Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of the promoters in the shrimp business

ZAL's promoters have more than 25 years of experience in shrimp farming. Mr Pradeep Navik started with a small farm. In 2009, he tied up with Mr Shantilal Patel to form ZAL. The company has healthy growth because of its diversified revenue from shrimp and satellite farming. ZAL has developed a strong network of farmers for satellite farming, and a strong sourcing channel for shrimps and seeds. The company commenced its shrimp processing unit in fiscal 2018, capitalizing on its existing captive and satellite farming facilities, strengthening its operating efficiency.

Company has reported operating income of Rs 302 crore in fiscal 2021, a growth of 22% as compared to fiscal 2020. Growth has continued in current fiscal as well, company recorded a revenue of around Rs 240 crore from Apr-Dec 2021, driven by recovery in exports. However, the margins have seen a decline in fiscal 2021 to 8.4% due to increase in traded goods and hike in raw material prices. Margins in fiscal 2022 are estimated to remain subdued due to increase in raw material prices and freight rates.

Healthy networth and moderate capital structure

The company's capital structure has improved however it remains moderate, marked by net worth of Rs. 57.55 crore and total outside liabilities to tangible net worth of 2.90 times as on fiscal 2021. Capital structure is expected to remain moderate over the medium term in the absence any major debt funded capex.

Weakness:

Elongated working capital cycle

Operations of the company remains working capital intensive, with Gross Current Assets (GCA) of 268 days (237 days in fiscal 2020) as of fiscal 2021 caused by debtor days at 112 days (96 days in fiscal 2020) and inventory days at 158 days (143 days in fiscal 2020). However, in fiscal 2022, company has seen an improvement in its working capital cycle, however, GCA days are expected to remain high at 180-200 days in fiscal 2022.

Exposure to risks associated with price fluctuations, geographic concentration, and competition

ZAL, a Gujarat-based player, operates on the north Gujarat sea coast near Surat. Though Gujarat is a large producer of shrimps in India, Andhra Pradesh is the leader in shrimp farming, and gives tough competition to other states. As all activities of ZAL are centered in Gujarat, it is susceptible to regional specific events impacting the business. Furthermore, the company's performance is vulnerable to volatility in the price and availability of shrimp. Any change in export or import regulations may also adversely impact the company’s performance.

Rating Sensitivity factors

Upward factors

• Improvement in revenue and operating margins. Sustainable net cash accrual above Rs 25 crore.
• Significant improvement in working capital cycle and liquidity; with GCA below 200 days and higher cushion in bank lines.

Downward factors

• Stretch in working capital cycle, leading to weakening of financial risk profile; especially interest cover falling below 1.5 times and deterioration in liquidity profile.
• Larger-than-expected debt-funded capex or acquisition, or more-than-expected dividend payouts, weakening the financial risk profile, particularly liquidity.

Key Financial Indicators

Annexure - Details of Instrument(s)

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