Key Rating Drivers & Detailed Description

Strengths:

• Established relationships with reputed clientele and extensive experience of the promoters: Presence of four decades in the food processing industry has enabled the promoters to scale up operations and manufacture varied products in the breakfast cereal category, along with infant food and sauces. Sizeable manufacturing capacity, technical expertise and a wide product portfolio have helped Kayem attract reputed customers such as Nestle, Pepsico, Kellogg’s, ITC Ltd and Avenue Supermart, with a steady increase in year-on-year offtake. Kayem also benefits from its longstanding relationships with most customers and arrangements as an exclusive manufacturer as well as co-developer for few of their product lines.

• Improvement in operating performance and scale of operations: Revenue has recorded a compound annual growth rate (CAGR) of 24% over the past three fiscals, to reach Rs 284 crore in fiscal 2022, driven by new and existing customers and products. The co-development strategy, contract manufacturing and cost-plus revenue model insulate the company from volatility in raw material prices, as reflected in the steady operating margin of over 24% in the past three fiscals. A slowdown was witnessed in fiscal 2022 with 15% adjusted revenue growth, which otherwise comes on the back of 51% growth in fiscal 2021. EBITDA has grown at 14% in compounded terms over the last three fiscals.

Weaknesses

• Average financial risk profile: Financial risk profile remains constrained by the large long-term debt of almost Rs 282 crore as of June 2022. The debt was primarily raised to fund capital expenditure (capex) towards setting up the facility at Rai, Haryana, few years ago. With lower-than-expected, albeit improving operations, the ratio of debt to EBITDA and interest coverage ratios stood at 4.21 times and 1.5 times, respectively, in fiscal 2022. Debt protection metrics were modest on account of high-cost debt, though supported by healthy liquidity via the unutilised bank limit. The company plans to monetise assets worth Rs 60 crore and is likely to generate accrual of more than Rs 45-50 crore within next two fiscals. CRISIL Ratings understands that proceeds from the monetisation will be utilised for part prepayment of debt, which along with the ramp-up in scale, should support the financial risk profile over the medium term. Successful closure of the monetisation plan and subsequent debt reduction will remain key monitorables.

• Susceptibility to competition and customer concentration in the food processing industry: The domestic food processing industry is highly fragmented and vulnerable to high level of competition. Also, large prominent customers are highly quality sensitive and any changes in business terms could adversely impact the operations of Kayem. However, the state-of-art facilities, technical expertise and longstanding partnerships with established global and domestic brands are likely to mitigate these risks to a certain extent.

Annexure - Details of Instrument(s)

& - Including Rs 13 crore sub-limit for bills discounting

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