Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings to the bank facilities of Aries Agro Limited (AAL).

 

The rating reflects the strong position of the Aries group in the organized micronutrients market with a wide product basket, strong distribution and marketing network and extensive experience of the promoters in this field. The ratings also factor in the company's adequate financial risk profile supported by its comfortable networth and moderate leverage. These strengths are partially offset by intense competition from the unorganized sector, low awareness amongst the end consumers (farmers), large working capital requirement and vulnerability of demand related to monsoon and fungal/pest attacks. Further, the company also has considerable investments in overseas subsidiary Golden Harvest Middle East FZC (GHME; 75% subsidiary) and associate company Amarak Chemicals FZC (Amarak; 49% of equity stake held by GHME ) where operations have recently re-started during the third quarter of current fiscal after being completely shut for last 3-4 years.

 

Operating income grew by 27% year on year to Rs 475 crores in fiscal 2021 from Rs 372 crores the previous fiscal, driven by healthy monsoons and increased consumer awareness. In-spite of increase in raw material prices, operating margins for fiscal 2021 were maintained at 10% (Fiscal 2020: 12%) driven by stringent cost control measures undertaken and better operating leverage. The revenue growth momentum continued into the first half of current fiscal with the company recording revenues of Rs. 284 crores, a year on year growth of 11% over the corresponding period last fiscal (H1 Fiscal 2021: Rs. 254 crore). Operating margins too remained healthy at 12.3%. However, the business is seasonal is nature with company historically recording better revenues and margins during the first half of the fiscal owing to the monsoon occurring during this period and heavier discounts being offered during the second half. Nevertheless, for the full year company is expected to record revenues in excess of Rs. 500 crores with overall margins between 8-10%. Over the medium term, revenues are expected to grow at 6-8% with margins being maintained around 8-11%.

 

Financial risk profile remained adequate supported by networth of Rs 161 crores and moderate gearing of 0.84 times as on March 31, 2021. Total debt as on March 31, 2021 stood at Rs. 135 crore with around 85% in form of working capital. Debt protection metrics for fiscal 2021 also remained adequate with Interest Coverage of 2.84 times and Net Cash Accruals to Total Debt at 0.17 times. Same is expected to improve going forward with increased cash generation and progressive repayment of term debt. Capital expenditure (capex) too is expected to be moderate at Rs 3-5 crores per annum, as there is sufficient headroom in capacities and can be easily met through expected annual accruals of Rs. 25-30 crore.  

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Aries Agro and its subsidiaries, Aries Agro Care Pvt Ltd (AAC), Aries Agro Equipments Pvt Ltd (AAE), Golden Harvest Middle East FZC (GHME) and Mirabelle Agro Manufacturing Pvt Ltd (MAMPL). The companies, collectively referred to as the Aries group, have significant operational synergies and the controlling stake in them is held by the same promoters.

 

CRISIL Ratings has also completely written off investments in associate company Amarak Chemicals FZC (Amarak)  as the company re-started operations only recently and is likely to take time to generate meaningful returns for AAL.

 

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:

• Healthy market position of the Aries group in the organized micronutrients market with a wide product basket, strong distribution and marketing network and extensive experience of the promoters in this field:

The Aries group’s promoters have been in the business for more than 50 years and have established themselves as market leaders despite the high gestation period for product acceptability. The group is, as a result of consistent marketing efforts, well versed with the functioning of the agriculture sector and is capable of meeting the demands of end users.

 

The Aries group is the largest player in the domestic chelated micronutrients market with overall market share of around 30 percent in the organized segment. The group pioneered the concept of chelated micronutrients in the country and has, over the years, steadily established a strong marketing network to educate farmers and market its products.

 

The Aries group has steadily invested in grass-root level marketing by deploying its marketing staff in villages to educate farmers, convince opinion leaders, and demonstrate the effectiveness of its products in farms. The Aries group has a strong distribution reach with 6900+ distributors and more than 86,000 retailers and presence in 2, 00,000 villages and serves 0.8 crores farmers across the country. The group has continually brought in new nutrient formulations to meet the changing requirements of various farming regions. It also looks to provide a wide range of related products and services to further strengthen its brand.

 

CRISIL Ratings believes that the wide product basket of Aries group, its well established position in the domestic chelated micronutrients market and extensive experience of the promoters will help the group maintain its strong business risk profile over the medium term.

 

• Adequate financial risk profile supported by comfortable net worth and moderate leverage:

The group’s financial risk profile is marked by comfortable net worth and moderate gearing. Net worth was comfortable at Rs.161 crores as on March 31, 2021; it has seen significant improvement from Rs.110 crores as on March 31, 2010. The improvement is mainly driven by adequate accretion to reserves on the back of healthy revenue growth and healthy profitability margin.

 

The group’s gearing was moderate at 0.84 times as on March 31, 2021. Total debt has declined to Rs.135 crores as of 31 March 2021, from Rs 171 crores as of 31 March 2018 owing to increased efficiencies in working capital management. Around 85% of total debt of Rs. 135 crore as on March 31, 2021 is in form of working capital.

 

The group’s debt protection metrics were adequate with interest coverage and net cash accruals to total debt (NCATD) ratios at 2.84 times and 0.17 times respectively, as on March 31, 2021. However, same is expected to improve going forward with increased cash generation and progressive repayment of long term debt

 

CRISIL Ratings believes the Aries group’s financial risk profile will remain adequate despite its large working capital requirements on the back of improved cash generation owing to steady revenue growth at stable margins and modest capex plans.

 

Weaknesses:

• Intense competition from the unorganized sector:

The company faces stiff competition from unorganized players which comprises about 60% of the market. The industry is characterized by low entry barriers due to low capital investment and limited product differentiation and non-regulated nature of the industry unlike fertilizers which is highly regulated. However, with increasing customer awareness and farmer education, demand for the products is expected to gradually increase and company is expected to garner more share from the unorganized segment driven by its wide product basket and superior quality.

 

• Low awareness amongst the end consumers (farmers):

One of the other major restraints to growth of the agriculture micronutrients market is the lack of awareness among farmers in developing countries regarding appropriate dosage and proper application of micronutrients, thereby limiting its demand. As per the international standards, 4 kgs of micronutrients are used per 100 kgs of fertiliser, while in India, only 870 gms of micronutrients are used per 100 kg of fertilisers. However, with increasing awareness and education among farmers relating to the benefits of micronutrients, the offtake is expected to grow steadily over the medium term.

 

• Large investments in overseas subsidiary GHME and associate company Amarak (49% equity stake held by GHME):

AAL has one subsidiary in UAE namely GHME and through it holds 49% stake in associate company Amarak. GHME  is  subsidiary operating in trading/manufacturing business of micronurtients  where the operations were ceased in fiscal 2016 due to change in duty structure. An increase in import duty on micro nutrients/plant nutrients made operations more expensive and unviable. The customs department of India had changed the product classification for micro nutrients from speciality fertilisers to plant enhancers. This led to an increase in customs duty on importing the finished product for Aries Agro. To counter this increase in customs duty the company had moved from importing the finished good to importing the chelating agent which constitutes 70% of the raw material consumed. Consequently the factory premises, plant and machinery equipment in the UAE plants have been sold off and GHME has been made a trading hub instead. The current operations in this company remains miniscule but is expected to pick up over the medium term.

 

Operations in Amarak ( Associate company in which GHME holds 49% stake) were disrupted in fiscal 2018 on account of challenges in sourcing of major raw material i.e. sulphur and on the lack of availability of power. Large receivables of around Rs. 78 crore and loans and advances of another Rs. 75 crore were stuck in the company. In fiscal 2020, company roped in a UAE based partner named Odyssey Global and divested 26% stake to mobilize resources and re-start operations in the company. The company re-started operations in October 2021. Further, with the help of the JV partner, company has been able to recover receivables of around Rs. 24-25 crore till date and expects to recover the balance amount over the medium term.  Balance loans and advances of Rs. 73.28 Crore (as on March 31, 2021) is expected to be realized over the next 4-5 years

 

• Large working capital requirement:

The Aries group’s business is highly working capital intensive as reflected in high gross current assets (GCAs) of 230 days as on March 31, 2021. The high GCAs emanates from the company’s high inventory levels of 120 to 135 days and receivables cycle of 100 to 120 days. As on March 31, 2021, the group’s outstanding debtors were 95 days. GCA has been on a reducing trend with increased efficiencies in inventory management. Further, company has also been taking advances from customers to manage its working capital. Although the advance from customers entails an interest component, thus impacting operating margins, it provides the company with offtake assurance and accordingly helps them better manage inventory. CRISIL Ratings believes the Aries group’s GCAs and working capital requirements will remain high at around 230 days over the medium term.

 

• Vulnerability of the micronutrients sector to the extent of rainfall:

Micro-nutrients are chemicals used in correcting the nutrient imbalance in soil and improving the land/crop productivity. Rainfall and its distribution over time and space is one of the basic determinants of micronutrient consumption. The fortunes of the domestic micronutrient industry are, therefore, linked to rainfall. Surplus or inadequate rainfall could affect revenue and profit margins of domestic players. Despite increasing awareness among farmers about better irrigation mechanisms, a substantial area under cultivation in the country is still not well irrigated and depends on the monsoon to meet water requirements. As the group derives major portion of its revenue from domestic markets, the group will remain susceptible to vagaries in domestic rainfall.

Liquidity: Adequate

Liquidity profile of the company remains adequate, driven by expected cash accrual of Rs 25-30 crore per annum over the medium term as against annual debt repayment obligations of Rs. 5-7 crore and modest capex of Rs. 3-5 crore. Further, working capital lines of Rs 127 crore were utilised 75% on an average over the 12 months ended November 30, 2021, providing some cushion for meeting exigencies. Internal accruals and unutilised bank limits should suffice to cover the capex, debt repayment and working capital requirements.

Outlook: Stable

CRISIL Ratings believes the business risk profile of the Aries group will continue to benefit from its established market presence, healthy product portfolio, and extensive farmer reach, while the financial risk profile will benefit from gradual improvement in working capital management and improved cash generation.

Rating Sensitivity Factors

Upward factors:

• Sustained revenue growth of 10-12% and operating margin maintained over 10%, leading to more-than-expected increase in cash accrual
• Prudent working capital management strengthening key credit metrics
• Earlier-than-expected realisation of loans and advances and receivables from associate company

 

Downward factors:

• Revenue de-growth of over 10% and decline in operating margin to less than 6%
• Significant increase in debt due to large capex or stretched working capital cycle, leading to weakening of credit metrics.

About the Group

Incorporated in 1969, AAL manufactures and markets micronutrients. It introduced the chelation technology for manufacturing micronutrients in India, and is the market leader in the same. Headquartered in Mumbai, the company has five manufacturing units in India, in addition to an overseas subsidiary for sale of chelated micronutrients. The company was founded by Dr T B Mirchandani and Ms Bala Mirchandani, and is now managed by their son Dr Rahul Mirchandani. Mr Jimmy Mirchandani recently resigned as chairman and managing director, and will continue to guide the business as a consultant for five years.  As on September 30, 2021, the promoters held 52.66% and the remaining was held by public.

 

GHME, based in the UAE, used to manufacture chelated micronutrients and will be engaged in trading henceforth. AAE imports and trades in farm equipment, and AAC trades in seeds.

 

MAMPL was incorporated on 26th December, 2019. The Company’s started its Trading Activities during the Financial Year 2020- 21 and had a Turnover of Rs. 13.22 Lakhs earning a miniscule Profit of Rs. 0.09 Lakhs.

 

In the first six months of fiscal 2022, the company’s operating income and profit after tax (PAT) stood at Rs 283.5 crore and Rs 16.13 crore, respectively, against Rs 254.3 crore and Rs 16.98 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	84.8	NA	CRISIL BBB+/Stable
NA	Cash Credit*	NA	NA	NA	40	NA	CRISIL BBB+/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	25.2	NA	CRISIL A2

*Rs 5 crore of Cash credit can be used as a sublimit to Letter of Credit

Annexure - List of Entities Consolidated

Name of the entity	Extent of consolidation	Rationale for consolidation
Aries Agro Care Pvt Ltd	100%	Subsidiary
Aries Agro Equipments Pvt Ltd	100%	Subsidiary
Golden Harvest Middle East FZC	100%	Subsidiary
Mirabelle Agro Manufacturing Pvt Ltd	100%	Subsidiary