| SLMG Beverages Private Limited | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
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| This Rating Rationale is published solely to update the bank-wise facility details as provided by the rated entity; other sections are same as the previous Rating Rationale dated May 06, 2022. |
Detailed rationale CRISIL Ratings rating on the long-term bank facilities of SLMG Beverages Private Limited (SLMG) continues to reflect the extensive experience of the promoters of SLMG in the non-alcoholic beverages industry, support from group companies, benefits from the acquisition of additional territories in UP and improved market position post acquisition, aided by franchisee agreement with The Coca-Cola Company (Coca-Cola; rated ‘A+/Negative/A-1’ by S&P Global Ratings). These strengths are partially offset by leveraged capital structure, change in consumer preferences, and susceptibility to adverse regulatory changes.
The rating reflects the strengthened business risk profile of SLMG after integration of territories from Hindustan Coca-Cola Beverages Pvt Ltd (HCCB) in Uttar Pradesh (UP). These territories were acquired in fiscal 2020. As per revised arrangement with HCCB, sales of all other bottlers of HCCB for UP (such as Amrit Bottlers Pvt Ltd, Brindavan Agro Pvt Ltd, Brindavan Bottlers Pvt Ltd and Brindavan Beverages Pvt Ltd) are to be routed through SLMG, which has exclusive distribution rights for entire UP and part of Uttarakhand. The integration of territories and revised arrangement of sales led to significant increase in revenue to Rs 1,576 crore in fiscal 2021 and estimated revenue of Rs 2200 crore in fiscal 2022 from Rs 532 crore in the fiscal 2020, despite the impact of Covid-19 induced disruptions on volumes, especially during the peak season. Company is expected to report healthy revenue growth in fiscal 2023 as well because the first plant of SLMG at Barabanki, UP commenced operations in May 2019 and territory acquisition from CCI was carried out in December 2019. The full benefit of large debt-funded capital expenditure (capex) has started accruing from fiscal 2022 and with enhanced capacity coming in, the operating scale is expected to improve further.
Operating margin is estimated at 8.0-8.5% in fiscal 2022. Despite the restrictions imposed during the second wave of the pandemic impacting volumes in April-May 2021, overall volumes are estimated to be higher than the previous fiscal. Accordingly, topline is likely to augment further in fiscal 2023. Operating profitability is also expected to improve on the back of better absorption of fixed costs.
CRISIL Ratings takes cognizance of a moderately leveraged capital structure, as reflected in estimated adjusted debt to networth ratio of 2.6 times as on March 31, 2022, because of sizeable debt contracted for the acquisition of territory from HCCB and new capex of ~Rs 221 crore undertaken to enhance capacity. However, with expectation of improvement in profitability and better accretion to reserve, capital structure should improve over the medium term. |
Analytical approach Unsecured loan of Rs 351 crore as on March 31, 2021, from the promoters and related parties has been treated as 75% equity and 25% debt as it is subordinate to bank debt and likely to remain in the business over the medium term. |
Key rating drivers and detailed description Strengths: Extensive experience of the promoters in the non-alcoholic beverages industry and support from group companies: The promoters' extensive experience of around three decades, strong understanding of market dynamics, and healthy relationships with Coca-Cola should continue to support the business. Constant operational and financial support from group companies, Amrit Bottlers Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+'), Brindavan Bottlers Pvt Ltd ('CRISIL BBB+/Stable), Brindavan Agro Industries Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+'), and Brindavan Beverages Pvt Ltd also benefit the credit risk profile.
Significantly improved market position post-acquisition, aided by franchisee agreement with Coca-Cola: After integration of acquired territories and revised arrangement of distribution rights, the company now caters to the entire UP region (excluding part falling in the National Capital Region), where SLMG is the sole distributor for carbonated soft drinks (CSD), juices and packaged drinking water for Coca-Cola. This makes SLMG one of the largest bottlers for Coca-Cola in India, in terms of volume (combining CSD and packaged water). There is sufficient scope to penetrate further in the acquired territories. This gives the company a headroom to grow and strengthen its market position further. Demand for beverages has been healthy in fiscal 2022 over that in the previous fiscal. Therefore, market position should sustain over the medium term.
Further improvement in operating margin: Operating margin remains low compared to other bottlers due to blended effect. As the routing of sales of group companies through SLMG happens on cost plus fixed margin basis, margin from this segment (referred as trading) remains low at less than 2%. However, the margin from manufacturing operations is comparable to other bottlers or group companies.
Operating margin, estimated at 8.0-8.5% in fiscal 2022, is expected to improve further over the medium term on the back of better absorption of overhead costs. Moreover, support from Coca-Cola should continue to its bottlers amid Covid-19 (higher proportion of reimbursement of promotion expenses and discount on concentrate pricing, which is a key input cost).
Weaknesses: Moderately leveraged capital structure: SLMG has a weak capital structure despite considering goodwill as a tangible asset. High leverage is on account of the debt-funded acquisition in fiscal 2020, full benefits of which has started reflecting from fiscal 2022. However, leverage moderated to 2.92 times as on March 31, 2021 and is estimated at 2.6 times on March 31, 2022 as well, on the back of benefits arising from integration of acquired territories and ramp-up in operations from the manufacturing plant.
SLMG has recently undertaken a capex of ~Rs 221 crore to enhance its capacity in CSD line and tetra pack unit. The capex is funded through a debt of Rs 130 crore and the balance Rs 91 crore by internal accrual and unsecured loans from promoters.
Capital structure will improve further with total outside liabilities to tangible networth ratio expected to remain moderate at 2.5-2 times over the medium term backed by increase in cash accrual and accretion to reserve, which will aid networth enhancement. Better cash accrual should also reduce reliance on external debt to fund capex and working capital requirement over the medium term.
Limited growth opportunities due to geographical concentration in revenue and change in consumer preferences: While there is scope for further penetration in the acquired territories, the exclusive franchise agreement restricts sales and growth potential of SLMG to the said region. Furthermore, with consumers increasingly turning health conscious, CSDs are losing market share to non-carbonated drinks. The company also faces stiff competition from PepsiCo India and other beverage manufacturers in the CSD segment. Incremental sales growth will, therefore, depend on the success of non-carbonated products.
Susceptibility to adverse regulatory changes: SLMG is vulnerable to any unfavourable government regulations over the contents of aerated drinks, and rising environmental concerns in the country regarding water depletion and discharge of effluents by bottling plants. Furthermore, evolving concerns related to disposal of plastic may impact the beverages industry. |
Liquidity: Adequate Net cash accrual (estimated at Rs 91 crore in fiscal 2022) was sufficient to meet debt obligation of Rs 57 crore in fiscal 2022. Expected cash accrual of Rs 140-170 crore per annum over the medium term should comfortably cover yearly debt obligation of Rs 90-130 crore and support liquidity. Utilisation of working capital limit averaged 73% for the 15 months through March 2022. Liquidity is also supported by unsecured loan of above Rs 351 crore (as on March 31, 2021) from the promoters and group companies. The group companies have also provided letter of comfort/corporate guarantee for debt contracted by SLMG. |
Outlook: Stable CRISIL Ratings believes SLMG will continue to benefit from its improved market position resulting from acquired territories and higher profitability driven by synergies post acquisition. |
Rating sensitivity factors Upward factors:
Downward factors:
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About the company SLMG was incorporated in April 2017 and commenced operations in May 2019. Mr Prakash Ladhani, Mr Paritosh Ladhani, Mr Rakesh Ladhani and Mr Vivek Ladhani are the promoters. The company recently completed setting up a CSD and juice manufacturing plant in Barabanki. It markets products under the Coca-Cola brand. |
Key financial indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 14-Jun-2022 in line with the lender-wise facility details as on 06-May-2022 received from the rated entity.
Criteria Details
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