Rating Rationale
August 06, 2024 | Mumbai
Diana Tea Co Limited
Ratings downgraded to 'CRISIL BB+/Stable/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities RatedRs.46.25 Crore
Long Term RatingCRISIL BB+/Stable (Downgraded from 'CRISIL BBB-/Stable')
Short Term RatingCRISIL A4+ (Downgraded from 'CRISIL A3')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of Diana Tea Co Ltd (DTCL) to 'CRISIL BB+/Stable/CRISIL A4+' from 'CRISIL BBB-/Stable/CRISIL A3'.

 

The downgrade reflects the muted operating profitability for two consecutive fiscals, as reflected in operating margin of about 3.7% in fiscal 2024 (against -2.5% for fiscal 2023), estimated at -2.1% in the first quarter of fiscal 2025, driven by diseconomies of scale emanating from low tea prices. This resulted in sustenance of weak debt protection metrics, with interest coverage and net cash accrual to adjusted debt ratios of 1.0 time and 0.1 time, respectively, for fiscal 2024 (-0.9 time and -0.1 time, respectively, previous fiscal). Furthermore, return on capital employed (RoCE) was low at 3.5% for fiscal 2024 against -1.6% for fiscal 2023. Sustenance of volume sales and improvement in tea prices strengthening operating efficiency and financial risk profile will be closely monitored over the medium term.

 

The ratings reflect the extensive experience of the promoters in the tea industry and moderate capital structure. These strengths are partially offset by modest profitability susceptible to volatility in tea prices and seasonality in production of tea, and exposure to government regulations.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive experience of the promoters: Plantations owned by DTCL have been under cultivation since the early 1900s. Tea produced at its estates is well known and commands a premium. The company is present in the bulk as well as branded segments, and its brand, Diana Tea, has an established market position. Longstanding presence in the tea industry has enabled DTCL to establish healthy relations with customers and suppliers, and will be instrumental for improvement in scale of operations over the medium term.

 

  • Moderate capital structure: Networth was about Rs 69 crore as on March 31, 2024, and limited dependence on external borrowings yielded gearing of less than 0.5 time and total outside liabilities to adjusted networth ratio 0.6 time.  In the absence of large, debt-funded capital expenditure (capex) and limited working capital requirement due to prudent receivables and inventory policies, steady accretion to reserve is crucial for strengthening the financial risk profile over medium term.

 

Weaknesses:

  • Modest profitability, susceptible to volatility in tea prices and seasonality in production of tea: Price of tea is linked to auction prices, which are again linked to international prices. Hence, significant price movement in the international tea market affects DTCL’s topline and operating margin. Tea is a seasonal product, and its yield is dependent on the monsoon. Unfavourable weather conditions result in poor production. Furthermore, replantation entails fixed cost per fiscal and tea industry is labour intensive, which constitutes 50-60% of the total costs. In the event of lower production, the company witnesses a pressure on profitability, as reflected in volatile operating margin of -2.5-3.7% in the two fiscals through 2024, against 4.2-13.2% in the three fiscals through 2022. Scale of operations will remain exposed to risks related to volatility in tea prices and climatic conditions.

 

  • Exposure to government regulations: The tea industry is subject to a plethora of government regulations, from raw materials to product pricing. Labour wages and import customs duty are the major concerns for the industry. India signed a free trade agreement (FTA) with ASEAN countries implemented from January 2010. Pursuant to the FTA, customs duty on tea has progressively reduced by 5% each year to reach 40% in 2022 from 100% in 2010. On the other hand, Tea Board of India mandated plucking to be stopped by December to improve the quality of Indian tea and consumer perception. Moreover, w.e.f. August 2022, plantation labour wage rate has been increased by Rs 27 per day and again by Rs 18 per day from October 2023, exerting downwards pressure on operating profitability.

Liquidity: Adequate

Bank limit utilisation was moderate at around 57% for the 12 months through March 2024. Cash accrual is expected to be over Rs 2.5 crore against term debt obligation of Rs 1.9-2.3 crore annually. over the medium term. Free cash and bank balance and liquid investments in equity were around Rs 1.1 crore and Rs 4.5 crore, respectively, as on March 31, 2024. The current ratio was low at 1 time. Low gearing and moderate networth support financial flexibility and provide cushion in case of adverse conditions or downturn in the business.

Outlook: Stable

The company will continue to benefit from the extensive experience of its promoters in the tea industry.

Rating Sensitivity factors

Upward factors

  • Growth in revenue or operating margin resulting in net cash accrual at over Rs 5 crore
  • Improvement in liquidity and debt protection metrics

 

Downward factors

  • Decline in revenue or margin leading to interest coverage ratio sustained below 1.5 times
  • Stretch in working capital cycle or large, debt funded capex or loans and advances to third party weakening financial flexibility

About the Company

Incorporated in 1911 and listed on the Bombay Stock Exchange, DTCL is an integrated tea player. The company was set up by Mr Nawab Ghulam Jabbar of Jalpaiguri, West Bengal, and was acquired by Mr Radheshyam Singhania in 1976. It is now managed by the Singhania family. It has tea plantations and manufactures crush-tear-curl (CTC) tea.

Key Financial Indicators

As on/for the period ended March 31

 

2024

2023

Operating income

Rs crore

73.05

76.30

Reported profit after tax

Rs crore

0.55

-3.09

PAT margins

%

0.8

-4.0

Adjusted Debt/Adjusted Networth

Times

0.46

0.62

Interest coverage

Times

0.98

-0.90

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Complexity Levels Rating Assigned with Outlook
NA Bank Guarantee NA NA NA 1.71 NA CRISIL A4+
NA Tea Hypothecation NA NA NA 33.55 NA CRISIL BB+/Stable
NA Term Loan NA NA Mar-2031 10.99 NA CRISIL BB+/Stable
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 44.54 CRISIL BB+/Stable   -- 09-05-23 CRISIL BBB-/Stable 09-02-22 CRISIL BBB-/Stable   -- CRISIL BBB-/Stable
Non-Fund Based Facilities ST 1.71 CRISIL A4+   -- 09-05-23 CRISIL A3 09-02-22 CRISIL A3   -- CRISIL A3
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 1.71 Punjab National Bank CRISIL A4+
Tea Hypothecation 33.55 Punjab National Bank CRISIL BB+/Stable
Term Loan 10.99 Punjab National Bank CRISIL BB+/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt

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