded foods portfolio of ACT II (popcorn) will enable Agro Tech to steadily improve its branded foods portfolio in India. The share of the foods business will continue to increase, supported by new product launches, while the edible oil business will hold steady. 

 

• Strong financial risk profile: The financial risk profile is supported by nil long-term debt and adjusted networth of Rs 486 crore, resulting in healthy adjusted gearing of 0.07 time as on March 31, 2024 (0.10 time a year earlier). Adjusted interest coverage ratio was 12.4 times during fiscal 2024 (14.6 times during the previous fiscal). The financial risk profile will remain comfortable over the medium term in the absence of any long-term debt or significant capex, with adjusted gearing and adjusted interest coverage ratio expected below 0.1 time and above 10 times, respectively.

 

Weaknesses:

• Susceptibility to risks associated with agriculture-based business: The edible oil business remains susceptible to availability of oil, regulatory changes and pricing. Availability of oil, both in the domestic and international markets, is linked to oilseed production, which 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, its profit margin is lower than that of integrated branded oil manufacturers. The operating margin moderated to 4.5% in fiscal 2024 (5.4% in fiscal 2023) owing to lower realisation in the oil business, leading to reduced gross margin and fixed cost absorption. The operating margin will remain sensitive to movements in commodity prices (given the company’s limited pricing flexibility amid intense competition) and sales promotion and advertising expenditure required to support the increasing scale of operations in the branded food business.

Liquidity: Strong

Cash and equivalent stood at Rs 14 crore as on March 31, 2024. Utilisation of the fund-based limit (Rs 157 crore as on June 30, 2024) was low at 12% on average for the 12 months through June 2024. The company had nil long-term debt as on March 31, 2024. Annual cash accrual of Rs 25-30 crore, cash and equivalent and unutilised bank lines will adequately cover moderate capex and working capital requirement.

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 strong financial risk profile and liquidity.
• Any positive impact on the business or financial risk profile of the company post the completion of acquisition of DMFPL

 

Downward factors:

• Weakening of operating performance with no significant growth in revenue and/or operating margin remaining below 5 – 5.5% on a sustained basis
• Increase in debt to fund capex or higher dividend outgo weakening the financial risk profile and liquidity; interest coverage ratio going below 10 times on a sustained basis
• Any negative impact on the business or financial risk profile of the company post the completion of acquisition of DMFPL

About the Company

Incorporated in 1986, Agro Tech has an established market position in the edible oil and branded food businesses 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 food market by introducing new products such as sweet corn, chocolate spread, extruded breakfast cereals, granola cereals and chocolate confectionery.

Key Financial Indicators (Consolidated)*

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

Any other information: Not Applicable