Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Nitta Gelatin India Ltd (NGIL; part of the NGIL group) from ‘Rating Watch with Developing Implications’ and reaffirmed the ratings at ‘CRISIL A-/CRISIL A2+’ while assigning a ‘Stable’ outlook to its long-term rating.

 

CRISIL Ratings had placed the ratings on watch in March 2024 following an order from the Maharashtra Pollution Control Board (MPCB) dated March 13, 2024, directing Bamni Proteins Ltd (BPL; subsidiary of NGIL with ~82% stake) to stop its manufacturing activities and cease sourcing water supply in view of alleged violations of pollution control norms.

 

Post order, BPL’s management stopped manufacturing operations on immediate basis and the board of directors had resolved to retrench the work force by serving appropriate notice in May 2024 as per the relevant regulations, in the absence of a technically and economically viable solution readily available for resuming operations on a sustainable basis.

 

The watch resolution reflects the low impact seen on the operations of NGIL in the first quarter of fiscal 2025 despite the closure of BPL’s operations. NGIL procures ~20% of its total ossein requirements (raw material to manufacture gelatin) through BPL, while the balance was met internally through other plants located in Kerala and Gujarat. As per the discussion with the management, NGIL, in the absence of commencement of BPL’s operations has relied on the sourcing of ossein through its in-house capacities. That said, raw material sourcing disruptions over the short – medium term impacting NGIL’s operational performance will remain a key monitorable.

 

Meanwhile, a permit to restart BPL’s operations was received on August 2, 2024, from MPCB, subject to the disposal of treated effluents on its own land after confirming to consented standards. However, the unit (of BPL) is expected to remain shut for 12-18 months until a plan for disposal of treated effluents in a sustainable manner is implemented. CRISIL Ratings will continue to monitor the timelines on the resumption of operations of BPL and any potential impact on the business and financial risk profiles of NGIL.

 

The ratings continue to reflect the established position of the NGIL group in the gelatin industry, steady technical and operational support from joint venture (JV) partner, Nitta Gelatin Inc, Japan (NGI), and adequate financial and business risk profiles of NGIL, supported by healthy growth in volumes and comfortable product realisations. These strengths are partially offset by susceptibility to fluctuations in input prices and foreign exchange (forex) rates, and probability of disruption of operations or sub-optimal capacity utilisation due to pollution concerns.

 

Revenue fell 5.8% in fiscal 2024 to Rs 533 crore, after increasing 12% on-year in fiscal 2023 to Rs 566 crore. The decline was mainly attributed to subdued global demand and an accident at Kakkanad (Kerala) factory in September 2023 that briefly impacted operations in the third quarter of the fiscal. That said, in the near term, growth will be driven by steady realisations in products such as gelatin and di-calcium phosphate (DCP) with modest growth in volumes. Furthermore, comparatively lower raw material (crushed bone) prices in the first half of fiscal 2024 led to an all-time high operating profitability of 24.1% in fiscal 2024, against 20.8% in fiscal 2023 and 13.5% in fiscal 2022. Profitability also improved due to higher realisations in the first half of fiscal 2024. While margin could soften over the medium term as the global demand-supply gap eases and fluctuation in raw material prices, which saw an increase from the second half of fiscal 2024, overall profitability is expected at 12-15% in the long term due to improved operating efficiency. With customers becoming more health conscious, demand prospects for gelatin and other protein-based products are expected to remain comfortable. 

 

The group plans to incur a capital expenditure (capex) of ~Rs 250 crore over fiscals 2025 and 2026 to expand capacity in its gelatin and collagen peptide unit. It has announced withdrawal of its proposed rights issue of Rs 40 crore to fund the above capex and plans to finance the proposed investment through a mix of internal accrual and external borrowings. Though this could be partly debt-funded, financial risk profile is projected to remain comfortable on the back of expected annual cash accrual of over Rs 50 crore and adequate liquid surplus, which stood at Rs 76 crore as of March 31, 2024.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of NGIL and its subsidiary, Bamni Proteins Ltd (BPL). This is because the two companies, collectively referred to as the NGIL group, are in the same business, operate under common management and have significant operational and financial linkages.

 

NGIL has outstanding redeemable preference shares of Rs 4.09 crore as on March 31, 2024 as consideration towards the stake of NGI in Reva Proteins Ltd. Considering the redeemable and interest-bearing nature of the shares, CRISIL Ratings has treated these as debt.

 

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:

Established presence in the gelatin market and steady support from NGI: The group is a strong player in the gelatin market. It started producing ossein and DCP in 1978, and gelatin in 1999. It has technological tie-up and operational linkages with the Osaka (Japan)-based NGI (which holds 43% stake in NGIL), a leading global gelatin manufacturer that enjoys considerable brand equity.

 

Gelatin sales, both domestically and to the parent (NGI Japan) and its group companies, contributed about 59% to the sales in fiscal 2024, followed by DCP, ossein and collagen peptide at 18%, 13% and 9%, respectively.

 

Adequate financial risk profile: Debt protection metrics remained healthy, with interest coverage and net cash accrual to total debt ratios of over 44.18 times and 17.66 times, respectively, in fiscal 2024. The strong profitability in fiscal 2023 that continued in fiscal 2024 also led to a cash surplus build-up of Rs 76 crore as on March 31, 2024. Gearing remained below 0.10 time and should be below 0.50 time despite upcoming debt funded capacity expansion plans. The ~Rs 250 crore capex planned for the next two fiscals is expected to be funded prudently through a mix of equity infusion, debt and internal accrual. Given the steady cash accrual and healthy liquidity, credit metrics and overall financial risk profile should remain strong over the medium term.

 

Weaknesses:

Susceptibility to volatility in input prices and foreign exchange (forex) rates: Crushed animal (cattle) bone and hydrochloric acid are the key raw materials. The market for crushed animal bone is highly unorganised, which exposes margin to price fluctuations. Supply of crushed bones was disrupted during the pandemic but has normalised since. Additionally, the group has sizeable forex exposure via exports. Although 60% of export receivables are hedged using forward contracts, the group remains vulnerable to any steep fluctuation in forex rates.

 

Exposure to concerns over pollution norms: Operations at the ossein plant of NGIL in Koratty, Kerala, were disrupted in the past because of an agitation by local protestors alleging pollution of the surrounding region due to effluents discharged by the plant. While NGIL has taken various measures (such as construction of an anaerobic digester) to address these concerns, the pollution allegation case is currently pending before the High Court of Kerala. Operations remain susceptible to similar protests in the future, and any stringent pollution control requirements hereon.

 

Furthermore, in March 2024, operations of its subsidiary, BPL, came to a halt due to an order by the MPCB, thereby impacting the supply chain of NGIL. While the management has confirmed that all sourcing of ossein is being met through in-house capacities and there has been minimal impact on NGIL’s operations, this will remain monitorable over the medium term. Meanwhile, a permit to restart the operations was received by BPL on August 2, 2024, from MPCB, subject to disposal of treated effluents on its own land after confirming to consented standards. However, the unit (of BPL) is expected to remain shut for 12-18 months until a plan for treatment of effluents is implemented.

Liquidity: Adequate

Cash accrual of Rs 50-70 crore is expected in the medium term. Average utilisation of fund-based limit remained low around 8% for the six months ended July 2024. Planned capex of around Rs 250 crore over fiscals 2025 and 2026, along with incremental working capital requirement, should be met through a mix of internal accrual and borrowings. Furthermore, the company has no long-term debt obligation except Rs 4 crore redeemable preference shares towards NGI, and liquid surplus of Rs 75 crore as on March 31, 2024.

Outlook: Stable

NGIL will continue to benefit from its established position in the domestic gelatin market, support from NGI, and its adequate financial risk profile. While there has been low impact on NGIL’s operations due to closure of BPL's manufacturing activities, but the timelines of resumption of operations of BPL and any potential impact on business and financial risk profiles of NGIL will continue to remain a key monitorable.

Rating Sensitivity Factors

Upward Factors

• Steady improvement in sales volumes and sustained operating profitability of over 12%
• Significant improvement in gearing and debt protection metrics

 

Downward Factors

• Decline in revenue by over 20% or fall in operating margin below 8%
• Larger-than-expected debt-funded capex weakening the credit metrics
• Inability of NGIL to replace the supply of ossein due to non-commencement of operations at BPL
• Operational disruptions due to environmental concerns, agitations, or court verdicts on pollution control

About the Group

Set up in 1975, NGIL is a JV between the Kerala State Industrial Development Corporation (32% shareholding) and NGI (43%). The company manufactures gelatin, ossein, limed ossein, and DCP by processing crushed animal bone and treating it with hydrochloric acid. It also produces collagen peptide-based consumer products used in the pharmaceuticals and healthcare industries. BPL processes crushed animal bone and hydrochloric acid into ossein and then supplies the same to NGIL.

 

NGIL merged its erstwhile subsidiary, Reva, with itself after receipt of approval from the National Company Law Tribunal in fiscal 2019, with effect from April 1, 2017.

Any other information: Not Applicable