Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA (CE)/CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of The Panchmahal District Co-Op. Milk Producers Union Limited (Panchmahal Dairy).

 

The ratings factor in the unconditional, continuing and irrevocable guarantee from the Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF; ‘CRISIL AAA/Stable/CRISIL A1+’) and an undertaking by the parent for securing principal and interest obligations on the debt of the company. The suffix (CE) reflects the payment structure, which is designed to ensure full and time-bound payment to lenders.

 

In fiscal 2021, revenue rose 4% year-on-year to Rs 3018 crore despite the pandemic, driven by healthy volume growth and price increase across both, liquid milk as well as value added product (VAP) categories. Revenue growth is expected to remain healthy at 8% in fiscal 2022, supported by healthy demand and retail price increase in liquid milk since July 2021.

 

Steady growth in milk procurement over the last 18 months along with relatively lower demand in fiscal 2021 has led to a build-up of skimmed milk powder (SMP) and ghee inventory. Inventory increased to 7,922 metric tonne (MT) as on October 31, 2021, as compared to 3,374 MT as on March 31, 2020. The union is likely to undertake capital expenditure (capex) of Rs 340 crore for setting-up a milk processing and cold storage capacity in Ujjain, Madhya Pradesh, over the next two fiscals, which will be largely debt-funded. The financial risk profile will likely remain average, after factoring in the capex plans. Timely completion of planned capex, ensuring steady improvement in cash flow, will be a key monitorable. 

 

The ratings reflect the established position of the company in GCMMF’s value chain and the strong business linkages between the entities. The ratings also factor in the union’s strong procurement capability and benefits derived from the healthy position of GCMMF's Amul brand in the domestic market. These strengths are partially offset by Panchmahal Dairy's average financial risk profile because of high gearing and exposure to changes in government policies and environmental conditions, including risk of epidemics.

Analytical Approach

• For arriving at the rating on the long-term bank facilities guaranteed by GCMMF, CRISIL Ratings has applied its criteria for rating instruments backed by guarantee.
• For arriving at the rating not guaranteed by GCMMF, CRISIL Ratings has applied its criteria for notching-up ratings for parent support. GCMMF's support is treated as similar to parent support on account of the cooperative structure, with GCMMF being the apex marketing federation for all the cooperative unions in Gujarat. There is an arrangement between GCMMF and its cooperative unions for an assured off-take of their products. For Panchmahal Dairy, around 80% of sales in fiscal 2020 were to GCMMF.
• CRISIL Ratings also factors in the financial flexibility enjoyed by Panchmahal Dairy on account of the two-step price payment mechanism.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the value-chain of GCMMF and expected strong funding support: Panchmahal Dairy is one of the 19 milk cooperatives in Gujarat and has an established position in GCMMF’s value chain, given its large processing capacity and proximity to key markets. Panchmahal Dairy has exclusive rights to collect milk from the Panchmahal and Dahod districts in Gujarat and has also started procuring milk from some areas in Madhya Pradesh, Rajasthan, Chhattisgarh, and Maharashtra. The large distribution network of GCMMF as well as the strong brand equity of Amul supports the company. It should benefit from continuing strong financial support from GCMMF, given its strategic importance to the guarantor.

 

• Strong procurement set-up, backed by cooperative model: Panchmahal Dairy has exclusive rights to collect milk from the Panchmahal and Dahod districts in Gujarat and has also started procuring milk from some areas in Madhya Pradesh, Rajasthan, Chhattisgarh, and Maharashtra. It has a network of 2,155 dairy cooperative societies that collect milk from over 289,000 farmers. Average milk procurement for fiscal 2021 was 17.9 lakh litre per day (LLPD) against 15.8 LLPD in fiscal 2021.

 

• Benefits derived from GCMMF’s strong Amul brand: GCMMF is India’s largest dairy products marketing organisation, backed by a strong brand, sizeable product portfolio, wide-spread distribution network, and an aggressive marketing strategy. Panchmahal Dairy benefits from the large distribution network of GCMMF as well as the strong brand equity of Amul.

 

Weaknesses:

• Average financial risk profile: The financial risk profile is constrained by high gearing and small networth of 4.5 times and Rs 133 crore, respectively, as on March 31, 2021. As a cooperative organisation, Panchmahal Dairy distributes a major portion of the profit to village societies, which are suppliers of milk and shareholders. The union has capex plans of Rs 340 crore spread over the next two years, which will be largely debt-funded. Timely stablilisation of operations will be a key rating sensitivity factor. However, strong financial flexibility and liquidity should ensure that financial obligation is met on time.

 

• Exposure to changes in government policies and environmental conditions, including the risk of epidemic: Panchmahal Dairy, like all dairy players, is susceptible to changes in government regulations including duty on import of milk and milk products, and risks related to volatility in global milk powder prices. Milk procurement is vulnerable to environmental conditions such as the outbreak of bovine diseases. The lockdown imposed to contain the spread of Covid-19 and the pandemic itself affected institutional demand for value-added products, resulting in surplus milk procurement and build-up of SMP inventory in the first quarter of fiscal 2021.  

Liquidity: Strong

Expected net cash accrual of Rs 80-90 crore per annum will comfortably cover debt obligation of Rs 70 crore in the next few fiscals. Cash and bank balance was Rs 149 crore as on March 31, 2021. The fund-based limit was moderately utilised in fiscal 2022. Capex of Rs 340 crore over the next three years will be largely debt-funded. While a major portion of the profit generated during the year is distributed to farmers, the cooperative nature of the organisation also provides flexibility to reduce milk prices, if required, and to retain sufficient funds to service debt.

Outlook

Outlook on rating on facility guaranteed by GCMMF: Stable

The outlook is based on the ‘Stable’ outlook on the rating of GCMMF. The rating on Panchmahal Dairy will remain sensitive to any change in the ratings on GCMMF.

 

Outlook on rating on facility not guaranteed by GCMMF: Stable

CRISIL Ratings believes Panchmahal Dairy will continue to benefit from its established position in the markets allocated to it, efficient operations, and support from GCMMF.

Rating Sensitivity factors

Downward factors

• Large, debt-funded capex, resulting in gearing above 10 times
• Disruption in milk supply or softening of milk prices adversely impacting profit
• Weakening in the credit profile of GCMMF or lower criticality of the union to GCMMF

Adequacy of credit enhancement structure

• Creditworthiness of the guarantor

GCMMF has a dominant market position in the Indian dairy industry. It remains the largest dairy product marketing organisation in India, with superior brand equity, wide product portfolio, a well-spread distribution network, and an aggressive marketing strategy. The federation is part of a cooperative structure, wherein farmers are owners and suppliers to district cooperative milk unions that supply milk and milk products to GCMMF for marketing. It follows a two-step price payment mechanism, with the final price during the year reflecting strong control over the effective price paid to unions. Thus, the quality of the rated debt reflects the credit quality of the guarantor, GCMMF.

 

• The rating is based on the strength of an unconditional, continuing, and irrevocable guarantee from GCMMF and an undertaking by the parent for securing principal and interest obligations on the company’s entire debt. The (CE) suffix reflects the payment structure that is designed to ensure full and time-bound payment to lenders.

 

• According to the payment mechanism, the guarantor, GCMMF, will pay, not later than three calendar days from the due date, any amount due and payable by Panchmahal Dairy, in relation to these instruments if there is any default on, or shortfall in, payment. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

Unsupported ratings: CRISIL AA

CRISIL Ratings has introduced the ‘CE’ suffix for instruments with an explicit Credit Enhancement feature, in compliance with the Securities and Exchange Board of India’s circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has applied its criteria for notching-up ratings for parent support. GCMMF’s support is treated as similar to parent support given the cooperative structure, with GCMMF being the apex marketing federation for all the cooperative unions in Gujarat. There is an arrangement between GCMMF and its cooperative unions for assured offtake of their products. For Panchmahal Dairy, around 80% of sales in fiscal 2020 were to GCMMF.

 

Rating sensitivity factors for unguaranteed rating

 Upward factors

• Consistent revenue growth of 20% annually, along with prudent working capital management
• Timely ramp-up of operations after capacity expansion and efficient working capital management

 

Downward factors

• Large, debt-funded capex, resulting in gearing of above 10 times
• Disruption in milk supply or softening of milk prices adversely impacting profit
• Weakening in the credit profile of GCMMF or lower criticality of the union to GCMMF

About the Union

Panchmahal Dairy, incorporated in May 1973, works under the cooperative structure of GCMMF. It procures milk from 2.89 lakh farmers across 2,155 dairy cooperative societies at the village level, processes it, and sells milk products across the country. At the national level, the products are marketed by GCMMF under the Amul brand, while at the district level, products such as milk, ghee, butter, and cattle feed are sold under the Panchamrut and Amul brands. The union has milk processing units in Godhra with combined capacity of 12.05 LLPD and a unit with capacity of 1 LLPD at Ujjain in Madhya Pradesh. It also has a cattle feed plant in Khadiya, Gujarat, with capacity of 350 tonne per day. The dairy has set up a milk processing plant with capacity of 7.5 LLPD (expandable to 13 LLPD) in Taloja, Maharashtra, which became operational in September 2018. Average milk procurement in fiscal 2021 was 17.9 LLPD against 15.3 LLPD in fiscal 2020.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	3018	2879
Profit after tax (PAT)	Rs crore	14	133
PAT margin	%	0.5	4.6
Adjusted debt/adjusted networth	Times	4.70	5.49
Interest coverage	Times	2.99	4.99

*CRISIL Ratings-adjusted numbers

List of covenants

The list of material covenants under guaranteed instrument are as follows:

• Any changes in the capital structure or schemes of amalgamation/reconstruction must be agreed upon by the bank prior to being undertaken
• The borrower will seek the bank’s prior permission if the borrower (i) wishes to declare or pay any dividend/distribution to its shareholders if an event of default has occurred and is subsisting or would occur as a result of such declaration or payment of dividend/distribution or its authorisation, (ii) does any capex to the extent not included in projections resulting in increase in gross block/capital work-in-progress by more than 15% vis-a-vis the last audited figures, (iii) increases its exposure to related companies, to the extent not factored in projections,  (iv) proposes to repay existing unsecured loans and advances from promoter/directors’, or (v) wishes to avail any fresh term borrowings not included in the projections or working capital borrowings outside maximum permissible bank finance from any other bank/lender.
• The borrower should keep the bank promptly informed about any material adverse event affecting the condition of the borrower or its subsidiaries, including but not limited to litigation and disputes with Government /regulatory bodies.
• The borrower will provide its interim results within 45 days of the end of every quarter, and audited financials within 120 days of the end of financial year
• The borrower shall ensure that the milk bonus to be paid only after timely repayment  of term loan instalment and applicable interest, to the satisfaction of the bank
• The borrower to pro-actively update the bank on the development/status/receipt of ‘Grant’ under ‘Rashtriya Krishi Vikas Yojana (RKVY)’ amounting to Rs 125 crore, as specified in the national Dairy Development Board (NDDB) sanction letter vide ref no DIDF: Panchmahal : 4916 dated June 11, 2019. 

 

• The following financial covenants are applicable to borrower

Covenants	Financial year 2021 onwards
DSCR	Minimum 1.10x
Net external debt/EBITDA	Maximum 3.5x
Interest coverage ratio	Minimum 1.25x
Tangible networth	Minimum Rs 1200,000,000/-
Credit rating	AA or more

 

About the federation

Set up in 1973, GCMMF is India's largest dairy products marketing organisation. The federation procures milk from over 0.35 crore farmers, who are its members. GCMMF has 18,554 active village dairy cooperative societies and is the apex marketing federation of 19 district cooperative milk unions in Gujarat. The products of its member unions are marketed and distributed under the Amul brand. The federation is the largest exporter of dairy products from India.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Short Term Loan	NA	NA	NA	1045.0	NA	CRISIL A1+
NA	Term Loan	NA	NA	31-Jul-23	100.0	NA	CRISIL AAA (CE)/Stable
NA	Term Loan	NA	NA	15-Oct-25	55.0	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Oct-26	53.0	NA	CRISIL AAA (CE)/Stable
NA	Term Loan	NA	NA	31-Oct-25	65.0	NA	CRISIL AAA (CE)/Stable