Key Rating Drivers & Detailed Description

Strengths:

Established market position in the MIS segment: Netafim India is one of the largest players in the domestic MIS segment, with a healthy market share, a diversified product portfolio and a wide distribution network (over 2,500 dealers). The company is executing seven CIPs, which will aid revenue growth over the medium term. The government’s efforts to popularise MIS, as a mechanism to tackle water shortage issues and enhance the yield, should also benefit performance. Moreover, the company has a wide geographic reach, with no state contributing more than 40% of the overall revenue. It has strong presence in Gujarat, Maharashtra, Tamil Nadu, AP, Telangana and Karnataka, and is likely to improve its reach in Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Bihar and Jharkhand over the medium term.

Strong support from the parent and ultimate parent: The company receives robust financial, operational and technical support for product innovation from Netafim Israel and Orbia, and leverages the extensive experience of its parents in the global market. Netafim India offers the parent a strong business potential in the Indian market. The parent had infused equity of Rs 107 crore in fiscal 2020, to support working capital requirement and CIP undertaking. Liquidity is further aided by the flexible credit period provided by the parent. The parent has also given a corporate guarantee on the loan that Netafirm India has availed from the International Finance Corporation in fiscal 2022. The company also has limits worth Rs 215 crores from one of the global bankers of Netafim Israel (backed by parent guarantee), which can fund additional working capital requirement, if any.  Netafim India will continue to receive financial support from the parent over the medium term; the extent of support will be a key monitorable.

Healthy financial risk profile: Total debt (including LC acceptances) reduced to Rs 268  crore as on March 31, 2023, from Rs 401 crore as on March 31, 2022, aided by improvement in working capital management and better collections. Debt may reduce further, with scheduled repayment of term debt starting from the first quarter of fiscal 2025, lower reliance on short-term borrowings, and the absence of any major debt-funded capital expenditure (capex) plan. Capital structure should remain comfortable with total outside liabilities to tangible networth ratio likely to be under 1.50 times as on March 31, 2024. Networth and gearing were healthy at Rs 348 crore and 0.77 times, respectively, as on March 31, 2023. Debt protection metrics will also improve over medium term: interest coverage and net cash accrual to total debt ratios were 1.6 times and 6%, respectively, in fiscal 2023 and will remain above 1.9 times and 8%, respectively, in fiscal 2024.

Weaknesses:

Large working capital requirement: Receivables have improved to 271 days as on March 31, 2023, from 431 days as on March 31, 2022, driven by collection of past dues (as majority of clients are government bodies). The company has undertaken several CIPs, which entail larger working capital requirement. However, there has been no commensurate increase in operating margin, thus impacting the return on capital employed. Working capital cycle is likely to improve over the medium term, aided by collections from CIPs, but the overall position may remain stretched, given the subsidy support for MIS. Timely realisation of these subsidies will be a key monitorable.

Susceptibility to changes in government policies: Policies related to government subsidies drive growth for the MIS sector. State governments provide up to 60% capital subsidy to farmers, and the central government offers around 30%. The government will continue to offer subsidies amidst the growing concern over drop in water levels and agriculture productivity. However, any change in schemes or reduction in subsidies may impact revenue. Around half the revenue is derived from government-related projects; state governments pay subsidies up to six months after installation/completion of the project. Additionally, pricing flexibility is limited as prices are determined by the state governments. Although working capital requirement is partly met through payables, operations will remain vulnerable to the credit extended to government agencies.

Susceptibility to volatility in raw material prices: The company is vulnerable to sharp fluctuations in raw material prices and inability to completely pass on any hike in prices to end-users, as unit prices are fixed by the government and reviewed periodically. Raw materials (high- and low-density polyethylene) are predominantly crude oil derivatives, and their prices move in line with crude oil rates. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin  fell to 5.55% in fiscal 2023 (from 6.28 % in fiscal 2022), due to rise in raw material prices.

Annexure - Details of Instrument(s)

* Fully interchangeable with bank guarantee

**Fully interchangeable with letter of credit/bank guarantee

# Interchangeable with bank guarantee of Rs 3 crore

##Fully interchangeable with letter of credit

$ Interchangeable with letter of credit of Rs 75 crore and bank guarantee of Rs 60 crore

$$ Fully interchangeable with letter of credit/WCDL

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