Detailed Rationale

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

 

The rating reflects the continued healthy position of the Aries group in the organized micronutrients market with improving market share, 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 net-worth and moderate leverage. These strengths are partially offset by intense competition from the unorganized sector, low awareness amongst the end consumers (farmers) 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. With operations in Amarak gaining momentum and company opening an unit at Fujairah, it is expected to increase its reach in the export markets over the medium term.

 

The revenue of the company grew by 10% to Rs. 485 crores during 9MFY23, from earlier Rs. 440 crores during 9MFY22 driven by volume growth of 11.75% even as realizations remained flattish. During fiscal 22 the revenue of the company grew by 15% at Rs. 548 crores from earlier Rs. 475 crores during FY 21 driven by volume growth of 20% even as realizations dipped by ~5%. Continued initiatives undertaken by the company towards better educating farmers about the benefits of their products has helped the company in growing its volumes and improve its market share. However, these initiatives also resulted in increased marketing and promotional spends which had an adverse impact on the company’s operating margins.The operating margins reduced to 8% during 9MFY23 from 9.7% during 9MFY2) owing to factors mentioned above. Margins for fiscal 2022 also witnessed a year on year dip to of ~300 bps to 7% primarily owing to moderation in gross margins by ~200 bps.  It is important to note that 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 discount being offered during the second half. Nevertheless, for the full year company is expected to record revenues in excess of Rs. 600 crores with overall margins between ~7%. 

 

Financial risk profile remained adequate supported by net-worth of Rs.230 crores and moderate gearing of 0.46 times as on March 31, 2022. Total debt as on March 31, 2022 stood at Rs. 106 crore with around 83% in form of working capital. It might be noted that owing to efficient working capital management, company has been able to reduce its overall borrowing from Rs.135 crore in fiscal 2021 to Rs. 106 crore in fiscal 2022 even as scale of operations increased. Debt protection metrics for fiscal 2022 also remained adequate with Interest Coverage of 2.98 times and Net Cash Accruals to Total Debt at 0.15 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.5-10 crores per annum which 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 had earlier completely written off investments in associate company Amarak Chemicals FZC (Amarak) as the company was yet to re-start its operations and thereby generate meaningful returns for AAL. However, with the help and support of 26% JV partner, Amarak re-started operations. Hence, team is recommending a change in analytical approach wherein the investments are not being knocked off.

 

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, 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 which 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 healthy 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.230 crores as on March 31, 2022 as against Rs.217 crores as on March 31, 2021.

 

The group’s gearing was moderate at 0.46 times as on March 31, 2022. Total debt has declined to Rs.106 crores as of 31 March 2022, from Rs. 135 crores as of 31 March 2021 owing to increased efficiencies in working capital management. Around 83% of total debt of Rs. 106 crores as on March 31, 2022 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 2.98 times and 0.15 times respectively, as on March 31, 2022. 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 due to improved cash generation owing to steady revenue growth at stable margins, better management of working capital cycle and modest capex plans.

 

Efficient working capital requirement

Although Aries group’s business is inherently working capital intensive, company’s consistent efforts and focus and has helped it improve its overall working capital efficiency. The company has successfully optimized its working capital cycle, by reducing its debtor days from ~120-130 days around 3-4 years back to ~80-90 days currently. The inventory period has also been rationalized from more than 150-160 days earlier to ~100- 105 days currently. Thus, even though the scale of operations have nearly doubled since fiscal 2019, the outstanding debt has come down to Rs. ~106 crore in fiscal 2022 from Rs. 172 crore in fiscal 2019. The company has been taking advances from its customers to manage its working capital better. The customer advance entails an interest component; although this impacts the operating margins, it provides the company with offtake assurance. The average working capital utilization during past 11 months has also come down and average 55% despite significant increase in volume of goods sold.

 

Weakness:

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 despite being 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 company taking aggressive measures towards farmers education, awareness amongst farmers have improved. The steady growth in awareness amongst farmers is expected to further improve offtake 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 company operating in trading/manufacturing business of micronutrients where the operations earlier ceased in fiscal 2016 due to change in duty structure. An increase in import duty on micronutrients/plant nutrients made operations more expensive and unviable. The customs department of India had changed the product classification for micronutrients from speciality fertilisers to plant growth regulators. 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 operation 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 are also expected to be realized over the next 4-5 years.

 

With operations in Amarak slowly gaining momentum and company setting up an unit at Fujairah, it expects to expand its penetration into international markets.

 

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 is likely to remain adequate, with expected accruals being sufficient to cover low repayment obligations of Rs. 3-4 crore per annum and modest capex of ~Rs. 5-10 crores per annum. Further, working capital lines of Rs. 148 crores were utilised 55% on an average over the 11 months ended November 30, 2022, providing sufficient 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, gradual long-term debt repayment and improved cash generation.

Rating Sensitivity Factors

Upward factors

• Sustained revenue growth of 10-12% and operating margin maintained at over 8-9%, leading to improvement in net cash accruals.
• Optimum working capital management strengthening key credit metrics and gradual reduction in gross current asset days
• Earlier-than-expected realisation of loans and advances and receivables from associate company.

 

Downward factors

• Revenue de-growth of over 10% and sustenance of operating margin at below 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 March 31, 2022, 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 full operations during the Financial Year 2021- 22 and had a Turnover of Rs. 667.79 Lakhs incurring a loss of Rs. 72.66 lakhs during financial year as compared to profit of Rs. 0.09 lakhs in previous year.

 

In the first nine months of fiscal 2023, AAL’s revenue and operating margins stood at Rs 485 crores and 8%, respectively, against Rs. 440 crores and Rs. 9.7%, respectively, for the corresponding period of the previous fiscal

Any other information: Not applicable