Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Mrs.Bectors Food Specialities Ltd (MBFSL) to ‘Positive’ from ‘Stable’ while reaffirming the ‘CRISIL AA-’ rating. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook factors in sustained improvement in the business risk profile of the company driven by significant scale up in operations and improvement in operating profitability while maintaining a strong financial risk profile. The business risk profile is expected to further benefit from improving geographical penetration supported by capacity expansions being undertaken, strengthening of distribution network and a strong brand recall.

 

The company reported revenue growth of ~19% on-year to Rs 1,620 crore in fiscal 2024, largely driven by volume growth and higher capacity utilisation. Healthy revenue growth momentum is expected to continue over the medium term aided by ramp-up of new capacities. Furthermore, the operating margin improved to 15.1% in fiscal 2024 from 13.4% in fiscal 2023 driven by product premiumisation, softening of key raw material prices and increasing share of export revenue. The operating margin is expected to sustain at 14-15% over the medium term supported by various cost rationalisation initiatives and gradual absorption of fixed costs with improved utilisation of incremental capacity.

 

The company has a strong financial risk profile as reflected in interest coverage ratio over 20 times in fiscal 2024. Gearing was 0.34 time as on March 31, 2024. MBFSL embarked on a capital expenditure (capex) plan of ~Rs 550 crore mainly towards capacity expansion in its Rajpura (Punjab) and Khopoli (Maharashtra) facilities and setting up a greenfield biscuit plant in Dhar (Madhya Pradesh). Out of the total capex plan, company has already incurred capex of ~Rs 200 crore in fiscal 2024 and remaining capex of ~Rs 350 crore is expected to be completed by the end of fiscal 2025. Expected annual cash accruals over Rs 200 crore over the medium term will be sufficient to cover yearly debt obligations. Further, CRISIL Ratings takes note of company’s announcement and subsequent approval by its board and shareholders for raising funds up to Rs 400 crore towards funding the ongoing capex. The company’s financial risk profile is expected to improve significantly in case the fund raise fructifies as existing debt may be reduced and additional debt would not be required for the aforementioned capex.

 

The ratings continue to reflect the company’s strong business and financial risk profiles, supported by healthy networth and comfortable debt protection metrics. These strengths are partially offset by modest market share in the intensely competitive biscuits segment and susceptibility of profitability to volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of MBFSL and its wholly owned subsidiary, Bakebest Foods Pvt Ltd (Bakebest; 'CRISIL A/Positive’), as the entities have strong 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:

• Strong brand presence in north and northwest India and improving revenue diversity: Around 80% of the company’s domestic biscuit revenue comes from north and northwest India. MBFSL is among the top three players in several states such as Punjab, Haryana, Himachal Pradesh, Jammu and Kashmir, Uttar Pradesh, Uttarakhand and Delhi National Capital Region. Revenue diversification has improved in the bakery segment, with west and south markets providing healthy contribution. The company has presence across 28 states and 5 union territories and a network of more than 490 super stockists and 1,250 distributors, which supply 700,000 retail outlets and 4,000 preferred outlets.

 

Furthermore, it has been increasing its premium product portfolio and leveraging its presence with focus on high-margin biscuits, such as cookies, creams and crackers, and reduced dependence on low-margin glucose biscuits. Strong growth in the bakery segment is reflected in its contribution of 35% to overall revenue in fiscal 2024. English Oven is among the leading premium bakery brands in India. With addition of new lines and products (premium breads, croissants and buns), the business is likely to grow over the medium term.

 

• Established relationships with large institutional players: MBFSL has been a preferred supplier of buns to large quick-service restaurants (QSR) customers and is also targeting new quick-service restaurants supported by its continued focus on quality. Longstanding relationships with large institutional customers resulted in steady revenue over the past few years.

 

The company exported biscuits to over 70 countries as of March 2024. It also undertakes job work for Mondelez International Inc. Established customer relationships are likely to provide stability to operating income and profitability, given revenue visibility and cost-plus margin clause built into long-term contracts with established institutional clients.

 

• Strong financial risk profile: Capital structure and debt protection metrics were strong, as indicated by gearing of 0.34 time as on March 31, 2024, and interest coverage ratio of 20.1 times in fiscal 2024. The financial risk profile will remain strong over the medium term despite sizeable debt-funded capex plans. Expected annual cash accruals of over Rs 200 crore will be sufficient to cover ensuing debt obligation. The working capital cycle was managed efficiently, as reflected in receivables and inventory of 32 days and 28 days, respectively, as on March 31, 2024. The company had strong liquidity and financial flexibility supported by low bank limit utilisation of 24.2% for last 15 months through June 2024. It had unencumbered cash balance of ~Rs 85 crore as on March 31, 2024.

 

Weaknesses:

• Modest market share in the intensely competitive biscuit industry: MBFSL is a relatively small player in the biscuits industry vis-à-vis other manufacturers, as reflected in overall revenue of Rs 1,620 crore in fiscal 2024 of which biscuits formed ~61%. Although its brand Cremica has established presence in north and northwest India, it has limited presence in other parts of the country. Furthermore, the biscuit industry is intensely competitive, with large players such as Britannia Industries Ltd (Britannia; ‘CRISIL AAA/Stable/CRISIL A1+’) vying for a greater market share. With the entry of ITC, Mondelez and Unibic in the biscuits segment, competition has intensified across product categories.

 

• Susceptibility of profitability to volatility in raw material prices and forex rates: The biscuits segment, accounting for ~61% of the revenue in fiscal 2024, is price-sensitive, with limited product differentiation, especially in the low-end biscuits segment. Thus, players have limited ability to pass on increase in input prices (wheat, sugar and oil accounting for 50-60% of overall cost) to customers. Therefore, profitability will remain vulnerable to sharp fluctuations in raw material prices and forex rates. While the company undertakes forward contracts to hedge its forex exposure, it is able to pass on price rises to consumers with lag.

Liquidity: Strong

MBFSL has a strong liquidity profile supported by healthy cash accrual and comfortable debt protection metrics. Annual expected cash accrual over Rs 200 crore are expected to sufficiently cover planned capex and existing debt obligations of Rs 20-30 crore. Further, average utilisation of fund-based working capital limits of Rs 90 crore was low at 24.2% for the last 15 months ending June 2024. Unencumbered cash balance stood at Rs 85 crore as on March 31, 2024

Outlook: Positive

MBFSL’s business risk profile is expected to improve in the near to medium term with sustenance of healthy margins, strong brand presence in biscuit and bakery segments, improving geographical diversity and established relationship with large institutional clients.

Rating Sensitivity factors

Upward factors:

• Sustained growth in scale of operations with operating profitability being maintained at 14-15% leading to healthy cash accruals
• Increase in market share through geographical and product expansion
• Timely completion of ongoing capex and sustenance of a strong financial risk profile

 

Downward factors:

• Weaker-than-expected operating performance, leading to lower revenue and moderation in the business risk profile
• Sustained decline in operating margin to less than 11-12% resulting in lower-than-expected cash accruals
• Any large, debt-funded acquisition or capex impacting the financial risk profile

About the Company

Mr Anoop Bector set up MBFSL as a joint venture (JV) with Quaker Oats (now a subsidiary of PepsiCo Inc) to supply packaged ketchup to McDonald's, in addition to buns, batter and bread. Quaker Oats withdrew from the JV in 1999. In fiscal 2014, the company underwent business reorganisation and demerged its food supplements (sauces, spreads and namkeen) division. MBFSL is now focusing on digitisation and strengthening its senior leadership team in operations and supply chain. The new CEO, Mr Manu Talwar, has experience of over three decades and business leadership exposure in consumer-facing industries. The company has expanded its geographical presence over the years.

 

MBFSL operates in three segments: it sells biscuits under the brand Mrs Bectors Cremica; buns and other bakery items to institutional investors viz. large QSR chains,; and bread and bakery items under its brand English Oven to modern retail chains  and distributors.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

*Includes Rs 20 crore of sublimit for export credit packing credit