Detailed Rationale

CRISIL Ratings’ rating on the bank facilities of Dharampal Satyapal Limited (DSL; flagship concern of Dharampal Satyapal Group) continue to reflect DSL’s robust business profile - supported by its strong Rajnigandha brand, presence across India through an established distribution network; leadership position in the premium pan masala segment; sustained healthy financial profile. These strengths are partially offset by product concentration in revenue, regulatory risk associated with the pan masala segment and sizeable support provided to group concerns.  

 

Operating revenue is expected to register a 5-10% growth annually over the medium term backed by the opening of all retail and distributor establishments, increased focus on online sales and scaling-up of its mid-market product offerings. Operating margin to sustain at 23-25% range backed by strong brand equity, regular passing on raw material cost increase and improving backward integration. As a result, net cash accruals will be ~Rs 600 crore in fiscal 2022. Debt metrics to remain robust with Interest coverage and net cash accrual to adjusted debt (NCAAD) ratios expected at 24.63 times and 0.98 time, respectively, in fiscal 2022 compared to 25.52 times and 0.60 time, respectively, in fiscal 2021.

 

DSL’s operating revenue fell 14% in fiscal 2021 owing to the impact of the lockdown imposed by the Centre to contain the spread of Covid-19 in late March 2020 and transfer of confectionery business to a group company (DS Confectionary Ltd) October 2019 onwards. The company enjoys pricing power given its strong brand loyalty among customers and the largely price-inelastic product segment (pan masala), which is exhibited by the successful price hikes implemented by the company in the past. The company has also ventured into hydroponics business in fiscal 2021. Operating margin improved ~600 basis points in fiscal 2021 owing to a decline in key raw materials prices and cost cutting measures adopted by the company in the recent past.

Analytical Approach

The consolidated financials have been considered to arrive at the final rating for DSL factoring in its subsidiaries and joint ventures proportionately as they are also engaged in similar business lines with significant business, operational and financial linkage.

 

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:

Leading market position in the premium pan masala segment and strong business risk profile demonstrated by healthy recovery in fiscal 2021

DSL, the flagship company of the DS Group, has been in the tobacco and pan masala business for more than 80 years. DSL has remained one of the largest players in the Indian pan masala industry through its flagship brand, Rajnigandha (world’s largest selling premium pan masala), commanding 65-70% market share in a highly fragmented market. The company’s leadership position in the premium pan masala segment supports its strong operational and financial performance.

 

Despite the adverse impact of Covid-19 induced disruptions in first quarter of fiscal 2021, DSL has witnessed business recovery in subsequent quarters of the fiscal as evident by the moderate 14% decline in operating revenue in fiscal 2021 over the previous fiscal. This reflects the dominant position of its products and strong brand loyalty among customers. DSL had also undertaken cost rationalisation measures in the recent past, which shall further contribute to growth in overall metrics. DSL is focussed on securing backward integration of its key raw materials and has started production of the same at its facilities in Noida, Uttar Pradesh. The company also enjoys pricing power in a largely price-inelastic product segment (pan masala), which is exhibited by the successful price hikes implemented by the company in the past.

 

Strong pan India distribution network and healthy operating efficiency

DSL’s market position is supported by its established and strong pan India distribution network spanning more than 25,000 distributors and over 10 lakh retailers. The strength of this widespread distribution network is reflected in the group’s demonstrated ability to push sales of new products and variants. Aided by this network, the DS Group has successfully forayed into new product segments such spices, beverages, mouth fresheners, confectionary and dairy products (under brands such as Pulse, Catch, Pass Pass, Chingles and Ksheer) over the years, besides maintaining a dominant position in the pan masala and tobacco segments (under Rajnigandha, Tulsi and Tansen brands).

 

The Company has demonstrated sustained operating margin of 23-25% over the years including fiscal 2021. Prevailing decline in price of key raw materials along with cost cutting measures undertaken by the Company shall translate into additional cost savings in fiscal 2022. Going forward, operating margin is estimated to sustain at 23-25% in medium term. Return on capital employed (adjusted for cash) is estimated to sustain above 20% in medium term.

 

Healthy financial risk profile

DSL has consistently generated cash accruals greater than the requirement of its core business operations supported by sustained healthy revenue and profitability. Dependence on external borrowings has remained low because of strong capital base and healthy accrual, which have been sufficient to meet most of its funding requirements, as also reflected in its low leverage (total debt/tangible networth, or TOL/ TNW, of ~0.51 time as on March 31, 2021). This is despite DSL’s sizeable, regular outflows towards investments in various ventures to support the group’s diversification plans and other strategic investments in unrelated companies and start-ups. Liquidity is superior, characterised by sizeable cash and liquid investment balances and adequate undrawn working capital limits during the year (average utilisation of 30-35%). Debt coverage metrics are at comfortable levels with interest coverage and NCAAD expected at 24.63 times and 0.98 time, respectively, in fiscal 2022 (25.52 times and 0.60 time, respectively, in fiscal 2021).

 

DSL is expected to generate net cash accruals of ~Rs 600 crore and Rs 640 crore in fiscal 2022 and 2023.

 

Further, DSL has capital expenditure plan of Rs 100-150 crore per annum. While the company may go for inorganic growth, it will be funded prudently. As a result, adjusted Gearing is expected to further improve to 0.10-0.15x with TOL/TNW at 0.30-0.40x over the medium term.

 

Weaknesses: 

Brand and product concentration risks

DSL’s dependence upon Rajnigandha pan masala sales has remained high, with 78-80% share in revenue during the last three years. While DSL had expanded its product portfolio in recent years, to include mouth fresheners, confectionaries and dairy products, the shifting of its confectionery business to a group entity from October 2019 has again increased DSL’s concentration on the pan masala segment. Besides heightened product and brand concentration risks, the company is now exposed to increased regulatory risk associated with the product category. The company has forayed into hydroponics business in fiscal 2021. Scalability of its diversified segments is critical to reduce its dependence on pan masala business and also improve RoCE.

 

Regulatory risks due to adverse health effects of pan masala

Pan masala, due to its adverse health effects, remains susceptible to changes in government policies related to its sale. The government disincentivises consumption of pan masala by levying high taxes and periodically increasing tax rates. Thus, the company’s ability to pass on the hikes in taxes remains critical for its sales growth and profits. The company also remains exposed to the risks related to the bans on pan masala, as witnessed in the first quarter of fiscal 2021, when a temporary ban was imposed by the government on manufacturing, sale and storage of pan masala and tobacco across India, to contain the spread of coronavirus. Although the company has transferred the tobacco business to another group entity, it remains exposed to regulatory risks associated with the pan masala segment.

 

Sizeable investment in group companies and external firms

The Company has investments in affiliates amounting ~Rs 150 crore during fiscal 2021 compared to ~Rs 110 crore in fiscal 2020 which is ~3% of the networth of the Company for the year. DSL continuously invests in its affiliate concerns to support diversification, business operations as well as scalability. Additionally, the company also invests in external firms linked with development of new technology, start-ups etc. for sustained improvement in operating efficiency. Return from investments have historically being below the desired level at ~4%. As a result, overall Return on Capital Employed (~17% in fiscal 2021) has been impacted with declining trend over the years. ROCE is expected to remain in the range of 15-20% in the medium term supported by healthy profitability of core business operations.

Liquidity: Strong

DSL’s liquidity position remains strong with a comfortable cushion in working capital limits (average BLU 30-35%) and healthy free cash and bank balance of ~Rs. 575 crore as on March 31, 2021. Moreover, the company’s demonstrated ability to generate healthy cash flow from operations, together with limited repayment obligations and no material expansion plans, is expected to help it maintain a comfortable liquidity profile, despite the regular funding support to Group entities in the form of incremental investments, loans and advances.  The Company has an annual cash generating ability of ~ Rs 500-600 crore against repayment obligation of ~Rs 81 crore and Rs 50 crore in fiscal 2022 and 2023 respectively.

Outlook: Stable

The Stable outlook on the reflects CRISIL Ratings’ expectation that DSL’s credit profile will remain robust, supported by established position in the pan masala business, healthy profitability and cash generation and low reliance on debt, with limited capex/ investments plans.

Rating Sensitivity Factors

Upward Factors

• Steady and sustained improvement in operating performance, supported by enhanced products and brands diversity, resulting in cash accrual of over Rs 800 crore annually – has accruals quantum been explained earlier?
• Continued healthy financial risk profile and debt metrics, supported by moderate cash generation, and prudent working capital management
• Sustenance of healthy liquidity

 

Downward Factors

• Weak operating performance resulting in cash accrual of less than Rs 300 crore
• Any regulatory change in the pan masala segment impacting the company’s operating performance
• Weakened cash generation, along with elongation in working capital cycle and increased capital expenditure impacting debt metrics
• Steep decline in liquidity, including due to sizeable support to group companies

About the Company

DSL, is the largest entity of the DS group which contributes over 71% to the group’s revenue. The company operates in various product segments like perfumery, pan masala, dairy, and hospitality. DSL derives about 65-70% of its revenue from its flagship brand- Rajnigandha with annual sales of over Rs 2500 crore. It sells perfumery and gold & silver leaves to its other group companies which are essential raw materials for manufacturing of other flavoured and essence products

 

DSL also sells milk and other dairy based products under the brand ‘Ksheer’, the current product basket contains UHT Milk, Cow & Desi Ghee, Fresh Milk, Chaach, Dahi, Paneer, Khoya, Flavoured milk, Dairy Whitener & Creamer.

 

In FY2014, DSL demerged its food, beverage and packaging divisions into separate companies, while also transferring some of its investments in hospitality, real estate and agriculture to new holding companies. From December 2014 onwards, DSL began shifting tobacco manufacturing into a newly formed Group entity, DS Chewing Products LLP, and in October 2019, the company also shifted its confectionery business to a Group entity, DS Confectionery Products Ltd.

 

DSL has on a standalone basis registered net sale of Rs 2592 crore and operating profit of Rs 651 crore as on December 31, 2021.

Key Financial Indicators

Particulars	Unit	2021^	2020
Revenue	Rs.Crore	3211	3735
Adjusted profit after tax (PAT)	Rs.Crore	523	363
Adjusted PAT margin	%	16.28	9.7
Adjusted debt/adjusted networth	Times	0.26	0.16
Adjusted interest coverage	Times	25.52	21.64

^Provisional numbers

Any other information: Not applicable