Soaring Spirits Private Limited August 28, 2018 Rating Amount Facilities Rating1 Rating Action (Rs

Rationale-Press Release Soaring Spirits Private Limited August 28, 2018 Rating Amount Facilities Rating1 Rating Action (Rs. crore) 6.00 CARE BB; Stable Long-term Bank Facilities Reaffirmed (Double B ; Outlook Stable) Total 6.00 (Rupees Six Crore only) Details of facilities in Annexure-1 Detailed Rationale& Key Rating Drivers The rating assigned to the bank facilities of Soaring Spirits Private Limited (SSPL) continues to be tempered by small scale of operations with low networth base, moderate working capital cycle, geographic concentration risk and highly regulated user industry with change in government policies. The ratings also factor in increase in profitability margins, improvement in capital structure and debt coverage indicators albeit decline in total operating income in FY18 (Prov.) (refers to period from April 01 to March 31). The rating, however, derives strength from the long track record of the company and experienced management and positive demand prospect of distilleries Going forward, ability of the company to increase its scale of operations, enhance its geographical reach, efficient management of working capital requirements without impacting the capital structure would be the key rating sensitivities Detailed description of the key rating drivers Key Rating Weaknesses Small scale of operations with low networth base and decrease in total operating income Despite having a long track record, the scale of operations are relatively small marked by total operating income (TOI) of Rs.11.58 crore during FY18 (Prov.) with moderate networth base of Rs.9.21 crore as March 31, 2018(Prov.) as compared to other peers in the industry. The total operating of the company decreased from Rs.15.10 crore in FY17 to Rs.11.58 crore in FY18 (Prov.). The company does production on job work basis for John Distilleries Private Limited, MS Biotech Private Limited and Sun Pure Oranges. These customers have to renew their licenses every year. In FY 18, MS Biotech Private Limited could not renew the license till mid of June. So the company could not do the job work for MS Biotech Private Limited for 2.5 months in FY18. Because of the above said factor the revenue from job works decreased from Rs.12.99 crore in FY17 to Rs.7.97 crore in FY18 (Prov.). In Jan 2017, the company started its own product with brand name ‘Smart City’ and generated revenue for 3 months in FY17. In FY 18, the company sold its own product throughout the year. The revenue from sale of products has increased from Rs.0.65 crore in FY17 to Rs.2.64 crore in FY18 (Prov.). Moderate working capital cycle The operating cycle of the company remained moderate and stood at 123 days in FY18 (Prov.) due to comfortable average collection period. The operating cycle days increased from 66 days in FY17 to 123 days due to increase in average collection period and increase in average inventory period. The average utilization of CC facility was 100% for the last 12 months ended July 31, 2018. Highly regulated user industry with change in government policies The company is running a distillery – blending and bottling unit which is highly regulated market, controlled by state government rules and regulations. Further, the prices of key raw material of the company i.e. ENA is also subjected to price fluctuations which are regulated as per the MSP’s (Minimum support prices) and further prices of the final products are affected by increasing amount of excise duty levied by the govt., other policy changes. Such volatility in the product prices impact the profitability margins to a large extent. Geographical concentration risk The liquor products produced by SSPL are being supplied to John Distilleries Private Limited, MS Biotech Private Limited, M & S Bottling Company and Sun Pure Oranges as per the agreements, which in turn is supplied to dealers and shops located in Andhra Pradesh region through Andhra Pradesh State Beverages Corporation Limited. Due to the geographic concentration of the company’s supplies to a single state, any changes in the government rules and regulations in terms of liquor manufacturing and sale may affect the company’s revenues. However, the company is planning to expand their operations and supply their products to Telangana state also with necessary approvals and licenses from Telangana State 1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 Credit Analysis & Research Limited Rationale-Press Release Beverages Corporation Limited from the next financial year (FY19), which would mitigate the risk of geographical concentration of the company. Key Rating Strengths Long track record of the company and experienced management SSPL was established in the year 2004 and promoted by Mr. Venkateswara Raju Bhupathiraju, Mr. V S V S Raju and Mr. A Krishnam Raju, who have rich exposure of alcohol manufacturing business for more than two decades. All the directors are actively involved in the day to day activities of the business. Furthermore, the top management is assisted by second line of management having adequate experience in the industry. Increase in profitability margins The PBILDT margin has increased from 22.03% in FY17 to 27.97% in FY18 (Prov.) due to decrease in raw material cost coupled with increase in revenue from sale of its own product in FY18. The firm realizes relatively more operating margins in manufacture of its own products as compared to in manufacture on job work to other companies. The PAT margin has increased from 9.77% in FY17 to 10.72% in FY18 (Prov.) to due increase in PBILDT margin and decrease in interest cost. Improved capital structure and debt coverage indicators The capital structure of the company stood comfortable marked by debt equity ratio and overall gearing ratio of 0.39x and 0.46x respectively as on March 31, 2018 (Prov.) (as against 0.90x and 0.91x respectively as on March 31, 2017). The debt equity and overall gearing ratio marginally improved due to decrease in debt levels at the back of repayment of term loans, vehicle loans and unsecured loans coupled with increase in networth at the back of accretion of profits. The debt coverage indicators of the company improved marginally and stood comfortable. The PBILDT interest coverage ratio has improved from 7.59x in FY17 to 9.56x in FY 18 (Prov.) due to decrease in interest cost at the back of repayment of term loans and vehicle loans. The total debt to GCA has improved from 2.95x in FY17 to 1.52x in FY18 (Prov.) due to decrease in debt levels at the back of repayment of term loans, vehicle loans and unsecured loans coupled with increase in gross cash accruals (GCA) levels. Positive demand prospect of distilleries Extra Neutral Alcohol (ENA) is the key raw material for IMFL (Indian made Foreign Liquor) manufacturers, the IMFL segment, comprising 36% of the Indian alcoholic beverages industry. As India has huge youth population, the demand of alcohol would remain high in the coming years. Pan-India, the undivided AP and Tamil Nadu accounted for the highest share of 21 per cent share in the IMFL space, followed by Karnataka with 18 per cent. These three geographies account for a major 60 per cent of the total IMFL sales in the country. State division has given a fresh boost to the IMFL market, which otherwise has seen marginal growth in the last couple of years, as the scope for market expansion has been created for a variety of reasons. In the present scenario, both AP and Telangana may together bypass Tamil Nadu to become the largest IMFL market in the country. Analytical Approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit ratings CARE's Policy on Default Recognition Financial ratios – Non-Financial Sector Rating Methodology-Manufacturing Companies About the company Incorporated in August 2004, Soaring Spirits Private Limited (SSPL) was promoted by Mr. Venkateswara Raju Bhupathiraju, Mr. V S V S Raju and Mr. A Krishnam Raju. The company is engaged in the business of distillation, blending and bottling of alcohol, primarily Indian-made foreign liquor (IMFL). The company derives 100% revenue from job work. The company has entered into one year agreement (can be mutually extended) with John Distilleries Private Limited (rated BWR A Stable / BWR A2+ as on April 12, 2018) for job work of 25000 cases/month and for which it receives Rs. 56/case. Also, with MS Biotech Private Limited, it produces 75000 cases/ month and receives Rs. 60/case. SSPL has also agreement with Sun Pure Oranges for producing of 10000 cases/ month for which it receives Rs. 73/case. The company’s plant facility is located at West Godavari in Andhra Pradesh. Initially, the factory was equipped with 3 production lines. Subsequently, the production lines increased to 5 lines in 2016 which came into operational in 2017 out of which 3 are fully automated and 2 being semi-automated line with a total installed capacity of 1.21 lakh cases per month. The final product is produced by adding different varieties of flavors to Extra Neutral Alcohol (ENA). The major raw material of the company is ENA and other packaging materials which include bottles, caps, labels, etc. are procured from domestic suppliers. The products come in various quantities i.e. 90ml, 180ml, 375ml, 750 ml and 1000ml.` 2 Credit Analysis & Research Limited Rationale-Press Release Brief Financials (Rs. crore) FY17 (A) FY18 (CA certified Prov.) Total operating income 15.10 11.58 PBILDT 3.33 3.24 PAT 1.48 0.96 Overall gearing (times) 0.91 0.46 Interest coverage (times) 7.59 9.56 A-Audited Status of non-cooperation with previous CRA: Not Applicable Any other information: Not applicable Rating History for last three years: Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity.

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