Southern Agrifurane Industries Pvt. Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 95.00 Crs. of Southern Agrifurane Industries Pvt. Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (29 Apr 2021)	Present
Fund Based	95.00	95.00	Long Term	BWR BBB-/Stable Reaffirmation	BWR BBB - /Stable Reaffirmation
Grand Total	95.00	95.00	(Rupees Ninety Five Crores Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

Brickworks Ratings (BWR) reaffirms the rating of Southern Agrifurane Industries Pvt. Ltd (SAIPL or the company) drawing comfort from experienced management, established track record of operations and a consistent moderate financial risk profile. BWR also draws comfort from the support of the Chennai based MGM Group. However, the rating remains constrained by increasing investments in subsidiary/associate companies, customer and geographical concentration risks of business, susceptibility of profitability to volatility in input prices, intense competition from other brands and regulatory risks. BWR notes the demand constraints faced by the company due to Covid-19 pandemic which impacted the revenue growth in FY21 and 9MFY22. BWR also notes the outstanding contingent liabilities of around ~Rs.48.42 Crs as on 31 Mar 2021 primarily on account of Corporate Guarantees issued on behalf of subsidiaries & associates.

BWR believes that Southern Agrifurane Industries Private Limited’s business risk profile will be maintained over the medium term. The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. The rating outlook may be revised to 'Positive' in case the revenues and profit margins show sustained improvement. The outlook may be revised to Negative if lower than expected revenue or profitability, sizeable, unanticipated capex or weakening gearing impact the financial risk profile. Any sharp reversal in industry conditions on account of any prolonged Covid-19-impact may exert downward pressure on the ratings.

KEY RATING DRIVERS

Credit Strengths:

Experienced management :
The company's management is experienced in the Indian Made Foreign Liquor (IMFL) segment, well supported by a team of qualified and experienced professionals. The company is part of Chennai based MGM group of Chennai which was founded in 1963 by Dr. M. G. Muthu. The Group has presence in logistics, hospitality, international trading, housing, distillery business and theme parks.
Established track record of operations :
The company commenced distillery and IMFL manufacturing in 2002 and has now been in operation for almost two decades. It has been able to establish long standing and satisfactory relationships with both suppliers and customers. The company sells its products majorly to TASMAC (Tamil Nadu State Marketing Corporation) owned by the Government of Tamil Nadu. The company is well established in the IMFL and breweries market in Tamil Nadu and has maintained an overall market share of ~7-8% in the industry and ~25% in the premium segment. The company has a total nine own active brands which are categorized into three range segments: premium, medium and ordinary range brands. Old VSOP, MGM GOLD VSOP, Indian Challenge, MGM Gold Reserve, Richman's Rum are the premium range brands. Apple Vodka and MGM Orange Vodka are medium-range brands and Diamond Rum is an ordinary range brand. The company is expected to benefit from the recent approvals of capacity additions. The company's capacity stands presently at ~74 lakh cases at Villupuram unit.
Consistent moderate financial risk profile :
Total operating income of the company declined from Rs. 490.17 Crs. in FY20 to Rs. 431.32 Crs. in FY21. Accordingly, EBITDA and PAT also declined from Rs. 54.77 Crs. and Rs. 38.05 Crs., respectively, in FY20 to Rs. 51.47 Crs, and Rs. 32.67 Crs., respectively, in FY21. Tangible net worth (TNW) increased from Rs. 242.71 Crs. as on 31Mar2020 to Rs. 276.25 Crs. as on 31Mar2021. Gearing and TOL/TNW were at 0.18 time and 0.53 time as on 31Mar2021. Current ratio was subdued at 1.23 times as on 31Mar2021. Debt coverage metrics were comfortable as on 31Mar2021 with ISCR at 13.55 times and DSCR at 5.58 times. The company reported revenue of ~Rs. 303 Crs. in 9MFY22 on a provisional basis.

Credit Risks:

Geographical and client concentration risk :
Majority of the company's revenue is derived from the state of Tamil Nadu via sale to TASMAC (~91% in FY21, ~93% in 9MFY22) resulting in geographical and client concentration risk. The company's revenue stream is vulnerable to the policies of the Tamil Nadu government. The company has been trying to mitigate such concentration risk by diversifying to other states namely Kerala and Telangana. The sales to Kerala State Beverages Corporation and Telangana State Beverages Corporation Ltd in FY21 were ~4% and ~5% (~3% and ~4% in 9MFY22), respectively.
Increasing investments in subsidiary/associate companies :
The company has substantial investments in subsidiary/associate companies. The investment increased from Rs. 166.56 Crs. as on 31Mar2020 to Rs. 216.50 Crs. as on 31Mar2021 primarily due to an increase in investment in SAFL British Hotels Limited (100% owned subsidiary) from Rs. 130.66 Crs. to 180.60 Crs. and in Singapore Spirits Pte Ltd (89% owned subsidiary) from Rs. 0.03 Cr. to Rs. 25.95 Crs. during FY21. BWR also notes that the operations of such group companies are at a nascent stage with neither significant revenue contribution nor returns. The company’s ability to recover the said loans/ investments to maintain adequate liquidity in the business is considered a rating sensitivity. Any incremental investment in the group/associate entities may impact the liquidity of the company.
Regulatory risks :
The Indian alcohol industry is characterized by high regulation and is primarily regulated by the respective States. Every state has its set of regulations with respect to distribution and retail channels, registration, taxation, and pricing of alcohol. SAIPL operates in an intensely regulated environment, thus, cash flow is highly susceptible to any material change in the regulatory landscape. SAIPL derives more than 90% of revenue from TN where state owned TASMAC entirely controls the distribution. TASMAC, in negotiations with IMFL and beer manufacturers, fixes a maximum retail price for all products and does not often revise prices, due to which the margins remain vulnerable to fluctuations in input costs. Both export and import of these products are tightly controlled by the state government. The direction or timing of any regulatory changes being difficult to predict, the industry is vulnerable to such unanticipated changes. Any adverse regulatory changes would impact the business risk profile.
Volatility in input prices :
Neutral spirit is the primary raw material containing 96% alcohol by volume. It is derived from sugarcane molasses. So, any fluctuation in sugarcane availability due to agro-climatic conditions would impact the raw material cost of the company. Further, in view of the limited pricing flexibility for its final product (as most of the liquor market is controlled by the government distribution channel), the profitability of the company is also likely to be affected. The company manages the input cost volatility by sourcing the raw materials through various suppliers from different agro-climatic regions of India.
Impact of Covid-19 :
There was no widespread lockdown during the second and third waves of the pandemic. The company’s manufacturing operations in Tamil Nadu and Telangana were normal during most of FY21 and in FY22. However, the demand growth remained muted from the government agencies. So, the company’s production in FY22 remained at almost the same level as in FY21. BWR expects the long term demand to be intact with minor supply chain disruptions due to curtailment of mobility with the onset of the second wave of Covid-19.

ANALYTICAL APPROACH - Standalone

The company has two wholly-owned subsidiaries: SAFL Leisure & Entertainment Pte Ltd and SAFL British Hotels Ltd, and a 89% owned subsidiary Singapore Spirits Pte Ltd as on 31 Mar 2021. The company has reported that the operations of the subsidiaries are in the initial stage and hence there is no significant contribution of the subsidiaries to the overall performance of the company. BWR has taken standalone approach for arriving at the rating of the company and has applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this Rationale).

RATING SENSITIVITIES

Going forward, the company’s ability to increase its scale of operations and improve profitability as envisaged, ability of company to realize its investments in the subsidiary/associate companies timely without impacting the liquidity of the company and diversify the customer base will be the key rating sensitivities. Furthermore, the company has contingent liabilities of Rs. 48.42 Crs. as on 31Mar2021 comprising corporate guarantee for bank loan to group company, bank guarantee and income tax demand under appeal. Crystallization of any of the contingent liabilities and the impact of the same on the financial risk profile of the company would also be a key rating sensitivity factor.

Upward:

Increase in revenue and profitability on sustained basis
Geographical and customer base diversification

Downward:

Further investment in subsidiary/associate companies impacting financial flexibility and liquidity
Disruption in demand and supply chain due to second wave of Covid-19 pandemic

LIQUIDITY INDICATORS - Adequate

The company's liquidity profile is considered adequate keeping in view the adequate operating profit and net cash accruals compared to debt service obligations in FY21 and FY22, unutilized limits of working capital facilities, comfortable debt coverage metrics, moderate cash & cash equivalents and moderate cash conversion cycle. The company's operating profit and net cash accruals were adequate to cover the finance cost and debt repayment obligations during FY19-FY21. The trend is expected to continue in FY22-FY23. Debt coverage metrics as given by ISCR and DSCR were comfortable at 13.55 times and 5.58 times as on 31Mar2021. Working capital limit utilization with banks remained low at ~44% in the past 6 months. Cash & cash equivalents were moderate at ~Rs. 35 Crs. as on 31Mar2021. Current ratio was adequate at 1.23 times as on 31Mar2021. Cash conversion cycle was moderate at 54 days as on 31Mar2021. BWR notes the increase in substantial investment in the wholly owned subsidiaries since previous rating review. The operations of such group companies are at a nascent stage with neither significant revenue contribution nor returns. The company's ability to recover the said loans/ investments to maintain adequate liquidity in the business is considered a rating sensitivity and any incremental investment in the group/associate entities may impact the liquidity of the company.

ABOUT THE ENTITY

Southern Agrifurane Industries Private Limited (SAIPL) was incorporated on 21Sep2001 in Chennai, Tamil Nadu. The company is primarily engaged in the manufacture and sale of Indian Made Foreign Liquor (IMFL) (alcoholic beverages) in India. The company has its distillation and manufacturing units located at Viluppuram, Tamil Nadu and Nandigama, Telangana. The company's current sanctioned production capacity of IMFL is 6,13,100 cases per month at Tamil Nadu unit and 1,20,000 cases per month at Telangana unit. It sells its products to TASMAC (Tamil Nadu State Marketing Corporation) owned by the Government of Tamil Nadu, Kerala State Beverages Corporation Limited and Telangana State Beverages Corporation Limited. The capacity utilization in FY21 was ~79%.

The company is part of the MGM group of Chennai which has presence in logistics, hospitality, international trading, housing, distillery business and theme parks. Mr. MGM Anand, Mr. Subramanian Ramanathan and Mr. Yash Roy Sanjeev are the directors of SAIPL.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	431.32	490.17
EBITDA	Rs.Crs.	51.47	54.77
PAT	Rs.Crs.	32.67	38.05
Tangible Net Worth	Rs.Crs.	276.25	242.71
Total Debt/Tangible Net Worth	Times	0.18	0.13
Current Ratio	Times	1.23	1.55

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not Applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	95.00	BWR BBB-/Stable (Reaffirmation)	29Apr2021	BWR BBB-Stable (Reaffirmation)	30Sep2020	BWR BBB-Stable (Reaffirmation)	29Mar2019	BWR BBB-Stable (Reaffirmation)
Grand Total		95.00	(Rupees Ninety Five Crores Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

Analytical Contacts
Swarn Saurabh Senior Rating Analyst swarn.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Southern Agrifurane Industries Pvt. Ltd.

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Axis Bank Ltd.	Cash Credit - Sanctioned	19.80	_	19.80
2	Punjab National Bank	Cash Credit - Sanctioned	45.00	_	45.00
3	Punjab National Bank	Cash Credit - Proposed	_	_	0.00
4	Un tied portion	Cash Credit - Proposed	30.20	_	30.20
Total			95.00	0.00	95.00
TOTAL (Rupees Ninety Five Crores Only)

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