Rating Rationale
March 15, 2022 | Mumbai
Wow Momo Foods Private Limited
Rating migrated to 'CRISIL BB+/Stable'
 
Rating Action
Total Bank Loan Facilities RatedRs.70 Crore
Long Term Rating&CRISIL BB+/Stable (Migrated from 'CRISIL BB+/Stable ISSUER NOT COOPERATING*')
& *Issuer did not cooperate; based on best-available information
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

Due to inadequate information, CRISIL Ratings, in line with the Securities and Exchange Board of India guidelines, had migrated its rating on the long-term bank facilities of Wow Momo Foods Private Limited (WMFPL) to ‘CRISIL BB+/Stable Issuer Not Cooperating'. However, the management has subsequently started sharing the requisite information necessary for carrying out a comprehensive review of the rating. Consequently, CRISIL Ratings is migrating its rating on the long-term bank facilities of WMFPL from ‘CRISIL BB+/Stable Issuer Not Cooperating’ to ‘CRISIL BB+/Stable’.

 

The rating continues to reflect the moderate business risk profile of WMFPL and above-average financial risk profile because of comfortable capital structure. These strengths are partially offset by exposure to competition in the quick service restaurant (QSR) industry and to risk associated with stabilisation of business operations in new geographies.

 

The company incurred operating losses in fiscal 2021 (due to lockdown, leading to lower absorption of fixed costs) and is likely to neither register profit nor incur loss in fiscal 2022 (Ebitda level). Modest profitability in fiscal 2022 is estimated to be due to lower absorption of costs of two new verticals: Wow! Chicken and FMCG (frozen momos). However, after witnessing operating-level losses in the first-half of fiscal 2022, the company registered operating profit in the third quarter. With the economy gradually opening up, profits are likely to be higher in the fourth quarter of fiscal 2022 compared with the third quarter.

 

The rating also factors in the equity that investors have regularly infused in the business, with the latest ~Rs 125 crore in fiscal 2022. However, with large debt obligation about to commence from October 2022 and new verticals having started, a large chunk of the current cash and bank balance is likely to be utilised to meet debt obligation.

 

Since the company has continued its expansion in fiscals 2021 and 2022 (partially funded through debt), capital expenditure (capex) plans, ramp-up and debt additions (if any) will remain key monitorables.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive experience of the promoters leading to healthy growth: The promoters have experience of over a decade in the QSR industry, during which it increased outlets to 425 as of December 2021 from 64 in 2016. Backed by strong brand recall, the management now plans to expand operations to tier-2 and tier-3 cities in India over the medium term. However, such plans would be contingent on the impact of the pandemic. Sales growth in existing stores, rise in turnover, and improvement in profitability of the new stores will be key monitorables.

 

  • Healthy industry prospects augmenting business risk profile: The QSR segment, in which the company operates, constitutes around 45% of the Indian food service market. This industry is estimated to have registered a compound annual growth rate (CAGR) of around 10% over fiscals 2018-2022. However, the QSR segment is expected to grow at a better rate, backed by changes in the food habits and lifestyles of people living in metros and tier-1 cities. In the past, the company grew at CAGR of around 30% during fiscals 2016-2020. Product quality, increasing brand recall and strategic price point positioning could augur well for future growth prospects.

 

  • Moderate financial risk profile: The management is committed to maintaining a gross debt to equity ratio of under 0.5 time on an ongoing basis. Although debt protection metrics weakened in fiscal 2021 because of operating losses, these are likely to bounce back from 2023. In the absence of any major debt-funded capex, financial risk profile is expected to sustain over the medium term.

 

Weaknesses:

  • Susceptibility to changing customer preferences in highly fragmented industry: Quick service restaurants or fast food chains are impacted by changes in customer preferences. Furthermore, the QSR industry in India is highly fragmented, with unorganised players having 67% market share. Thus, WMFPL needs to continuously innovate in terms of menu and décor to match fast-changing customer preferences. The company has undertaken initiatives (such as adding new items to the menu) and also started new verticals called Wow! Chicken and FMCG (Frozen momos). The success of such initiatives is yet to be seen.

 

  • Exposure to risk related to stabilisation of business in new geographies: From fiscal 2018 onwards, the company began increasing its presence in Odisha, Kanpur and Lucknow. Also, capex planned for the next two fiscals is mostly in tier-2 locations such as Raipur, Ahmedabad, Patna and Goa. Store performance in new cities and timely stabilisation of business operations will be key rating drivers.

Liquidity: Adequate

Bank limit utilisation was around 91% for the 33 months through January 2022. Term debt repayment will commence from October 2022 and will likely be completed over the next two fiscals. During the initial months, cash accrual is likely to be insufficient to meet debt obligation. Investment of Rs 125.89 crore from private equity players is being maintained as cash and bank balance. Of this, at least Rs 25 crore will be used to meet initial term debt obligation. Current ratio was low at 0.77 time as on March 31, 2021.

Outlook: Stable

The company will continue to benefit from the extensive experience of its promoters.

Rating Sensitivity Factors

Upward factors:

  • Healthy increase in scale of operations and profitability, leading to cushion between net cash accrual and current portion of term debt of more than Rs 7.5 crore
  • Capital infusion by the promoters or private equity partners reducing debt levels

 

Downward factors:

  • Lower-than-expected sales and dip in profitability level leading to low cash accrual
  • Higher-than-expected debt-funded capex affecting financial risk profile, especially liquidity
  • Dip in unencumbered cash and bank balance below Rs 10 crore till accruals are lesser than repayment obligations

About the Company

Set up as a partnership firm (Yo Foods India) in 2008 and reconstituted as a private limited company in 2016, WMFPL is promoted by Sagar Jagdish Daryani, Binod Kumar Homagai and Shah Miftaur Rahman. It operates QSR chains specializing in wide varieties of momos, with various other items added to its menu over the years. The company started operations with a single outlet in Kolkata, and currently owns and operates both takeaways and dine-in restaurants in Kolkata, Bengaluru, Chennai, Pune, Delhi, Noida, Gurgaon, Mumbai, Odisha, Lucknow, Goa, Kanpur and Kerala.

Key Financial Indicators

As on/for the period ended March 31

Unit 

2021

2020

Operating income

Rs.Crore

105.88

164.99

Reported profit after tax (PAT)

Rs.Crore

-59.07

-3.47

PAT margin

%

-55.79

-2.10

Adjusted debt/adjusted networth

Times

0.63

0.33

Interest coverage

Times

-2.22

1.78

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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 Proposed Long-Term Bank Loan Facility NA NA NA 60 NA CRISIL BB+/Stable
NA Cash Credit NA NA NA 10 NA CRISIL BB+/Stable
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 70.0 CRISIL BB+/Stable   -- 26-11-21 CRISIL BB+ /Stable(Issuer Not Cooperating)* 24-03-20 CRISIL BBB-/Negative 19-11-19 CRISIL BBB-/Stable --
      --   -- 30-06-21 CRISIL BBB-/Negative   -- 29-10-19 CRISIL BBB-/Stable --
      --   --   --   -- 28-02-19 CRISIL BBB-/Stable --
All amounts are in Rs.Cr.
* - Issuer did not cooperate; based on best-available information
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 10 YES Bank Limited CRISIL BB+/Stable
Proposed Long Term Bank Loan Facility 60 Not Applicable CRISIL BB+/Stable

This Annexure has been updated on 14-Mar-2023 in line with the lender-wise facility details as on 24-Feb-2023 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Assessing Information Adequacy Risk

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