Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Aries Agro Ltd (AAL; part of the Aries group) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB+’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A2’.

 

The revision in outlook factors in the established position of AAL in the organised micronutrients market, its improving market share, wide product basket, strong distribution and marketing network, and extensive experience of the promoters. The ratings also factor in the company's healthy and improving financial risk profile supported by its comfortable networth and reducing leverage. These strengths are partially offset by exposure to intense competition, low awareness about its products among consumers (farmers) and vulnerability of demand to monsoons and fungal/pest attacks.

 

In fiscal 2024, revenue is estimated to have improved by 8-10% from Rs 613 crore in fiscal 2023. The increase in revenue was primarily driven by volume growth of 5-6% despite realisation growth remaining muted. Revenue is expected to grow at 10-12% over the near-to-medium term driven by increased awareness among farmers of the benefits of micronutrients owing to education initiatives undertaken by the company. The company will continue to benefit from its wide product portfolio, established brand image and wide reach of over 9,600 distributors. In the first nine months of fiscal 2024, the company recorded revenue of Rs 530 crore, on-year growth of 9%, and operating margin of around 9.3%. The fourth quarter is usually a lean quarter, and hence, for the full fiscal 2024, the operating margin is estimated at 7.5% (fiscal 2023: 7%). Thereafter, the operating margin is expected to improve to 7.5-8.0% over the medium term, with sustenance of gross margin aided by calibrated price hikes, lowering dependance on imports and better operating leverage.

 

The financial risk profile remains healthy with estimated networth of Rs 270 crore as on March 31, 2024 (Rs 247 crore as on March 31, 2023) against debt of Rs 60-65 crore (sharp reduction from Rs 96 crore as on March 31, 2023), resulting in healthy gearing of 0.22 time (0.39 time). Owing to optimisation of the working capital cycle, progressive debt repayment and steady accretion to reserve, gearing is expected below 0.3 time over the medium term. Debt protection metrics will remain healthy with interest coverage expected at 5-6 times over the medium term. Net cash accrual to adjusted debt ratio is estimated at 0.54 time in fiscal 2024 and will strengthen over the medium term. Further, the company received ~Rs 11 crores in lieu of loans and advances to group company, Amarak Chemicals FZC and is expected to receive repayment of Rs 10-15 crore per annum going forward.

 

Though operations are working capital intensive, the company has been making efforts to efficiently manage the same and has been able to grow the business without additional debt. The net working capital cycle is estimated to have reduced to 65-70 days as on March 31, 2024, from 115-120 days as on March 31, 2021. This has resulted in lower utilisation of  fund-based working capital limit which stood at ~28% for the past 12 months ending March’2024. The working capital cycle is expected to remain range-bound at 65-80 days over the medium term even with growing share of exports. Also, expected cash accrual of Rs 30-45 crore per annum will be sufficient to meet yearly debt obligation of Rs 8-10 crore and partly fund capital expenditure (capex) of ~Rs 30 crore.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of AAL 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 entities, collectively referred to as the Aries group, have significant operational synergies and common promoters.

 

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 and extensive experience of the promoters: The promoters have been in the micronutrients industry for more than 50 years and have established the company as a market leader despite the high gestation period for product acceptability.

 

The company is the largest player in the domestic chelated micronutrients market and has steadily developed a strong marketing network to educate farmers and market its products.

 

It has 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. It has continuously added new nutrient formulations to meet changing requirements of farming regions and provides a wide range of related products and services, further strengthening its brand. 

 

The wide product basket of the group, its well-established position in the domestic chelated micronutrients market and extensive experience of its promoters will help maintain healthy business risk profile over the medium term.

 

• Comfortable financial risk profile: The financial risk profile is marked by comfortable networth and gearing. Networth and gearing are estimated at Rs 270 crore and 0.22 time, respectively, as on March 31, 2024, as against Rs 247 crore and 0.39 time, respectively, as on March 31, 2023. Gearing is expected below 0.3 time over the medium term with optimisation of working capital cycle, progressive debt repayment and steady accretion to reserve.

 

Debt protection metrics will remain healthy, with interest coverage ratio expected above 5 times over the medium term. Net cash accrual to adjusted debt is estimated at 0.54 time in fiscal 2024 and will strengthen further over the medium term.

 

The financial risk profile is also expected to remain healthy owing to improved cash accrual driven by steady revenue growth and stable profitability as well as better management of working capital cycle.

 

• Efficient working capital management: The working capital cycle is managed efficiently, as reflected in decline in receivables to 70-80 days from 120-130 days. Inventory has also been rationalised from 150-160 days to 90-105 days over the past 3-4 fiscals. Even though the scale of operations has doubled since fiscal 2019, outstanding debt declined to Rs 60-65 crore in fiscal 2024 from Rs 172 crore in fiscal 2019. The company has been taking advances from its customers to manage its working capital cycle better. The customer advances entail interest; although this impacts on the operating margin, it provides offtake assurance. Also, fund-based working capital limit utilisation in the past 12 months has come down to an average of 28% despite significant increase in volume of goods sold.

 

Weaknesses:

• Exposure to intense competition: The company faces competition from unorganised players, which comprise around 60% of the market. The industry is characterised by low entry barriers owing to low capital investment and limited product differentiation despite being regulated. However, with increasing customer awareness and farmer education, demand for its products should increase.

 

• Low awareness among consumers: 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, limiting demand. As per international standards, 4 kg of micronutrients are used per 100 kg of fertiliser, while in India, only 870 gm of micronutrients are used per 100 kg of fertilisers. However, with the company taking aggressive steps towards farmer education, awareness among farmers has improved, which will improve offtake over the medium term.

 

• Large investments in overseas subsidiary, GHME, and associate company, Amarak (49% equity stake held by GHME): 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, sulphur, and lack of availability of power. Loans and advances of Rs 75 crore were stuck in the company. In fiscal 2020, the company roped in a UAE-based partner, Odyssey Global, and divested 26% stake to mobilise resources and restart operations. Further, with the help of the joint venture partner, the company has been able to recover loans and advances of around Rs 20 crore till date and is expected to recover Rs 10-15 crore per annum going forward.

 

With operations in Amarak gaining momentum in Fujairah, the group expects to penetrate international markets.

 

• Vulnerability of the micronutrients sector to rainfall: Micronutrients are chemicals used for correcting 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 rainfall to meet water requirements. As the group derives a major portion of its revenue from domestic markets, it will remain susceptible to the vagaries of monsoon.

Liquidity: Adequate

Liquidity is likely to remain adequate, supported by expected cash accrual of Rs 30-45 crore per annum against yearly debt obligation of Rs 8-10 crore and capex of Rs 30 crore. Fund-based working capital limit of Rs 121 crore was utilised around 28% over the 12 months through March 2024, providing sufficient cushion for meeting exigencies. Internal accrual and bank limits will sufficiently cover capex, debt obligation and working capital requirement.

Outlook: Positive

CRISIL Ratings believes the business risk profile of the Aries group will continue to benefit from its established market presence, healthy product portfolio, and improving market share. The financial risk profile is also expected to remain comfortable with continued improvement in the working capital cycle and higher cash accruals.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth of 10-12% and operating margin maintained at 8% leading to higher net cash accrual
• Prudent working capital management strengthening key credit metrics and reduction in gross current assets
• Earlier-than-expected realisation of loans and advances and receivables from associate company

 

Downward factors:

• Decline in revenue of over 10% and sustenance of operating margin below 6%
• Significant increase in debt owing to large capex or stretched working capital cycle, weakening the 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. Headquartered in Mumbai, the company has six 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 Dr Rahul Mirchandani. As on March 31, 2024, the promoters held 52.66% stake and the remaining was held by public.

Any other information: Not Applicable

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	121.3	NA	CRISIL BBB+/Positive
NA	Letter of credit and bank guarantee	NA	NA	NA	26.7	NA	CRISIL A2
NA	Proposed cash credit	NA	NA	NA	2	NA	CRISIL BBB+/Positive