Suguna Foods Private Limited: Ratings Downgraded and Placed on Watch with Developing Implications

April 06, 2020

Suguna Foods Private Limited: Ratings downgraded and placed on watch with developing implications

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Non-convertible Debenture 0.00 185.00 [ICRA]BBB+&; assigned Programme Long Term-Term Loan Facilities 270.02 270.02 Revised from [ICRA]A- (Stable) to [ICRA]BBB+& Revised from [ICRA]A- (Stable) to Long-term - Fund based facilities 885.00 885.00 [ICRA]BBB+& Short-term - Non-fund based Revised from [ICRA]A2+ to 18.00 18.00 facilities [ICRA]A2& Revised from [ICRA]A- (Stable)/ Long-term/Short-term - Proposed 122.65 122.65 [ICRA]A2+ to [ICRA]BBB+&/ facilities [ICRA]A2& Total 1,295.67 1,480.67 *Instrument details are provided in Annexure-1

Rationale The rating revision factors in the current turmoil in the Indian poultry industry after the outbreak of the Coronavirus pandemic. Rumors linking chicken as possible vectors of the Coronavirus disease resulted in a sharp decline in domestic demand during February-March-2020, thereby adversely impacting the average realisations for broiler chicken. The realisations rock-bottomed to ~Rs. 10/KG in certain parts of the country during early March 2020 leading to huge losses for all the poultry players. For Suguna Foods Private Limited (SFPL), a pan India player, the average realisation of live broiler bird for the month of March fell to ~Rs. 30/KG, significantly lower than the average production cost of Rs.75- 80/KG. This had led to significant losses and increase in borrowings during FY2020 impacting capitalisation and coverage metrics. The company is expected to witness an operating loss of ~Rs. 200 crore and the debt levels are expected to increase from Rs. 903.9 crore as on March 31, 2019 to Rs. 1,250 – Rs. 1,300 crore by March 31, 2020.

However, the ratings positively factors in SFPL’s established market position in the Indian poultry industry and its pan India presence supported by the long-standing experience of the promoters and a strong management team. SFPL is the largest integrated poultry player in India with a presence across the value chain of the poultry industry from procurement of raw material, manufacturing feed, growing of grandparent and parent, sale of live birds and processed chicken. This has aided the company in achieving operational efficiencies over the years. Further, development of inhouse broiler pureline (Sunbro) is expected to improve the margins over the medium term. Although, the company is exposed to the inherent industry risk of disease outbreak (bird flu), SFPL’s wide geographic presence across 19 states provides some cushion against the same.

Being an essential commodity, SFPL continues to operate and supply protein in the market in the current lockdown scenario. Prices of chicken meat have started increasing over the past two weeks to reach Rs. 57/KG as on March 24, 2020. SFPL has also started reducing placements in the market since early March 2020, impact of which will be visible as

reduced market supply by early May 2020. Going forward, supply demand dynamics, duration of the lock down and its consequent impact on logistics, demand and live bird realisations remains to be seen.

Key rating drivers

Credit strengths Geographically diversified presence across India – SFPL is the largest player in the Indian poultry industry with a healthy market share and diversified presence across 19 states in India. This insulates the company against any disease outbreaks/ reduced demand in one specific region/state.

Well-integrated presence across the value chain –SFPL has long-standing relationships with large number of contract farmers spread across 19 States, access to latest technology in poultry breeding and establishment of in-house feed production capabilities. The company has strong presence across the value chain in the poultry industry from procurement of raw material, manufacturing feed, inhouse broiler pureline (Sunbro), growing of grandparent and parent, sale of live birds and processed chicken.

Large scale of operations with strong operating efficiencies; development of inhouse breeder – The company has a very large scale of operations (Rs. 9,046 crore for FY2019) with integrated presence across the value chain resulting in strong operational efficiencies. SFPL has also developed in house broiler change Sunbro, which is expected to improve the profitability of the company over the medium term.

Significant experience of the promoter/management team and established brand name: SFPL was promoted by Mr. B. Soundararajan and his brother Mr. G.B. Sundararajan, first generation entrepreneurs, in 1984. The company has established a strong brand name, particularly in south India aided by over three and half decades of experience.

Credit challenges Exposure to cyclicality; negative outlook for the poultry industry – In the past, the Indian poultry industry has been periodically affected by record high feed prices and unfavorable broiler realizations. The highly volatile broiler realizations is a consequence of the seasonal nature of triggers higher chick-placements in the market from organized and unorganized players, leading to an over-supply and a sharp correction in realizations. Further profitability remains vulnerable to fluctuations in feed prices with maize/soya forming ~65-70% of raw material cost. During the period FY2017-18, the industry profitability revived with increase in chick placements supported by healthy broiler realizations coupled with modest soya and maize prices. Subsequently in FY2019 and 9M FY2020, broiler realization moderated owing to the increase in chick placements and this coupled with increase in feed prices led to a dip in margins. This trend in the profitability of the industry exposes the company to earnings risk during the period of industry downturn as witnessed during Q4 FY2020.

Rumors linking chicken as possible vectors of the Coronavirus disease resulted in a sharp decline in domestic demand during February-March-2020, thereby adversely impacting the average realisations for broiler chicken. The realisations rock-bottomed to ~Rs. 10/KG in certain parts of the country during early March 2020 leading to significant losses for all the poultry players. For Suguna Foods Private Limited (SFPL), a pan India player, the average realisation of live broiler bird for the month of March fell to ~Rs. 30/KG, significantly lower than the average production cost of Rs.75-80/KG.

Prices of chicken meat have started increasing over the past two weeks to reach Rs. 57/KG as on March 24, 2020. SFPL has also started reducing placements in the market since early March 2020, impact of which will be visible as reduced market supply by early May 2020. Also, ICRA expects readjustments in cost structure of the feed with correction in commodity prices.

Being an essential commodity, SFPL continues to operate and supply protein in the market although not at the similar scale. Going forward, supply demand dynamics, duration of the lock down and its consequent impact on logistics, demand and live bird realisations remains to be seen.

Financial profile characterised by significant losses for FY2020 – With fall in demand and significant drop in realisations especially during March 2020, the company is estimated to witness an operating loss of ~Rs. 200 crore for FY2020. The debt levels are expected to increase from Rs. 903.9 crore as on March 31, 2019 to Rs. 1,250 – Rs. 1,300 crore by March 31, 2020. As a result, the capitalisation and coverage metrics are likely to deteriorate for FY2020.

Nevertheless, the company has maintained adequate liquidity with cash and bank balances of ~Rs. 120 crore as on March 28, 2020 and undrawn lines of credit of ~Rs. 950 crore (out of which Rs.400 crore is available for immediate draw down and the rest expected to be available by April end post documentation). This is likely to provide significant buffer for SFPL to tide over the downturn in the industry.

Inherent risks in poultry business - The poultry industry is exposed to diseases such as Avian Influenza (bird flu) outbreaks. During CY2019, outbreaks were reported in Kerala; however, SFPL risk is partially insulated because of its geographically diversified presence across 19 states.

Liquidity Position: Adequate SFPL’s liquidity is adequate with cash and bank balances of ~Rs. 120 crore as on March 28, 2020 and undrawn lines of credit of ~Rs. 950 crore (out of which Rs.400 crore is available for immediate draw down and the rest expected to be available by April end post documentation). SFPL’s cash flow from operations is estimated to be turn positive i.e., in excess of Rs. 100 crore for FY2021. The company has a capex commitment of Rs. 50 crore and debt repayments of Rs. 59.0 crore in FY2021 the same is expected to be funded by the existing cash balances and undrawn lines of credit. While the company has no outstanding dues as on March 31, 2020, it is seeking a moratorium on payments from its lenders as part of the COVID-19 - Regulatory Package announced by the Reserve Bank of India (RBI) on March 27, 2020 which would provide additional buffer on liquidity for the immediate term. Overall, ICRA expects SFPL to be able to meet its near-term commitments through internal as well as external sources of cash.

Rating sensitivities Positive triggers – Any upgrade in rating is restricted in the current business environment. The rating could be upgraded, if the company witnesses substantial improvement in profit margins and reduction in debt levels. Specific metrics that could lead to an outlook revision are net debt/OPBITDA < 3.0 times on a sustained basis.

Negative triggers – Negative pressure on SFPL’s rating could arise if the average realisations of broiler chicken does not pick up within the next few weeks. Significant deterioration in capitalisation and coverage metrics could also lead to negative pressure on rating. Specific metrics that could lead to a downgrade are net debt/ OPBITDA > 3.0 times on a sustained basis.

Analytical approach

Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not Applicable Consolidation/Standalone The ratings are based on the standalone financial profile of the company.

About the company Suguna Foods Private Limited (erstwhile Suguna Foods Limited) was incorporated up in 1984 as a backyard farm in Udumalpet (Tamil Nadu). SFPL is based in Coimbatore and operates in over 19 states. Promoted by Mr. B. Soundararajan & his younger brother Mr. G.B. Sundararajan, first generation entrepreneurs, the company initially operated as a partnership firm, and the entity was later converted into a private limited company.

The holding company of the group is Suguna Holdings Private Limited, which also holds other companies in the group: Globion India Private Limited, Aminovit Feeds Private Limited, Suguna Foods and Feeds Bangladesh Private Limited etc.

Key financial indicators (audited) FY2018 FY2019 Operating Income (Rs. crore) 7,876.4 9,046.8 PAT (Rs. crore) 251.7 132.9 OPBDIT/OI (%) 5.9% 3.6% RoCE (%) 22.1% 13.3%

Total Outside Liabilities/Tangible Net Worth (times) 1.5 1.3 Total Debt/OPBDIT (times) 1.7 2.8 Interest Coverage (times) 5.3 4.9 DSCR 2.3 2.2

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2021) Chronology of Rating History for the Past 3 Years Amount Amount Date & Rating Date & Rating Date & Rating Date & Rating Rated O/s Date & Rating Date & Rating in FY2020 in FY2019 in FY2018 in FY2018 Instrument Type (Rs. crore) (Rs. crore) 06-Apr-2020 07-Jun-2019 10-May-2019 - 23-Feb-2018 22-Sep-2017 1 NCD Long Term 185.00 - [ICRA]BBB+& - - - - - [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]BBB+ 2 Term Loan Long Term 270.02 149.7 [ICRA]BBB+& - (Stable) (Stable) (Stable) (Positive) [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]BBB+ 3 Cash Credit Long Term 885.00 [ICRA]BBB+& - (Stable) (Stable) (Stable) (Positive) 4 Letter of Credit Short Term 18.00 [ICRA]A2& [ICRA]A2+ [ICRA]A2+ - [ICRA]A2+ [ICRA]A2 [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]BBB+ Long Term/ [ICRA]BBB+& 5 Unallocated 122.65 (Stable)/ (Stable)/ - (Stable)/ (Positive)/ Short Term /[ICRA]A2& [ICRA]A2+ [ICRA]A2+ [ICRA]A2+ [ICRA]A2 Amount in Rs. Crore

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 click here

Annexure-1: Instrument details Date of Amount Instrument Issuance / Coupon Maturity Rated Current Rating and ISIN No Name Sanction Rate Date (Rs. crore) Outlook Yet to be NCD Mar 2020 Mar 2028 185.00 [ICRA]BBB+& placed NA Term Loan Feb 2017 Dec’2022 270.02 [ICRA]BBB+& NA Cash Credit - - 885.00 [ICRA]BBB+& NA Letter of Credit - - 18.00 [ICRA]A2& NA Unallocated - - 122.65 [ICRA]BBB+& /[ICRA]A2& Source: Suguna Foods Private Limited

Analyst Contacts Subrata Ray Pavethra Ponniah +91 22 6114 3408 +91 44 4596 4314 [email protected] [email protected]

Prem Tej Reddy T +91 44 4297 4323 [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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