Ebro India Private Limited: Rating Reaffirmed; Rated Amount Enhanced

August 21, 2020

Ebro India Private Limited: Rating reaffirmed; rated amount enhanced

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Fund Based - Working Capital 544.0 612.0 [ICRA]A1; reaffirmed Facilities Total 544.0 612.0 *Instrument details are provided in Annexure-1

Rationale The rating factors in the benefits derived by Ebro India Private Limited (EBRO) from its strong parentage—Ebro Foods S.A. (a leading global player in the rice and pasta industry)—in the form of funding support and operational synergies. In addition to equity infusion in the past, the holding company has extended external commercial borrowing (ECB) to EBRO in FY2021. Moreover, EBRO benefits as a part of the Group’s global supply chain, with steady offtake of Basmati rice from international Group companies, which is expected to increase further with the parent’s recent acquisition of Tilda Basmati rice business globally. This is likely to result in higher exports, driving the company’s revenue growth and improvement in profit margins in FY2021, as already demonstrated in Q1 of the current fiscal to some extent. Moreover, EBRO’s presence in both the domestic and export market results in diversification of the revenue stream. Its Basmati rice supply arrangement with a major domestic customer also continues to provide some revenue visibility.

However, the rating is constrained by the deterioration in EBRO’s financial profile in FY2020, as marked by moderation in revenues, loss-making operations and weak coverage metrics. This was largely due to a considerable decline in exports to European Union (EU) following the tightening of its pesticide residue parameters for Basmati rice imports, softening of average realisations, limited pricing flexibility owing to competitive pressures and higher operational overheads. Moreover, lower offtake from the hotels, restaurants and cafes (Horeca) segment as a fallout of lockdown pursuant to novel coronavirus (Covid-19) pandemic, is likely to result in some moderation in EBRO’s domestic Basmati rice sales in the current fiscal. Nevertheless, the anticipated growth in the export revenue (primarily driven by increased offtake from group companies) is likely to compensate to large extent for the loss of domestic business. The company has recently set up a pasta manufacturing facility, but the segment’s sales are yet to scale up materially. EBRO’s operations also remain exposed to agro-climatic risks that impact the availability and quality of Basmati rice/paddy and in turn its pricing, with inventory levels exposing the company to price risks.

Key rating drivers

Credit strengths Strong parentage and track record of operational and financial support – EBRO continues to benefit from its strong parentage—Ebro Foods S.A.—one of the leading rice and pasta companies in the world. The company was set up by the parent as a part of the global supply chain to source Basmati rice from India and establish its footprint in the country’s Basmati rice and pasta market. In addition to equity infusion in the past, the holding company has extended external commercial borrowing (ECB) to EBRO in FY2021, besides, corporate guarantees for the working capital facilities availed in India. Moreover, EBRO benefits as a part of the Group’s global supply chain, with steady offtake of Basmati rice from international Group companies, which is expected to increase further with the parent’s recent acquisition of Tilda Basmati rice business globally. This is expected to result in higher exports, driving the company’s revenue growth and

improvement in profit margins in FY2021, as already demonstrated in Q1 to some extent. Further, EBRO’s bank lines are fully backed by corporate guarantees extended by the parent.

Diversification of revenue stream – EBRO’s revenue stream is diversified, given its presence in both domestic sales and exports, which reduces the concentration to any specific geography. Lower offtake from Horeca segment as a fallout of lockdown pursuant to the pandemic, is likely to result in some moderation in EBRO’s domestic Basmati rice sales in the current fiscal. Nevertheless, anticipated growth in the export revenues is likely to compensate the same. Moreover, EBRO’s Basmati rice supply arrangement with a major domestic customer, continues to provide some revenue visibility. Sales to this customer have grown steadily in the recent years, supporting the company’s domestic sales.

Favourable location of EBRO’s facility – The company’s manufacturing facility is suitably located in Haryana, which is one of the leading Basmati rice producing states. This ensures easy access to the key raw material—paddy—which is typically procured during the harvest season (typically October—January). Moreover, the state has numerous other small-to- medium-sized Basmati rice milling facilities, which provide steady availability of semi-processed/milled rice to EBRO for its processing facility.

Credit challenges Deterioration in financial performance in FY2020 – EBRO’s financial profile weakened in FY2020, as marked by moderation in revenues, loss-making operations and weak coverage metrics. This was attributable to considerable decline in exports to EU (key export destination for the company) following the tightening of its pesticide residue parameters for Basmati rice imports, softening of average realisations, limited pricing flexibility owing to competitive pressures and higher operational overheads. However there has been strong growth in exports in the current fiscal, on the back of increased offtake from Group companies and EBRO’s ability to source paddy, which is compliant with the revised norms. Sizeable growth in exports is expected to drive the recovery in EBRO’s performance in the current fiscal.

High working-capital intensity; exposure to price volatility – In line with most other industry participants, EBRO’s working capital intensity remains high, primarily due to high inventory levels (given the seasonality in the availability of Basmati paddy). Any adverse movement in the price of paddy/Basmati rice could affect the company’s margins, as witnessed in the past.

Intense competition – The Basmati rice industry is highly fragmented and marked by the presence of numerous players. This intensifies competition and limits the pricing flexibility of industry participants. However, EBRO benefits to an extent because of the steady offtake from its major clients (including Group companies).

Vulnerability of foreign exchange risk and agro-climatic risks – As exports constitute a significant percentage of its turnover, the company remains exposed to currency fluctuations to the extent of the unhedged exposure. However, it has a hedging mechanism for reducing the impact of fluctuations in foreign exchange rates. Moreover, given its operations in an agri-based industry, EBRO is exposed to agro-climatic risks such as raw material availability and its quality, which have a bearing on Basmati rice prices. Liquidity position: Adequate EBRO’s liquidity position is adequate, supported by cushion available in the form of unutilised bank lines (~Rs. 300 crore as on July 2020), funding support from the parent and no term loan repayment liability in the medium term. Cash flow indicators were negative in FY2020 owing to moderation in revenues and decline in profit margins. However, fund flow from operations are likely to turn positive in the current fiscal with higher revenues and some anticipated improvement in margins.

Rating sensitivities Positive triggers – The rating could be upgraded if EBRO demonstrates strong growth in scale of operations and improvement in profit margins, with reduced reliance on debt and healthy debt protection metrics, on a sustained basis. Moreover, the rating would be sensitive to a change in the credit profile of the parent—Ebro Foods S.A.

Negative triggers – The rating could be downgraded if there is continued pressure on the company’s revenues, it is unable to improve its profit margins, there is and elongation of the working capital cycle, leading to increased reliance on debt and deterioration in the liquidity position. Moreover, the rating would be sensitive to a change in the credit profile of the parent—Ebro Foods S.A.

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for Issuers in the India Rice Industry Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Group Support Ebro Foods S.A. Consolidation/Standalone Standalone

About the company/Group EBRO is a step-down wholly-owned subsidiary of Spain-based Ebro Foods S.A., involved in the milling and selling of Basmati rice. Its milling facility is in Karnal (Haryana) with rice processing capacity of around 1,40,000 TPA. The company was incorporated in 2013 to support the parent’s global supply chain for rice from India.

In FY2020, as per provisional financials, the company reported a net loss of Rs. 28.5 crore on an OI of Rs. 750.1 crore compared with a net loss of Rs. 1.7 crore on an OI of Rs. 766.3 crore in the previous year.

Key financial indicators FY2019 FY2020 (audited) (provisional) Operating Income (Rs. crore) 766.3 750.1 PAT (Rs. crore) - 1.7 - 28.5 OPBDITA/OI (%) 3.3% -0.3% PAT/OI (%) -0.2% -3.8%

Total Outside Liabilities/Tangible Net Worth (times) 1.7 1.9 Total Debt/OPBDIT (times) 17.9 - 190.0 Interest Coverage (times) 1.3 - 0.1

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years Rating History for the past 3 Current Rating (FY2021) years

Date & Amount Amount FY2020 FY2019 FY2018 Rating Type Rated Outstanding (Rs (Rs. crore) Crore) 21-Aug- 16-May- - - Instrument 2020 2019 1 Fund-based working Short 612.0 - [ICRA]A1 [ICRA]A1 - - capital facilities term

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: Instrument details ISIN No Instrument Name Date of Coupon Maturity Amount Current Rating Issuance / Rate Date Rated and Outlook Sanction (Rs. crore) - Fund-based working - - - 612.0 [ICRA]A1 capital facilities Source: Ebro India Private Limited

Annexure-2: List of entities considered for consolidated analysis – Not applicable

ANALYST CONTACTS Sabyasachi Majumdar Anupama Arora +91-124-4545304 +91-124-4545303 [email protected] [email protected]

Deepak Jotwani +91-124-4545870 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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