Rating Rationale 6 July 2020

PATANJALI AYURVED LIMITED

Brickwork Ratings reaffirms the short-term rating for the Commercial Paper (CP) programme of Rs. 200 Cr, affirms the long-term rating for the secured listed redeemable NCD of Rs. 250 Cr, withdraws the long-term rating of proposed NCD of Rs. 175 Crs and assigns long-term provisional rating for its proposed NCD programme of Rs. 475 Crs, and reaffirms the long- and short-term ratings for the enhanced amount of bank loan facilities aggregating to Rs. 2955.92 Crores of Limited.

Particulars Present Estimate Previous Coupon Maturity Amt Previous d Value Amt Interest Tenure Rating Instrument Date (Rs. Rating Date (Rs. Crs) Crs) (%)

Commercia - - 480.00 200.00 N.A. >7days < 365 BWR BWR A1+ l Paper days A1+

Total 480.00 200.00 Rupees Two Hundred Crores Only

Amount (Rs. Crs) Rating*

^Facility Tenure Previous Previous Present Present (14 Mar 2020)

BWR AA-/Stable BWR AA-/Stable Fund based 2620.36 2855.92 Long Term (Reaffirmed)

Non Fund BWR A1+ BWR A1+ 100.00 100.00 Short Term Based (Reaffirmed)

Rupees Two Thousand Nine Hundred Fifty Five Crores and Total 2720.36 2955.92 Ninety Two Lakhs Only *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings ​ ​ ​ ^Facility-wise details of bank limits are available in Annexure I

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Previo us Amt Coupon Value Maturit Previous ISIN No. Amt (Rs. Interest Tenure Rating Instrument Date y Date Rating (Rs. Crs) (%) Crs)

N.A. BWR Rating 175.00 NCD^ - - - NIL N.A. AA-/Stabl Withdrawn ^ e

3 years *Provisional (tentativ N.A. Rating; NCD* - - - - 175.00 - e) BWR AA/Stable (CE)

10 - *Provisional years Rating; NCD* - - - - 300.00 - (tentativ BWR AA/Stable e) (CE)

Secured listed 3 years BWR BWR AA-/Stable 29.05.20 28.05.20 INE01IG07 redeemable 250.00 250.00 10.10% AA-/Stabl (Affirmed) 20 23 014 NCD e

Rupees Seven Hundred and Twenty Five Crores Total 425.00 725.00 Only *The provisional rating is assigned based on the assumptions and conditions stipulated by the company’s management in the draft proposed NCD term sheets. The company is required to submit a final signed term sheet related to the proposed NCD issues. The provisional rating would be affirmed on receipt of the final signed term sheet.

^Proposed NCD programme of Rs. 175 Cr stands withdrawn due to non utilization

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RATING ACTION/OUTLOOK

The ratings assigned to Patanjali Ayurved Limited (PAL or the company)’s debt facilities factor ​ in its market position as a leading FMCG player with a strong positioning in the health and natural segment, its diversified agri-based product portfolio that includes herbal and ayurvedic products catering to consumers’ cosmetic, food and health needs; its established distribution network in its core markets and the potential benefits that it can realise with access to the distribution channel of its associate company Ruchi Soya Industries Limited (RSIL). The company has also proposed to dilute some portion of its equity stake in RSIL during FY21/FY22, which is likely to be utilized to improve its financials and operational credit metrics. The ratings also factor in the management’s stated commitment that no further cash flows from the company would be used to support the funding needs of RSIL. Brickwork Ratings (BWR) also notes that the company is raising NCDs which will be listed on the BSE Ltd., and requires the company to meet various disclosure requirements of SEBI on a continuous basis. Further, the company also plans to strengthen its board by inducting additional professional independent directors from the industry, to meet the statutory guidelines.

The ratings are constrained by its increasing debt and gearing, an outcome of the recent expansions, investments and acquisitions, as well as its increasing working capital requirements, lower operating margins due to below break-even sales at its Tezpur plant. Competition from established FMCG companies is another major factor as these companies have launched products that directly compete with those of PAL.

BWR notes that the company’s operations were impacted only for around one week during March 2020 due to measures taken by the government towards the containment of COVID-19. However, the sales of the company were not impacted as its products fall under the essential goods category. The company reported high sales during Q1FY21 due to aggressive buying by consumers during the lockdown period as demand for its hygienic, personal care and other medicinal products grew significantly. Patanjali has also received an approval for manufacturing ‘hand sanitizers’ in bulk quantities. As informed by its lenders, the company opted for a 3-month moratorium (under the COVID-19 regulatory package) upto May 2020, on its interest and term loan payments, which was subsequently paid in June 2020 and the company has not opted for any further moratorium extension offered under COVID 19 regulatory package.

The provisional CE ratings for its proposed NCD issue to the company are based on the explicit payment mechanism to ensure the timely servicing of coupon payments to bondholders (detailed below).

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RATING OUTLOOK: Stable

BWR believes that the company will maintain its business risk and financial risk profile, supported by its established market position and expectation to generate significant cash inflows by diluting a part of its stake in RSIL during the current and next financial year.

The rating outlook may be revised to Positive if the company’s leverage (Net Debt/EBITDA ratio) and profitability parameters improve significantly and there is a reduction in its overall debt position through the generation of significant cash inflows from liquidating investments in its various subsidiaries/group entities. The rating outlook may be revised to Negative in case it fails to ramp-up the operations of its recent capex, faces delays in generating significant cash inflows from the disinvestments in RSIL and reports turnover and profits at lower-than-expected levels.

Commercial Paper

BWR had assigned BWR A1+ to the commercial paper programme of Rs. 480 Cr of PAL, which was raised in various tranches and subsequently paid since the last rating review. The company is also proposing to raise another commercial paper programme of Rs. 200 Cr for its working capital requirements.

Structure of the NCDs

BWR withdraws the long term rating of the proposed NCD of Rs. 175 Cr as it was not issued since the last rating review.

PAL raised the secured listed redeemable NCD of Rs. 250 Crs, with a bullet repayment at the end of the third year. This NCD carries a coupon which is payable half yearly on the principal outstanding from time to time.

The company also proposes to issue secure listed NCDs of Rs. 175 Crs and Rs. 300 Crs, with a bullet repayment at the end of the 3rd and 10th year respectively, which will carry a coupon, payable quarterly on the principal amount outstanding from time to time. The reason for raising an NCD of Rs. 175 Cr is to meet its long-term working capital requirements and for general corporate purposes. The proceeds of the NCD for Rs. 300 Cr will be utilised for the purpose of refinancing the entire outstanding term loans of the Tezpur unit.

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KEY RATING DRIVERS

Credit Strengths:

Strong payment mechanism: As per the term sheet made available to us, the company’s ​ proposed NCD instruments shall carry a partial credit enhancement by the way of bank guarantees in favour of the debenture trustee (DT), to the extent of one-year coupon payment obligations on a yearly renewal basis. Under this mechanism, the company will transfer funds proportionately to the interest payment escrow account every quarter to ensure the required funds are made available by T-3 days. The escrow account shall regularly be monitored by the DT. In the case of a shortfall, the DT can send a notice to the bank guarantee issuing bank to fund the shortfall by T-2 days. This mechanism will remain till the maturity of the said NCD’s

Established market position with a well-diversified product portfolio: The company has established its market position in a wide range of FMCG products, covering cosmetics, food and health, and with special emphasis on its ayurvedic content. It is growing its distribution network of super distributors, distributors, retailers and owned mega stores, besides direct supplies to CSD and various government departments. The company also has tie-ups with online retailers such as Amazon, BigBasket, Flipkart, Paytm Mall, Grofers, ShopClues and Snapdeal.

Established brand name: Patanjali is now a prominent brand in the FMCG sector, with ​ products being well-positioned as healthy and natural. The company is also envisaged to benefit from ‘AtmaNirbhar/Vocal for Local movement’. The Patanjali brand is strongly associated with Yoga Guru Swami , who is popular in and abroad, although he is not formally involved in the ownership or management of the company.

Scalable business strengthened by access to RSIL’s longstanding distribution channel: The ​ access to RSIL’s distribution channel will supplement the company to leverage its brands and existing product portfolio across new and incremental markets. In addition to its own distributor network, the company has been able to enhance its market coverage through the acquisition of RSIL. RSIL has 90+ depots (with storage and other logistical facilities), which serve 4,000+ distributors across the country, reaching over 1 million retail outlets.

Turnover growth: The company has been able to maintain its turnover levels despite muted sales growth in the FMCG market in general. The annual turnover improved from Rs. 8135.94 Crs in FY18 to Rs. 8522.69 Crs in FY19 due to sales and marketing efforts. Furthermore, it achieved a turnover of Rs. 9024.24 Cr during FY20 (un-audited). During the lockdown period, the company has reported substantial growth in its revenue profile during Q1FY21 and further, the management is confident of achieving its projected turnover and profitability figures in FY21 despite the COVID-19 pandemic.

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Continuous R&D for developing new products: PAL set-up a new division for research and development in its own premises at the unit in FY18, which enabled it to launch health care and other FMCG products as per market demand. Launched products include dairy and frozen food, nutraceuticals, colour cosmetics, natural health supplements, packaged drinking water and products for pregnant and postnatal mothers which added to its revenue profile over the medium term.

Credit Risks

Intense competition from other FMCG players: The company continues to face intense ​ competition from other large FMCG players in the market. The FMCG sector has significantly large and established players that not only have a well-stacked traditional product portfolio, but are also entering the natural space backed by their much larger and deeper distribution network and financial strength. The company’s volume growth, pricing power and profitability may be impacted by the entrenched competition.

Increasing debt levels driven by recent acquisitions and high working capital requirements: The company’s debt level was at around Rs. 533.59 Crs during FY16, which has ​ increased significantly by Rs. 2000 Crs over four years. PAL, being a flagship company of the group, has supported group companies and thus, raised borrowings to incur debt-funded capex and invest in various subsidiaries/food parks that are yet to achieve breakeven levels. The company made significant investments of around Rs. 900 Crs (Equity - 200 Crs and Debt - 700 Crs) in its Tezpur unit, which has generated a turnover of around Rs. 216 Crs (including stock transfers) during 9MFY20 and is at present yet to break even.

Due to the recent acquisition of RSIL and significant investments made for capex in group companies, the availability of excess cash for its working capital requirement remains low, which has resulted in an increase in its working capital limits utilisation for the 12-month period ended May 2020.

High management risk: The company is highly dependent on its promoter, Acharya ​ (M.D.), for making all decisions related to its strategy, planning and operations. The Patanjali brand thus, has a strong dependence on Acharya Balkrishna and Yoga Guru Swami Ramdev. However, the management has plans to strengthen its board of directors by inducting independent professional directors from the industry. The company has raised listed NCD instruments and thus, needs to comply with all statutory requirements and disclosure norms. This will enhance its corporate governance, going forward. The ability of the company to increase bandwidth at the board level and management layers remains a key rating sensitivity.

LIQUIDITY PROFILE: Adequate

Historically, the company has generated healthy cash accruals, which helped to substantially fund its working capital requirements. This liquidity has been constrained due to increased www.brickworkratings.com page 6 of 12

investments, capex and also lower profitability from its Tezpur units. The average working capital limit utilisation remained high for the 12-month period ended May 2020. This liquidity, which looks lower currently with high bank line utilisation, is expected to improve with the additional long maturity working capital debt availed by the company and as the expansion starts generating revenue. The company can realise cash inflows through the potential monetisation of some of its investments in the current and next financial year. The current ratio improved during FY20 as the company paid its entire short-term loans by raising long-term working capital loans. The consortium lenders approved to raise Rs. 900 Cr as a long-term loan for its working capital requirements.

The company’s unencumbered cash and cash equivalents and undrawn fund-based limits stood at around Rs. 54.69 Crs and Rs. 116.41 Crs, respectively, as on 31 March 2020 (un-audited).

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA

For arriving at its ratings, BWR has considered the standalone performance of Patanjali Ayurved Limited. BWR has applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale).

RATING SENSITIVITIES

The company’s performance is highly sensitive towards the higher-than-envisaged debt-funded capex/investments, which may impact its credit risk profile and operational metrics over the medium term.

Positive: The rating could be revised upwards if the company is able to quickly ramp-up sales ​ from its Tezpur unit by leveraging on the access to RSIL’s distribution network. PAL may potentially monetise the investment in RSIL through a sale of a part stake in RSIL as mandated under the terms of the RSIL acquisition, which will aid in the reduction of debt and improving gearing.

Negative: The company’s debt levels have increased in the recent past, primarily due to investments made in various projects through subsidiaries and also direct investments, which are yet to yield operating cash flows. Although the management expects to reach a breakeven level for its Tezpur plant and other stalled projects over the medium term, any delays in ramping-up operations may significantly impact the company’s operations. Furthermore, cash outflows required, if any, in RSIL’s operations, are likely to significantly impact the company’s liquidity position over the medium term.

RATING COVENANTS

The company’s proposed NCD instruments shall carry a partial credit enhancement by the way of bank guarantees in favour of the debenture trustee (DT), to the extent of one-year coupon payment obligations on a yearly renewal basis. The bank guarantees will be legally enforceable, www.brickworkratings.com page 7 of 12

irrevocable, unconditional and covers the one-year coupon payment obligations on a yearly renewal basis. Given these attributes, the guarantee provided by its bank is adequately strong to result in an enhancement in the rating of its proposed NCD’s programme to Provisional BWR AA/Stable (CE) against the rating of BWR AA-/Stable without explicit credit enhancement. In case the rating of the guarantor were to undergo a change in future, the same would reflect in the rating of the aforesaid instrument as well.

COMPANY PROFILE

Patanjali Ayurved Ltd is a flagship company of Patanjali Group and is engaged in the manufacturing and trading of FMCG, herbal and ayurvedic products. It was established in 2006 and was later converted into a public limited company in 2007. It sells its products under the brand name of PATANJALI.

The company’s three major manufacturing units are located in Haridwar, along with a peas processing unit in Uttarakhand. The company set-up a new unit at Tezpur (Assam) in 2017 with a total investment of around Rs. 900 Cr. It also acquired two other units, a rice plant (Haryana) and dairy plant (Nevasa, Maharashtra) with a combined investment of around Rs. 175 Cr during 2017. Furthermore, Patanjali Group is in the process of establishing more units in various states to support its growth and increase penetration towards newer markets. The majority (98.54%) of the company’s shareholding is held by Acharya Balkrishna (Managing Director).

KEY FINANCIAL INDICATORS

Particulars FY19 (A) FY20 (Un-Audited) Total Operating Income (Rs. Crs) 8522.69 9024.24 EBITDA (Rs. Crs) 866.86 944.64 PAT (Rs. Crs) 349.37 485.02 Total Tangible Net worth (Rs. Crs) 2870.51 3845.47 Total Debt to Equity Ratio (times) 0.81 0.77 ISCR (times) 3.54 3.93 Status of non-cooperation with previous CRA: Not Applicable ​ Any other information: Not Applicable ​

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Rating History for the last three years (including withdrawn/suspended ratings)

Current Rating (2020) Chronology of Rating History for the past 3 years (Rating Assigned and Press Release date) Name of Type (Long Amt. Ratin along with outlook/ Watch, if applicable the Term/Short (Rs. Facility Term) Cr)

Bank Loan Facilities

01.07.2020 14.03.2020 05.12.2019 08.06.2018 2017 FB Long- 2855.9 BWR F Lo 2855 BWR F Lo 2051. BWR F Lo 290 BWR NA term 2 AA-/Stable B ng- .92 AA-/ B ng- 05 AA- B ng- 5.5 AA/stable

ter Stabl ter /Negative ter 5 NFB Short- 100.00 BWR A1+ m e m m term N Sh 100. BWR N Sho 100 BWRA1+ N Sho 100 BWR

F ort- 00 A1+ F rt-t F rt-t A1+

B ter B erm B erm

m

04.10.2019 31.03.2018 F Long 210 BWR

B -term 3.69 AA-/Ne F Lon 84 BWR gative B g-te 0 AA /stable rm N Short 100 BWRA F -term 1+ N Sho 50 BWR B F rt-te A1+ B rm

30.03.2019 FB Long 2512 BWR -term .15 AA-/St able

NF Short 100 BWRA B -term 1+

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Non Convertible Debentures

01.07.2020 14.03.2020 04.10.2019 08.06.2018 Facili Tenu Amt. Rating N 10 425 BW N 5 100 Withd NC 5year 1000 BW ty re Rs. C year R C year 0 rawn D R Cr D AA- D AA/ /Sta Stabl

NCD 3 250 BWR ble e 30.03.2019 years AA-/Stable

N 5 1000 BWR NCD 3 175 Provisional: C year AA-/S years BWR D table AA/Stable (CE)

NCD 10 300 Provisional: years BWR AA/Stable (CE)

Commercial Paper

01.07.2020 14.03.2020 05.12.2019 Facilit Te Amt. Rati CP <365 480 BW C <36 58 BW y nu Rs. ng days R P 5da 0 R re Cr A1+ y A1+

CP <3 200 BW 65 R day A1+ s

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#Annexure I Details of Bank Facilities rated by BWR

S Name of the Bank Type of Facility Long Term Short Term Total No. (Rs. Cr) (Rs. Cr) (Rs. Cr)

Cash Credit 600.00 - 1 Punjab National Bank BG/LC - 100.00 700.00

Term Loan (Tezpur unit) 79.74 2 HDFC Bank Cash Credit 25.00 - 112.00

Vendor Financing/WCDL 200.00 - 3 State Bank of India Cash Credit 100.00 600.00 Corporate Loan 300.00

Term Loan (Tezpur unit) 76.92 4 YES Bank Vendor Financing/WCDL 50.00 - 376.92 Cash Credit 250.00

Term Loan (Tezpur unit) 97.50 5 Axis Bank Cash Credit 15.00 - 112.50

6 Bank of India Cash Credit 90.00 - 90.00

7 Bank of Baroda Cash Credit 80.00 - 311.85 Corporate Loan 231.85

8 Bank of Maharashtra Cash Credit 170.00 - 170.00

9 NABARD Term Loan I & II 23.92 - 23.92

10 Syndicate Bank Cash Credit 200.00 - 200.00

11 Federal Bank Term Loan (Tezpur unit) 65.00 - 65.00

12 Union Bank of India Cash Credit 30.00 - 30.00

13 SVC Corporate Bank Cash Credit 40.00 - 40.00 Ltd

14 Proposed Loan COVID-19 emergency credit line 131.00 - 131.00

TOTAL 2855.92 100.00 2955.92

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Hyperlink/Reference to applicable Criteria

● General Criteria ● Manufacturing Companies

● Approach to Financial Ratios

● Short term Debt

Analytical Contacts Investor and Media Relations

Peeush Middha Assistant Manager - Ratings Liena Thakur +91 172 5032295 Assistant Vice President - Corporate [email protected] Communications

M : +91 84339 94686 Ashwini Mital B : +91 22 6745 6666 Director - Ratings [email protected] +91 172 5032295 [email protected] ​

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About Brickwork Ratings :Brickwork Ratings (BWR), a SEBI registered Credit Rating Agency, accredited by RBI and empaneled by NSIC, offers Bank Loan, NCD, Commercial Paper, MSME ratings and grading services. NABARD has empaneled Brickwork for MFI and NGO grading. BWR is accredited by IREDA & the Ministry of New and Renewable Energy (MNRE), Government of India. Brickwork Ratings has Canara Bank, a leading public sector bank, as its promoter and strategic partner. BWR has its corporate office in Bengaluru and a country-wide presence with its offices in Ahmedabad, Chandigarh, Chennai, Hyderabad, Kolkata, Mumbai and New along with representatives in 150+ locations.

DISCLAIMER Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented “as is” without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons

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