Associated Company

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs.20.00 Crs. of Associated Company

Particulars

Facility**	Amount (Rs.Crs)	Tenure	Rating*
Fund Based
Cash Credit - Sanctioned	20.00	Long Term	BWR BBB - (Stable)
Sub Total	20.00
Grand Total	20.00	(Rupees Twenty Crores Only)

*Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank facilities are provided in Annexure-I RATING ACTION / OUTLOOK : Stable

Brickwork ratings has assigned the Long term rating of BWR BBB- with a stable outlook for long term facility (Cash Credit). 

While assigning the rating, BWR has factored in the extensive experience of the partners in the industry, healthy order book position, high profit margins, comfortable gearing ratio and debt-protection metrics with better cash accruals and healthy relations with government departments. The ratings are, however, constrained on account of, fluctuations in the price of raw material due to high government interventions, risk associated with constitution of the entity and risks related to customer concentration.

The outlook is stable as the firm has a healthy order book position for the year FY21, which provides revenue visibility in the medium term.

KEY RATING DRIVERS

Credit Strengths:

• Experienced Promoters & safe clientele :

  The promoters of the firm - Mr. Ulhas Pagariya, Mr. Ulhas Pagariya and Mr. Umesh Pagariya, have a vast experience in the food grains industry since 2004 and they have generated strong relations with the suppliers and customers over the years. The promoters have had experience in the industry through three different proprietorship firms that got formed into one single partnership firm Associated Company in 2018. The firm caters to the government sector (Mid Day Meal Scheme for government school children) as their customer base which is safe in terms of receivables and lesser probability of doubtful debts. The safety kit supply is also to the construction workers under the government sector.

• Strong Group support :

  The firm is backed by a strong group entity (Infratech Construction support) promoted by the Pagariya family. The group entity is a diversified civil engineering firm involved in construction linked projects for the government sector and is rated BWR BBB- in May 2020. Since the management is common and the firms are under Pagariya group, the Associated company can seek backing or support from the group entity when facing financial distress in future.

• Diversified Products :

  The firm has a diversified product base divided almost equally into supply of food grains & other agri commodities, and supply of safety kit items such as helmets, gloves, masks etc. The other segment is completely unrelated, and thus can offer diversification benefits during slowdown and agro-climatic risks in the food grains business.

• Above average profit margins and financial risk profile :

  The firm has well above average profitability with high margins (Operating margin of 16.9% and PAT margin of 11.9%) as compared to its peers. The debt service metrics are above average. The ISCR stands comfortably at 18.02x in FY20 and DSCR stands comfortably at 7.6x in FY20. The firm has a gearing ratio (Total debt/TNW analysed) of 0.64 which is very low as compared to its peers due to low use of long term debt and increasing net worth. Net cash accruals/Total debt is on a growing trend (from 0.92x in FY19 to 1.42x in FY20).

Credit Risks:

• Constitutional & Diversion of funds risk :

  The entity being a partnership firm is vulnerable to risks arising from withdrawal of capital in case of personal exigencies which may affect the capital structure and consequently the business operations. As mentioned in the FY19 annual report (Schedule A), net withdrawals were INR 11.4 Crore during the year. Also there is a risk of diversion of funds to the other segment of the group entity since it is run by a single family of promoters. As per the information from management, the promoters intend to withdraw 50% of PAT as dividend, which is expected to be used to fund other businesses of the group. This might impact the future projects of the firm and entice the promoters to pull out profits from the firm and use it in other businesses of the group as per their discretion. Although the Associated company is making enough profits covering their operational requirements at the moment, it is at a very nascent stage since incorporation at which the commitment of the promoters to this firm cannot be assessed.

• Regulatory risks :

  There is a high level of intervention by the government in India into pricing of essential food commodities (Minimum Support Price), sourcing, warehousing, restrictions on free trade and other supply chain activities. The potential changes in regulations can impact the business and profit margins of wholesale agro food trading firms.

• Customer Concentration risk :

  The firm's food grain business caters majorly to the school children under the Mid Day Meal Program by the government. Any changes or shift in government preferences in terms of supply and distribution, or change in contract terms can directly affect the business of the Associated Company as a wholesale food grain supplier to the program.

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA

For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).

RATING SENSITIVITIES

Positive: Going forward, the rating outlook may be revised to 'positive' in case the profit margins are sustained and the firm increases its scale of business backed by healthy liquidity. 

Negative: The rating outlook may be revised to 'Negative' in case revenues of the company substantially deteriorates from current level. Rating may also be adversely affected in case of low capital commitment of the promoters towards the firm for increasing the scale of the firm.

LIQUIDITY POSITION

Adequate: The average maximum utilisation of working capital facilities was around 99.8% during the last 6 months. The net cash conversion cycle was 34 days in FY20(Prov) (FY19: 22 days), with receivables period of 41 days (FY19: 27 days) and payable period of 26 days (FY19: 28 days). The cash flow would continue to be positive in the near term on account of higher absolute EBITDA. The Company has a current ratio of 1.92x in FY20(Prov). In FY20 (Prov), Entity is having cash accrual of INR 39.54 Crores which is sufficient to repay the fixed repayment commitments The ISCR stands very comfortable at 18.02 times as per FY20 (prov).

PROFILE

Associated Company is a wholesale trading unit incorporated in 2018 by the Pagariya family in Nagpur, Maharashtra. The firm is primarily into supply of agro based commodities like food grains, pulses, rice, groundnuts, soybean oil, edible oil etc. to the government sector (Municipal corporations, Anganwadis, Trusts, Societies, Self help groups) on direct contracts or sub-contract basis. Food grain and other agri-commodities is supplied to the trusts/self help groups and other municipal corporations which are involved in the business of manufacturing and supply of packaged food items under Mid Day Meal Scheme of various state government departments. The firm also supplies agri products to Anganwadis on direct or sub contract basis. The firm procures the products from the agro processing units. The firm also supplies safety kit items like gloves, masks, helmets, jackets etc. to Municipal corporations, to be used for construction workers. The firm assembles the parts and supplies as ready to use items to the construction workers under the government sector.

KEY FINANCIAL INDICATORS

Key Parameters	Units	FY 19-20 (Provisional)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	329.20	167.35
EBITDA	Rs.Crs.	55.63	26.81
PAT	Rs.Crs.	39.17	16.20
Tangible Net Worth	Rs.Crs.	34.23	14.36
Total Debt/Tangible Net Worth	Times	0.81	1.23
Current Ratio	Times	1.92	3.05

KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED

NA

RATING HISTORY (INCLUDING WITHDRAWAL AND SUSPENSION)

S.No	Current Rating (2020)				Rating History
	Facilities	Tenure	Amount (Rs.Crs)	Rating	2019	2018	2017
Fund Based
1	Cash Credit - Sanctioned	Long Term	20.00	BWR BBB- (Stable)	NA	NA	NA
Total			20.00	(Rupees Twenty Crores Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS

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 :

• General Criteria
• Approach to Financial Ratios
• Trading Entities

For More Information Contact:

Analytical Contacts	Investor Contacts
Nalin Raj Mehta Lead Analyst nalinraj.m@brickworkratings.com	Liena Thakur Assistant Vice President - Corporate Communications M : +91 84339 94686 liena.t@brickworkratings.com
Satvinder Kumar Gakhar Associate Director - Ratings B : +91 11 2341 2232 satvinder.g@brickworkratings.com
1-860-425-2742

SL.No.	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Cash Credit - Sanctioned	20.00	_	20.00
Total				20.00
TOTAL (Rupees Twenty Crores Only)