Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Gujarat Ambuja Exports Limited (GAEL) to ‘CRISIL AA-/Stable/CRISIL A1+'.

 

The ratings reflect GAEL's stable business profile, with improving share from maize processing segment. GAEL has seen increasing contribution from the relatively stable and high margin maize processing segment, where the company enjoys a strong market position, and is further solidifying the same through capacity additions. The company is planning capacity additions through commencement of new plant at Malda, West Bengal. The company is also planning to add ethanol capacity at their Chalisgaon and Hubli plant. Overall, the maize processing division is expected to contribute to over 50% of GAEL’s revenues in fiscal 2022, and should have operating margins in excess of 20% for fiscal 2022. These strengths are partially offset by fluctuations in commodity prices and dependency on farmers and brokers for maize procurement, which can affect volumes to some extent.

 

In the company’s agro-processing segment, given better realisations in edible oil margins have remained stable in the range of 6-7%. Overall, the company’s revenues are expected to fall by around 15% in fiscal 2022 for the agro-processing segment as compared to fiscal 2021 driven by lower revenues from export sales due to mismatches in international vs. domestic Soyabean prices, leading to lower sales from crushing activity. The company is also expected to focus only on profitable conversion orders in its cotton yarn business, and scale will continue to be modest.

 

Over next 2 years, the contribution from GAEL’s maize division is expected to increase further with new capacity of 1000 tonne per day (TPD) coming up in Malda, West Bengal resulting in the overall capacity rising to 4000 TPD, also leading to better geographic reach and more stable and healthier operating margins. The ethanol capacity of around 180 klpd each to be added at Hubli and Chalisgaon by end of fiscal 2022 will further improve capacity of the maize division. This, along with profitability focussed approach in agro processing division and ongoing initiative to enhance captive power capacity, will lead to operating profitability remaining above 11% over the medium term. Exports (contributing ~25-30% to overall revenues) are expected to remain stable in the medium term despite lowering of demand in the agro-processing segment aided by improved exports in the maize segment.

 

Company’s financial risk profile remains comfortable with negligible long-term debt and prudent funding of expansions in the recent past largely out of internal accruals. Steady expected annual cash accruals of Rs 400-500 crore every year and disciplined working capital management will enable the company to keep overall debt levels under control, resulting in strong debt metrics. The company has healthy cash & cash equivalents of over Rs 200 crore as on December 31, 2021 while its bank lines remain moderately utilised, resulting in comfortable liquidity position.  While the company has capital spending plan of ~Rs.650-700 crores spread over fiscals 2022-2024, the same is expected to be funded mainly from internal accruals, resulting in continued strong debt metrics.

 

The rating continues to reflect the company's established position in the maize-processing and edible oil refining segments, improving operating efficiencies and its comfortable financial risk profile. These rating strengths are partially offset by exposure to risks inherent in agricultural commodity businesses leading to volatility in revenue and profitability and weak performance of its yarn business.

Analytical Approach

For arriving at the ratings, the business and financial risk profile of GAEL is assessed as a standalone entity.

Key Rating Drivers & Detailed Description

Strengths

* Established position in the maize processing and edible oil business

GAEL is one of the established players in agro and maize processing in India. The company is the largest player in maize processing with a capacity of 3000 tons crushed per day (TCD) and market share of around 30%. Maize division is expected to contribute more than 50% to GAEL's revenue respectively in fiscal 2022 and has registered at a cumulative aggregate growth rate (CAGR) of more than 12% over fiscals 2016-2021. GAEL offers a wide range of products such as starch, starch derivatives, and starch by products which find application in the food processing, pharmaceutical, paper, and textile industries. Further, addition of 1000 Tonnes per day (TPD) maize processing capacity through new green field project in Malda, West Bengal and 180 klpd ethanol capacity at each of their Chalisgaon and Hubli plant is expected to enhance the scale of GAEL's operations over the medium term.

 

In the agro-processing division, the company sells soya edible oil and deoiled cakes. Customers of GAEL in the agro and maize processing include some of the leading names in the industry such as ITC Ltd (ITC, rated 'CRISIL AAA/Stable/CRISIL A1+'), Cargill India Pvt. Ltd ('CRISIL A1+'), BL Agro Oils Ltd, Agro Tech Foods Ltd ('CRISIL AA-/Stable/CRISIL A1+'), and Godrej Agrovet Ltd. The revenues from agro-processing segment have grown at a CAGR of over 10% from fiscal 2016 to 2021, while the operating margin has improved from ~0% to ~6-7% during this period, owing to company’s focus on profitability.

 

* Improving operating efficiencies and disciplined working capital management.

The company's operating profitability has been on increasing trend owing to increasing contribution from maize processing segment. Operating margins in maize processing are more than 20%. The increased contribution from maize processing division has improved the margins, which are expected to be more than 11% in fiscal 2022. Improving profitability has enabled healthy return on capital employed (RoCE) from around 13% in fiscal 2020 to around 25% in fiscal 2022. The high utilisation of around 80% in the maize processing plants and increased share of derivatives in the maize segment are likely to support operating margins, offsetting volatility in operating margins of the agro processing division. Furthermore, with favourable demand for edible oil, currently margins from agro-processing division remains healthy. The company has its own warehouses as well as fleet and not on rent, unlike its competitors supporting the margins. Also most of company’s processing plants are near to the raw material sources which reduces the freight costs and improves the operating efficiency.  

 

* Comfortable financial risk profile

Steady cash generation and prudent funding of capital expenditure (capex) in addition to lower working capital requirement, have resulted in comfortable gearing of 0.09 times as on March 31, 2021. All the debt is short-term in nature to support working capital requirement. Over the last two years, with efficient working capital management, company has brought down the gross current asset (GCA) days to 85 days in fiscal 2021 compared to 109 days in fiscal 2018. Debt protection metrics are also healthy; interest coverage, net cash accrual to total debt and TOL/TNW ratios are expected to remain comfortable at around 96 times, 4.6 times and 0.16 time respectively in fiscal 2022.

 

Going forward, annual cash accruals of Rs 450-550 crore, annual capex of Rs 300-350 crore and nil term loan repayments will keep dependence on short term borrowings lower. Company will be incurring this capex for the Malda plant, Chalisgaon plant, Hubli plant and on upgradation of its power plants. Material increase in debt levels due to sizeable capex, acquisitions or elongation of working capital cycle will remain a monitorable.

 

Weakness

* Exposure to inherent risks in the agricultural commodity business

Operations are exposed to the inherent risks associated with the agriculture-based commodity business, such as availability of raw materials, fluctuations in prices, and changes in government regulations. For instance, the solvent extraction (edible oil) business is exposed to availability of soya bean seeds in domestic market as well as the international prices of degummed soya oil and crude palm oil that are imported. Over the past 6 years, operating margins for the agro processing division have ranged from 0-7%. Further, the demand-supply of soya bean oil and De-oiled cake (DOC) are affected by change in regulations in exporting and importing countries.

 

* Weak performance of cotton yarn business

The cotton yarn segment has been incurring losses over past few years, however has turned profitable in fiscal 2021. Despite the losses in the past, it has not impacted the overall performance of the company as the share of this segment is relatively small (around 4%) to the overall revenue. Company has also entered back to back agreement with one of its client which will help to limit losses for the segment.

Liquidity Strong

Liquidity is comfortable with expected cash accruals above Rs. 450 crore per annum over the next 2 years and no term debt obligations over the medium term, good cash surpluses of over Rs. 200 crore and largely unutilised bank limits. Planned capex of Rs 650-700 crore over next three fiscals is also expected to be funded through internal accruals. Company has cash and equivalents (including investments) of over Rs. 200 crores as on December 31, 2021. The company’s fund based bank limits are minimally utilized below 10% for the past 12 months ending December 2021.

Outlook Stable

CRISIL Ratings believes GAEL will continue to benefit over the medium term from a strong market position in the maize business which is expected to improve further with addition of new capacities. The company is also expected to sustain its comfortable financial risk profile, 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

GAEL was established in 1991 by late Mr Vijay Kumar Gupta, and is currently managed by his son, Mr Manish Gupta. The company manufactures refined oil (mainly soya bean oil) and de-oiled cakes (DOC); 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 Mandsour, both in Madhya Pradesh, with a total seed-crushing capacity of 1.32 million tonne per annum (mtpa) and refining capacity of 0.39 mtpa. The company has maize processing capacities of 3000 tonne per day in Himatnagar, Gujarat, Sitarganj, Uttarakhand, Hubli, Karnataka and Chalisgaon, Maharashtra. Its cotton yarn spinning unit, with capacity of 65,520 spindles, is in Himatnagar.

 

In the nine months of fiscal 2022, the company reported revenue of Rs 3449 crore and profit after tax of Rs 322 crore as against Rs 3056 crore and Rs 219 crore in the same period of previous fiscal.

Any other information: Not applicable