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Jagath Milk Dairy April 14, 2017 Ratings Amount Rating Facilities Rating1 (Rs. crore) Action Long-term Bank Facilities 10.13 CARE B+; Stable Assigned

(Single B Plus; Outlook: Stable) Total 10.13

(Rupees Ten crore and Thirteen lakh only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of Jagath Milk Dairy (JMD), is constrained by small scale and limited track record of operations, fluctuations in total operating income during review period, thin profitability margins, leveraged capital structure and weak debt coverage indicators, highly fragmented industry with intense competition from large number of players and constitution of the entity as partnership firm with inherent risk of withdrawal of capital. The rating is, however, underpinned by the experience of partners favourable plant location and comfortable working capital cycle.

Going forward, the ability of the firm to increase its scale of operations and improve the profitability margins in competitive environment and improve the capital structure and debt coverage indicators would be key rating sensitivities.

Detailed description of the key rating drivers Key Rating Weaknesses Small scale and limited track record of the entity

Jagath Milk Dairy was established in the year 2013. The firm has completed only 3.5 years of operations resulting in limited track record of operations. Furthermore, the scale of operations of the firm was small marked by total operating income of Rs.38.43 crore during FY16 and net worth of Rs.3.72 crore as on March 31st 2016.

Fluctuating total operating income and thin profitability margin during review period

The total operating income (TOI) of the firm has been fluctuating during the review period on account fluctuation in receipt of orders for supply of milk and milk products. The TOI increased from Rs.33.13 crore in FY14 to Rs.39.31 crore in FY15 and subsequently decreased to Rs.38.43 crore in FY16 due to decrease in order from regular customer coupled with high competition from local traders.

The profitability margins of the firm have been thin during the review period mainly due to competitive business segment with low barrier entry. However, the PBILDT margin of the firm increased from 5.18% in FY14to 6.94% in FY16 due to increase in sales realization of milk products resulting in absorption of overheads. The PAT margin of the firm declined from 0.24% in FY15 to 0.15% in FY16, due to increase in interest cost on account of enhancement in working capital bank borrowings.

Leveraged capital structure and weak debt coverage indicators

The debt equity ratio of the firm, though deteriorated from 0.94x as on March 31, 2015 to 1.02x as on March 31, 2016, due to increase in debt level (term loans and vehicle loans), remained at satisfactory level. Furthermore, the overall gearing ratio of the firm deteriorated from 3.70x as on March 31, 2015 to 4.02x as on March 31, 2016, due to increasing utilization of working capital facility to manage business operations along with availing term loans, vehicle loans and unsecured loans. The debt coverage indicators of the firm remained weak marked by total debt/GCA at 19.38x in FY16 due to high debt levels (the firm availed term loan for purchase of machinery at the time of setting up of the unit coupled with working capital borrowings). Furthermore, the PBILDT interest coverage ratio of the firm declined from 1.76x in FY15 to 1.44x in FY16 due to increase in interest cost on account of higher utilization of working capital bank borrowings in FY16.

1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications

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Key Rating Strengths Experience of the partners for more than one decade in dairy industry

JMD was established in the year 2013 and promoted by Mr Bhuma Nagi Reddy and Ms Bhuma Akkhila Priya. Both the partners have more than one decade of experience in the dairy industry. Furthermore, the operations of the firm are well supported by the satisfactory management team who are qualified graduates with more than decade of experience in marketing and operations department.

Plant located in dairy farming zone

The plant location of the firm is in dairy farming zone i.e., near B.B.R Indore Stadium, , Kandukur Road, Kurnool, . The firm procures milk from dairy farmers located in the districts of Kurnool of Andhra Pradesh, which enables the firm to procure and process milk immediately after collecting. This results in better quality product as well as lowers the transportation costs.

Comfortable operating cycle

The operating cycle of the firm increased from 31 days in FY15 to 66 days in FY16 still remained at moderate level. However, the firm allows the credit period of 30-35 days to its customers. In order to retain the existing customers, the firm stretches the credit period upto 60 days. The firm makes the payment to the farmers within 5-10 days. Being perishable nature of the product, the inventory holding of the firm stood comfortable at 4-5 days during review period.

Analytical Approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit ratings CARE's Policy on Default Recognition Criteria for Short Term Instruments Financial ratios – Non-Financial Sector

About the Firm Kurnool Based, Jagath Milk Dairy (JMD) was established in the year 2013 and promoted by Mr Bhuma Nagi Reddy and Ms Bhuma Akkhila Priya (D/o. Mr Bhuma Nagi Reddy). The firm is engaged in processing and trading of the milk and milk products like milk, curd, butter milk, lassi, doodh peda, etc. The firm purchases the milk from local traders and sells the products within Kurnool District of Andhra Pradesh In FY16, JMD reported a Profit after Tax (PAT) of Rs.0.06 crore on a total operating income of Rs.38.43 crore, as against a PAT and TOI of Rs.0.10 crore and Rs.39.31 crore respectively in FY15. 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. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

Analyst Contact Name: Mr. Manish Kumar Tel: 040-6900 0504 Mobile: + 91 99495 47551 Email: [email protected]

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CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer

CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors.

Annexure-1:Details of Facilities

Name of the Date of Coupon Maturity Size of the Rating assigned Issue along with Rating Instrument Issuance Rate Date Outlook (Rs. crore)

Fund-based - LT-Term Loan - - February 2017 0.26 CARE B+; Stable

Fund-based - LT-Term Loan - - January 2018 0.87 CARE B+; Stable

Fund-based - LT-Bank - - - 9.00 CARE B+; Stable Overdraft

Annexure-2: Rating History of last three years

Current Ratings Chronology of Rating history for past three years

Sr. Name of the Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & No. Outstanding Rating(s) Rating(s) Rating(s) Rating(s) Instrument/Bank assigned in assigned in assigned in assigned in (Rs. crore) 2016-2017 2015-2016 2014-2015 2013-2014 Facilities

1. Fund Based - LT-Term Loan LT 1.13 CARE B+; - - - - Stable

2. Fund Based-LT-Overdraft LT 9.00 CARE B+; - - - - Stable

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