January 19, 2017 ABT Industries Limited

Instruments* Amount Rated (Rs. crore) Rating Action Term Loans 24.00 [ICRA]BB+(stable) / reaffirmed Long-term Fund based 48.00 [ICRA]BB+(stable) / reaffirmed Long term Non-fund Based 0.65 [ICRA]BB+(stable) / reaffirmed Long term Unallocated 8.52 [ICRA]BB+(stable) / reaffirmed Short-term non-fund based 0.75 [ICRA]A4+ / reaffirmed *Instrument details are provided in Annexure-1

Rating action ICRA has reaffirmed the long-term rating of [ICRA]BB+ (pronounced ICRA double B plus) on the Rs.24.00 crore term loan facility, Rs.48.00 crore long-term fund based facilities, Rs.0.65 crore long-term non-fund based facilities and 8.52 crore Long term Unallocated facilities of ABT Industries Limited (“AIL”/ the company). The outlook on the long term rating is stable. ICRA has also reaffirmed the short-term rating of [ICRA]A4+ (pronounced ICRA A four plus) on the Rs.0.75 crore short-term non-fund based facilities of AIL.

Rationale The rating reaffirmation considers AIL’s strong market position in the commercial vehicles (CVs) dealership business in Madurai, the company being an authorized dealer of Tata Motors Limited (TML), and the stable market share in dairy segment in the region it operates. While the CV dealership division continues to report losses due to the inherently thin gross margins amidst heightened competition and pricing pressures, the same remains buffered by dairy segment. In March 2015, AIL pruned its non-profitable CV dealership division in Calicut which resulted in a 10% reduction in overall revenues. But addition of new products and price hikes in the dairy segment aided in AIL’s profit margins expansion (by 70 bps). Going forward, the company plans to introduce new products in the dairy division which is expected to boost profit margins owing to better realizations and the favorable outlook on skimmed milk powder (SMP) prices.

The ratings, however, remain constrained by the sustained losses in CV segment and the weak realizations in dairy segment. With the sluggish freight demand and currency demonetization, the CV segment performance is likely to remain weak although the impact of pre-buying (ahead of the proposed implementation of BS-IV emission norms from April 2017) during Q4FY2017 remains to be seen. The ratings also remain constrained by the stretched capitalisation and coverage indicators apart from the high working capital intensity inherent in the business. ICRA notes that the company is adding a processing facility for dairy products; the total project cost estimated at Rs.40 crore. With the project being partly debt funded, AIL’s capital structure is expected to remain at elevated levels; that said, the cash accruals are also likely to improve on account of higher margins expected from the new products.

Key rating drivers

Credit Strengths  Authorized dealer of TML with established market position in few clusters of Tamil Nadu  Strong market position in dairy operations in few districts of TN; widening product portfolio including milk derivative products coupled with broad procurement base and wide distribution network has supported revenue growth and margin expansion  Pruning of non-profitable dealership divisions to improve operating profits in medium term

Credit Concerns  Decline in revenues by 9% in FY2016 due to closure of dealership division in Calicut and weak skimmed milk powder prices  Profit margins remain low owing to the thin margins in the dealership segment  Stretched capital structure characterized by high gearing and moderate coverage indicators owing to the high working capital requirements in the business  Ongoing debt funded capex to keep the debt indicators moderate

Description of key rating drivers highlighted above: The company is an authorized dealer for Tata Motors Limited and has an established healthy market position in CV dealership business in Madurai. Due to low value addition, rising discounting and intense competition from other players, the segment’s profitability has been negative. To mitigate the same, AIL had closed its non- profitable CV dealership outlet in Kerala in March 2015, which contributed to over 20% of revenues, resulting in a 10% fall in overall revenues during FY2016. Further the ongoing slowdown in the CV segment on the back of sluggish freight demand and currency demonetization is expected to affect the segment’s performance in the near term. That said, the impact of pre-buying (ahead of the proposed implementation of BS-IV emission norms from April 2017) during Q4FY2017 remains to be seen.

In the dairy segment, AIL processes dairy products like milk, curd, butter, ghee, skimmed milk powder, etc under the brand name of Sakthi in Tamil Nadu and Kerala and also command a strong market share in few pockets. AIL’s profit margins are largely supported by the dairy division where contribution margins are high due to high value addition. In FY2016, the segment’s revenues were down by 11% affected by due to decline in demand from overseas markets and fall in SMP prices although price hikes in liquid milk, curd and ghee partly insulated the revenue fall and also aided in margin expansion. Going forward, the company plans to add new margin-accretive products like ice-cream, flavored yoghurt, butter, cheese, etc. AIL plans to add processing capabilities for the same at a project cost of Rs. 40 crore funded through Rs.20 crore of debt, Rs.10 crore of government grant and rest through internal accruals. AIL’s capitalisation and coverage indicators remain moderate owing to the inherent high working capital requirements in the business. The capital structure is expected to remain at elevated levels with this debt funded capex; although the coverage indicators can be expected to improve with the pruning of loss making outlets, improving price outlook for SMPs and higher margins expected from the new products planned to be introduced.

Analytical approach:

Links to applicable Criteria Corporate Credit Rating - A Note on Methodology Rating methodology for Automotive Dealership Industry

About the company: ABT Industries Limited (AIL) was incorporated in 1950 under the name “The Gounder & Co Private Ltd”. The Company was initially into tea plantations till 1990, subsequent to which it obtained a new dealership for commercial vehicles from TATA Motors Ltd (TML) at Madurai and also took up manufacturing facilities of fruit based beverages at Chennai (which was subsequently hived off during 2002). Later, the Company took over two other commercial vehicles dealerships of TML at Coimbatore and Calicut from the partnership firms of the promoters. The Company entered into the dairy business during 1993-94 and in 2009-10, the dairy plant was expanded and a new skimmed milk powder plant was commissioned. The company closed down its dealership division in Calicut in March 2015. Currently the company derives ~52% of its revenues through the dealership division and the rest through the dairy division. The company belongs to the Sakthi group of companies based out of Coimbatore which has diversified interests across various industries including automobile, transport, education, textiles and sugars.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Table: Rating History Current Rating Month - year Month - year Month - year Name of S. Type Rated Month - year & Rating in & Rating in & Rating in Instrumen No. amount (Rs. & rating FY2016 FY2015 FY2014 t Crores) Jan 2017 June 2015 June 2014 June 2013 [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ 1 Term loans Long term 24.00 (Stable) (Stable) (Stable) (Stable) Cash Long term- [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ 2 48.00 credit fund based (Stable) (Stable) (Stable) (Stable) Long term- Bank [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ 3 non fund 0.65 Guarantee (Stable) (Stable) (Stable) (Stable) based [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ [ICRA]BB+ 5 Proposed Long -term 8.52 (Stable) (Stable) (Stable) (Stable) Short-term- Letter of 6 non fund 0.75 [ICRA]A4+ [ICRA]A4+ [ICRA]A4+ [ICRA]A4+ credit based

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1

Details of Instruments

Name of the Date of Coupon Maturity Size of the Current Rating and instrument issuance rate Date issue (Rs. Cr) Outlook Term loan 1 Feb 2016 - March 2024 20.00 [ICRA]BB+(Stable) Term Loan 2 June 2011 March 2017 4.00 Cash credit - - - 48.00 [ICRA]BB+(Stable) Bank Guarantee - - - 0.65 [ICRA]BB+(Stable) Proposed long- - - - 8.52 [ICRA]BB+(Stable) term Letter of credit - - - 0.75 [ICRA]A4+

Source: ABT

Name and Contact Details of the Rating Analyst(s):

Analyst Contacts

Subrata Ray Srikumar K +91 22 2433 1086 +91 44 4596 4318 [email protected] [email protected]

Gayathri Ramesh +91 44 4596 4311 [email protected]

Name and Contact Details of Relationship Contacts:

Jayanta Chatterjee +91 80 4332 6401 [email protected]

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