Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the long-term bank facilities of Supple Tek Industries Private Limited (STIPL).

 

The rating continues to reflect STIPL’s established presence as India’s largest exporter of basmati rice, supported by improved demand from international markets such as Middle East and China in the current fiscal. The business risk profile is further supported by improved contribution from branded products. Consequently, STIPL’s revenue was Rs 1,803.33 crore till August 2021, which is expected to further improve 25% in fiscal 2022, against Rs 2,980.2 crore revenue reported in fiscal 2021. Operating profitability improved in fiscal 2021 to 5.63%, compared to 4.59% in fiscal 2020, largely because the decline in paddy prices happened at a higher rate compared to realisations for the entire basmati rice industry during the period. Debt protection metrics continued to remain healthy, because of improved profitability, with interest coverage ratio of 9.99 times and net cash accrual to adjusted debt ratio of 0.24 time in fiscal 2021. With continued low reliance on debt, the capital structure was healthy with gearing of 1.19 times as on March 31, 2021. STIPL has efficient working capital management. These strengths are partially offset by high customer and geographical concentration and susceptibility to fluctuations in raw material and regulatory changes.

Key Rating Drivers & Detailed Description

Strengths:

Established presence as India’s largest exporter of basmati rice:

STIPL has been India’s largest exporter of basmati rice in the four fiscals through 2021, reflecting its strong position in the export market. STIPL achieved export sales of Rs 2,738 crore in fiscal 2021 as STIPL tried to concentrate on developing new geographies for managing sustainable growth in sales over the medium term. STIPL has strong relationships with over 600 customers spanning 63 countries, which contributed to 90% of sales in fiscal 2021, out of which 36 customers and 10 countries were added in fiscal 2021. CRISIL Ratings believes healthy customer relationships should continue to support STIPL’s market position as the country’s largest basmati rice exporter.

 

Efficient working capital management:

Gross current assets were estimated at 116 days as on March 31, 2021 (105 days a year earlier) despite stocking up of paddy and rice during the peak season of procurement, which begins in the third quarter of every fiscal. Usually, STIPL has inventory of 2-3 months which is lower compared to other large players in the industry because STIPL offers quick payment to farmers and thus procures sizeable quantities during the start of the season. Accordingly, STIPL’s payables have been low at 17 days and 4 days, respectively, as on March 31, 2021 and as on March 31, 2020. For its export orders, STIPL has payment terms of 50% of the order value to be remitted in the form of an advance payment at the time of booking and the balance 50% at the time of handing over the export documents to the buyer. The practice of securing advances for export shipments ensures that STIPL’s receivables net of advances received are negligible even during peak periods of exports. As on December 31, 2020, STIPL had customer advances of Rs 294 crore, against debtors of Rs 173 crore. CRISIL Ratings thus believes that STIPL’s working capital management will remain efficient. However, any material changes in the terms of credit will continue to be a key monitorable.

 

Improving contribution from branded products:

Since its inception, STIPL has been focusing on supplying in bulk to various private labels. However, over the last two years, the company aimed at increasing contribution from its own brands - Zeeba, Loloh and Punjab Kingg. Accordingly, contribution from its own brands have increased to 13% of total sales in fiscal 2021, compared to 9% in fiscal 2020 and 5% till September 2021. CRISIL Ratings believes that contribution from branded products will continue to improve at a healthy rate.

 

Comfortable financial risk profile:

STIPL’s capital structure has been healthy because of low reliance on external funds, leading to low total outside liabilities to tangible networth ratio of less than 1.55 times as on March 31, 2021. STIPL’s debt protection metrics have also been strong because of leverage and healthy profitability. Interest coverage and net cash accrual to adjusted debt ratios were 9.99 times and 0.24 time, respectively, in fiscal 2021. In the absence of any major debt-funded capital expenditure (capex), the metrics should remain stable over the medium term.

 

STIPL is funding around Rs 80 crore of capex for expansion in Kandla, Gujarat, entirely through internal accrual. The company is expanding its packaging and warehousing capacities at Kandla from 12 lakh metric tonne (MT) per annum currently to 14 lakh MT per annum. The construction of its owned plant, expected to be completed by January 2022, will also help save annual rental costs of Rs 3.32 crore which is currently being incurred by the company. CRISIL Ratings expects any future capex to be funded through cash generated by the company. Any large, debt-funded capex will be a key rating sensitivity factor.

 

Weaknesses:

High customer and geographical concentration risk:

India exports around 80% of its basmati rice to Middle Eastern countries. STIPL too, being the largest exporter, gets the majority share of its export revenue from Middle Eastern countries (91.3% and 85% of total sales in fiscal 2020 and fiscal 2021, respectively), reflecting significant geographical concentration. Despite concentration of sales in the Middle Eastern region, STIPL has significantly improved share of sales among the countries in the Middle East. However, the region has a few dominant countries which contribute a sizable proportion of sales to the Middle East region.

 

Trade and commerce in some of the Middle Eastern countries are vulnerable to various geopolitical developments which include economic sanctions and embargos among other forms of trade restrictions. On account of the criticality of its sales to the Middle Eastern region, the business profile of STIPL has geographical risks which will be a monitorable over the medium term.

 

To reduce the risk of payments from customers based in these countries, STIPL has a payment term of 50% of value of the order to be remitted in the form of an advance payment at the time of booking itself and the balance 50% at handing over the export documents to the buyer. The practice of securing advances for export shipments ensures that STIPL’s receivables net of advances received are negligible even during peak periods of exports. Although STIPL books orders directly with its customers, the payments are remitted by international traders based in the UAE. High dependency of export remittances on key traders will continue to be a key monitorable.

 

Susceptibility to fluctuations in raw material prices and regulatory changes:

Raw material (paddy) constitutes 85-90% of the sales, and its prices directly impact profitability. Paddy, being a kharif crop, is harvested only during September to December. The water requirement for basmati is high, and though the rice-growing states (Haryana, Uttar Pradesh, Uttarakhand and Punjab) have good irrigation systems, there is dependence on the monsoon. Hence, the company is exposed to the risk of limited availability of raw material during a weak monsoon, resulting in low operating income and subdued profitability.

 
Moreover, government regulations directly impact raw material availability through minimum support price and procurement policies. Profitability was 3.5-5.50% in the three fiscals through 2021 but are over 5% from fiscal 2021 because of increasing contribution from branded products and expected reduction in rental cost post completion of ongoing construction of its owned plant at Kandla, Gujarat.

Liquidity: Strong

Strong liquidity profile is indicated by expected healthy cash accrual of Rs 120-160 crore in fiscals 2022, 2023 and 2024 in the absence of any debt obligation. Bank limit utilisation averaged 29% for the 12 months through August 2021. Liquidity is supported by unsecured loans from the promoters. Current ratio was healthy at over 5 times as on March 31, 2021. STIPL accumulates cash and keeps it in the form of fixed deposits with banks. During fiscal 2022, fixed deposits peaked at Rs 124 crore in August 2021, which is just before the beginning of the paddy procurement season.

Outlook: Stable

CRISIL Ratings believes STIPL’s credit risk profile will continue to benefit from its established market position and comfortable financial risk profile.

Rating Sensitivity Factors

Upward factors

• Improvement in business risk by rationalisation of customer concentration and geographical concentration risks
• Sustainable increase in revenue and profitability by at least 40% and 100 basis points, respectively, while maintaining its working capital cycle

 

Downward factors

• Higher-than-anticipated increase in customer or geographical concentration in total sales
• Reduction in net cash accrual by more than 25%
• Debt-funded capex or significantly higher-than-anticipated inventory levels impacting the capital structure

About the Company

STIPL is the largest exporter of basmati rice in India since the last five years as per the records of the Agricultural and Processed Food Products Export Development Authority (APEDA).

 

STIPL was incorporated in 2013 and is promoted by Mr Ramneek Singh. The company is engaged in milling, processing and exporting of basmati rice under both private labels and its owned brands - Zeeba, Loloh and Punjab Kingg. The company operates in three locations – Amritsar, Punjab; Taroari, Haryana; and Gandhidham, Gujarat; with manufacturing capacity of 24 MTPH (paddy) and 6 MTPH (rice processing) in Amritsar, 6 MTPH (paddy) in Taroari and 200 MTPH (rice processing) in Kandla, Gujarat.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021*	2020
Operating income	Rs.Crore	2,980.27	3,612.50
Reported profit after tax (PAT)	Rs.Crore	104.06	96.47
PAT margin	%	3.49	2.67
Adjusted debt/adjusted networth	Times	1.19	2.29
Interest coverage	Times	9.99	4.72

*Provisional

Any other information: Not applicable