Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the long-term bank facilities of Gujarat Ambuja Exports Limited (GAEL). CRISIL Ratings has withdrawn its ratings on bank facilities of Rs 367.40 crore on the request of the client and on reciept of no objection certificate . The withdrawal is in line with the CRISIL Ratings' withdrawal policy.

 

The company registered flat revenue growth in fiscal 2022 owing to impact on exports in the agro division, which offset revenue growth of ~35% in the maize division driven by increase in maize prices. Earnings before interest, tax, depreciation, and amortisation (Ebitda) margin increased to 14.9% in fiscal 2022 driven by inventory gain in the maize segment. In the nine months of fiscal 2023, revenue increased marginally by 2% because of low volume growth owing to high prices of maize and other agro products and Ebitda margin corrected to 10.6% due to high raw material prices as well. For the full fiscal 2023, the Ebitda margin is estimated at 10-11% with revenue growth remaining flat.

 

The company is focusing towards increasing the share of the high-margin maize processing segment, where it enjoys strong market position, and is solidifying the same through capacity addition. Capacity of its maize processing segment (accounting for 61% of revenue in the nine months of fiscal 2023) is 4,000 tonne per day (TPD) and is expected to increase to 5,000 TPD by fiscal 2024 and 6,000 TPD by fiscal 2025. Increase in capacity will improve the business risk profile of the company.

 

The agro processing segment (accounting for 39% of revenue in the nine months of fiscal 2023) is susceptible to demand and price risks, and hence, the company is reducing the segment’s share in revenue with more focus on maintaining price parity and segment profitability. Share of the agro processing segment in overall revenue declined to 39% in the nine months of fiscal 2023 from 55% in fiscal 2021.

 

The ratings continue to reflect the company's established position in the maize-processing and edible oil refining segments, improving operating efficiency and comfortable financial risk profile. These strengths are partially offset by exposure to risks inherent in agricultural commodity businesses and subdued performance of yarn business.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of GAEL.

Key Rating Drivers & Detailed Description

Strengths:

Established position in the maize processing and edible oil businesses

GAEL is one of the established players in agro and maize processing in India. The company is the largest player in maize processing with capacity of 4,000 TPD and domestic market share of around 20%. The maize processing division contributed to more than 60% of revenue in the nine months of fiscal 2023, and its contribution is expected to increase post completion of ongoing capital expenditure (capex). The company offers a wide range of products such as starch, starch derivatives and starch by-products, which find application in food processing, pharmaceutical, paper and textile industries.

 

In the agro processing division, the company sells soya edible oil, refined palm oil, refined sunflower oil and de-oiled cakes. Customers of GAEL include ITC Ltd (ITC; 'CRISIL AAA/Stable/CRISIL A1+'), Cargill India Pvt Ltd ('CRISIL A1+'), BL Agro Oils Ltd, Agro Tech Foods Ltd ('CRISIL AA-/Negative/CRISIL A1+') and Godrej Agrovet Ltd. The company is reducing the share of the agro processing division owing to the unstable price and demand dynamics of the industry.

 

Improving operating efficiency and efficient working capital management

The profitability during fiscal 2022 has improved to 14.9% due to inventory gains and is expected to be in the range of 10-12% in the near term with correction in maize prices which is higher than the historical range of 7-9%. Increasing contribution from the maize processing division will support margin growth over the medium term.

 

Higher profitability enabled increase in return on capital employed (RoCE) to around 29% in fiscal 2022 from around 13% in fiscal 2020. Utilisation of around 80% in the maize processing plant and increased share of derivatives in the maize segment will support the operating margin, offsetting volatility in the operating margin of the agro processing division. The company owns its warehouses as well as fleet, unlike its competitors, supporting profitability. Also, most of the processing plants are near raw material sources, which reduces freight cost and improves operating efficiency.  

 

Comfortable financial risk profile

Steady cash accrual and prudent funding of capex resulted in comfortable gearing of 0.03 time as on September 30, 2022. The company has only short-term debt. Over the past two years, the company has brought down gross current assets (GCAs) to 75 days as on March 31, 2022, from 109 days as on March 31, 2018. Debt protection metrics were healthy, as reflected in interest coverage, net cash accrual to total debt and total outside liabilities to tangible networth (TOLTNW) ratios of around 128 times, 2.07 times and 0.3 time, respectively, in fiscal 2022, and expected at similar levels over the medium term.

 

Weaknesses:

Exposure to risks inherent in agricultural commodity business

The company is susceptible to risks associated with the agriculture-based commodity business, such as availability of raw materials, fluctuations in prices and changes in government regulations mainly in agro processing division. For instance, the solvent extraction (edible oil) business is vulnerable to availability of soya bean seeds in the domestic market as well as the international prices of degummed soya oil and crude palm oil, which are imported. Over the past six years, the operating margin for the agro processing division stood at 0-7%. Furthermore, demand-supply of soya bean oil and de-oiled cakes are affected by changes in regulations in the exporting and importing countries.

 

Average performance of the cotton yarn division

The cotton yarn segment has been incurring losses over the past few years. Nonetheless, this has not impacted the overall performance of the company as the share of this segment reduced to 1% of revenue in the nine months of fiscal 2023 from 4% in fiscal 2020.

Liquidity: Strong

Cash accrual is expected at Rs 450-600 crore per annum over the next three fiscals against nil term debt obligation over the medium term. Cash surplus of over Rs 500 crore and unutilised bank limit of around 50% support liquidity. Planned annual capex of Rs 350-400 crore over the next two fiscals will be funded through internal accrual.

Outlook: Stable

GAEL will continue to benefit over the medium term from its strong market position in the maize business, which should improve further with addition of capacity. The financial risk profile will remain comfortable, supported by moderate capex and prudent working capital management, leading to low reliance on debt.

Rating Sensitivity factors

Upward factors

* Substantial increase in scale of operations and improvement in operating profitability backed by addition of maize processing capacity leading to annual cash accruals over Rs 700-800 crore

* Sustenance of healthy debt protection metrics, supported by moderate capex and prudent working capital management.

 

Downward factors

* Operating profitability significantly weaker-than-expected (below 7-8%), impacting cash accruals

* Significant impact on debt metrics, due to higher-than-expected debt levels on account of sizeable capex or elongation of working capital cycle (GCA beyond 150 days)

About the Company

Incorporated in 1991 by late Mr Vijay Kumar Gupta, GAEL is currently managed by his son, Mr Manish Gupta. The company manufactures refined oil (mainly soya bean oil) and de-oiled cakes; maize products such as starch, glucose, sorbitol, dextrose monohydrate powder and maltose dextrine powder (obtained through wet corn milling technology); and cotton yarn.

 

It has solvent extraction facilities in Kadi-Gujarat, Akola-Maharashtra, and Pithampur and Mandsaur, both in Madhya Pradesh, with seed-crushing capacity of 1.32 MTPA and refining capacity of 0.39 MTPA. It has maize processing capacities of 4,000 TPD in Himatnagar-Gujarat; Sitarganj-Uttarakhand, Hubli-Karnataka and Chalisgaon, Maharashtra. Its cotton yarn spinning unit, with capacity of 65,520 spindles, is in Himatnagar-Gujarat

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Cash Credit&	NA	NA	NA	440	NA	CRISIL AA-/Stable
NA	Cash Credit	NA	NA	NA	109	NA	CRISIL AA-/Stable
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	100	NA	CRISIL AA-/Stable
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	64.4	NA	Withdrawn
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	268	NA	Withdrawn
NA	Foreign Letter of Credit$	NA	NA	NA	35	NA	Withdrawn

& - Limits can be used interchangeably with letter of credit, export packing credit/pre-shipment credit in foreign currency, export bills, working capital demand loan, trade credit for imports, bank guarantee, vendor finance, customer finance, FCNR, import letter of credit

$ - Fully Interchangeable with bank guarantee