Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Positive/CRISIL A3+’ ratings to the bank facilities of Gokul Agro Resources Limited (GARL, part of the Gokul Agro group).

 

The ratings reflect the group’s strong business risk profile backed by established industry presence, large scale of operations, efficient working capital management, improving operating efficiencies and prudent risk management practices. These strengths are partially offset by though improving yet leveraged capital structure, debt protection measures, and susceptibility of operations to regulatory changes and climatic conditions and operating margin’s susceptible to any sharp and sudden unfavourable movement in commodity prices or foreign exchange rates.

Analytical Approach:

CRISIL Ratings has combined the business and financial risk profiles of GARL, and its wholly owned subsidiary, Maurigo Pte Ltd and its step-down subsidiary (i.e. wholly owned subsidiary of Maurigo Pte Ltd.) Riya International Pte Ltd. (collectively referred as the "Gokul Agro group"), as they are under the same management and have operational and financial linkages.

 

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:

Established presence and large scale of operations: The group is promoted by Thakkar family which has extensive industry experience of over 3 decades. It generates around 15-20% of its revenues through exports of soya meal, mustard deoiled cake, castor oil and its derivatives while the balance domestic revenue is spread out through the country.

 

Group has a customer base of over 500 parties and revenue contribution from top 5 does not exceed 15%. The group is well-established in the market with a reputed clientele like Parle, ITC, Britannia, Adani Wilmar among others. The group also enjoys wide presence through its brands- Zaika, Vitalife, Mahek, Pride and Richfield.

 

On the procurement side it benefits the presence of its own subsidiaries in Singapore (which is a key oil trading hub) and its long association with the largest of industry players  and plantations. Its long-standing presence in its segment of operation has enabled the group to maintain good relationships with suppliers and buyers which is critical for their line of activity.

 

Gokul Agro group has seed processing capacity of 3200 tons per day (TPD), DOC capacity of 1000 TPD, oil refining capacity of 3400 TPD, vanaspati manufacturing capacity of 200 TPD and castor derivative capacity of 200 TPD at its plant located at Gandhidham. The group clocked a turnover of Rs.8387 crores in 2020-21, growing at compounded annual growth of 18% over five years to FY21. With revenue of around Rs. 5000 cr from palm oil, the group is among top players in the segment. CRISIL Ratings believes that the group will continue to benefit from the established position and promoters experience in the business over the medium term.

 

Well managed working capital management: Gokul Agro group operates on a short working capital cycle, with minimal stocking and low debtors levels, which group further tightened in fiscal 2021. Group had gross current assets (GCA net of cash) of 45 days with debtors of 24 days and inventory of 16 days. Given the continued price rise in the edible oil, the group brought down its GCA from previous levels of around 2 months. CRISIL ratings believes that the working capital cycle shall continue to remain well managed around 45-50 days.

 

Sound operating efficiencies: Gokul Agro group has healthy operating efficiencies, reflected in robust return on capital employed (RoCE) of over 23% in fiscal 2021.Over the previous fiscals as well, RoCE was healthy ranging between 17.5 to 20%. The improvement in RoCE, in fiscal 2021, despite lower operating margin, was backed by faster rotation of capital resulting in scaled up operations. The average capacity utilization is 80% at the refining unit (through the year) and seed crushing unit (during season).

 

Prudent risk management practices: The group covers itself against inventory price fluctuations through back to back purchase arrangement wherein 70-75% of stock is pre sold. Also the balance stock is hedged through commodity exchange at CBOT, MCX, NCDEX. Given the large crude oil imports, group is exposed to high forex risk however it covers its forex as soon as it books revenue against the stock. The domestic prices reflect the fluctuation in the international oil prices and the exchange rates. Hence the group keeps its forex exposure open until sales happen. Also, the group exports around a fifth of its exports providing partial natural hedge. The counter party risk is mitigated by large (over 500) and long standing customer base, quantitative restrictions and limit on exposure with single customer base.

 

Weakness:

Leveraged capital structure and average debt protection measures, though improving : Gokul Agro group had net worth of Rs. 345 cr as on March 31, 2021 however indebtedness (total outside liabilities to tangible net worth, TOLTNW) remained high  at 3.5 times. The high indebtedness primarily emanates from significant funding requirement for the scale of group’s operations. The adjusted indebtedness (fixed deposit, cash balance, secured receivables netted off from total outside liabilities) is moderate at 2.41 times as on March 31, 2021. CRISIL Ratings believes that the group’s TOLTNW, while continuing to improve, shall remain leveraged on account of significant working capital requirements.

 

During fiscal 2021, the group brought down its borrowing costs supported by reduction in term debt borrowings, lower average interest costs and reduced LC discounting charges, thereby supporting improvement in debt protection measures. The group had an interest coverage of 2.55 times and 0.4 times in fiscal 2021 improving from 1.58 times and 0.16 times in previous fiscal. Group’s debt protection measures are likely to sustain at the improved levels backed by steady working capital cycle, moderation in term debt and absence of any large capex.

 

Susceptibility of operations to changes in regulatory policy and climatic conditions: Edible oil industry is closed monitored and regulated by government owing to direct bearing on food plate composition of common man. At various points in time, government has imposed restrictions through imposition/reduction in duties, exemptions/limitations in imports of certain edible oil or from certain countries. Further, India’s high import dependence makes the industry vulnerable to international demand supply dynamics and regulations by origin country. Gokul Agro group drives around two third of revenues from palm oil indicating high revenue concentration and pronounced import dependence risks. Moreover, edible oil, being an agricultural commodity derivative, is affected by changes in weather, epidemics, monsoon, which may affect the yield, price and availability in a particular year. Thus the group’s performance is exposed to these factors. The susceptibility is further compounded the group’s low and volatile margin business which is also exposed to sudden commodity price, forex fluctuations.

 

Operating margin’s susceptible to any sharp and sudden unfavourable movement in commodity prices or foreign exchange rates: The group is engaged in low value added nature of business activities with high competition. Consequently, Gokul Agro group has historically enjoyed low and volatile operating margin, ranging between 1.4% and 2.6%, over last five years. While the group hedges against commodity and forex risk, its margin still are susceptible to any sudden, sharp unfavourable movements in forex or commodity prices.

Liquidity: Adequate

GARL has adequate liquidity profile backed by optimum management of LC maturity, healthy cash accruals against debt servicing, and moderate bank limit utilization. The company relies on significant LC facilities  to support the import of crude oil and domestic purchases. The company ensures timely and adequate funds for LC servicing through continued build up of funds from sale proceeds. Further, the usual bank balance, margin money FD balance of over Rs. 200 cr (Rs. 239 cr and Rs. 225 cr as on March 31, 2021 and March 31, 2020 respectively) covers upcoming maturing LC obligations of around 20 days. Company had moderate bank limit utilization (export packing credit) at around 80 percent for the past twelve months ended June 2021. The company is expected to generate annual cash accruals of Rs. 70-80 cr against term debt obligation of around Rs 21 crore. Current ratio is moderate at 1.11 times on March31, 2021. The company intends to incur annual maintenance capex of around Rs. 30-35 cr which shall be appropriately funded through term loan, thereby limiting the strain on liquidity.

Outlook: Positive

CRISIL Ratings believe Gokul Agro group will continue to benefit from the extensive experience of its promoter, and established relationships with clients.

Rating Sensitivity Factors

Upward factor

• Sustenance of the interest coverage over 2.5 times with steady capital structure below 3.5 times
• Improved diversification among oils in term of revenue concentration  coupled with steady rise in accruals and sustained working capital cycle

 

Downward factor

• Deterioration in the TOLTNW over 4 times or weakening of debt protection measures
• Pressure on the operating margin or stretch in working capital cycle or large capex impacting the liquidity

About the Group

GARL came into existence post the demerger of Gokul Refoils and Solvent Limited (GRSL). The demerger received the approval and sanction from Hon'ble High Court of Gujarat with the effective date being July 01, 2015. GRSL started its operations in 1982 as partnership firm to carry out trading of sugar and edible oil. GRSL was promoted by Mr. Kanubhai Thakkar and Mr. Balvantsinh Rajput .  In 1992, it was incorporated as Gokul Refoils and Solvent Private Limited. Over the years, it expanded its refining capacity and also setup crushing and extraction facilities at different locations.

 

GARL is operated by Mr. Kanubhai Thakkar and family. Gokul Agro group has seed processing capacity of 3200 tons per day (TPD), DOC capacity of 1000 TPD, oil refining capacity of 3400 TPD, vanaspati manufacturing capacity of 200 TPD and castor derivative capacity of 200 TPD at its plant located at Gandhidham.

 

Gokul has subsidiary -Maurigo Pte Ltd and step down subsidiary- Riya International Pte Ltd. These entities are based in Singapore and are engaged in procurement and supplies to GARL. These entities’ presence in the Singapore eases the procurement of crude oil by the group and lowers the borrowing costs.

Any other information: Not applicable