Rating Rationale

Mukka Sea Foods Industries Private Limited

14 May 2019

Brickwork Ratings upgrades the ratings to ‘BWR BBB-/A3’ for the bank loan facilities of Rs. 69.40 Crore of Mukka Sea Foods Industries Private Limited [‘MSFIPL’ or ‘the ​ company’], Mangaluru,

​ Particulars Amount Ratings* Facilities (Rs. Crs) Tenure ​ Previous Present Previous Present Fund Based

47.00 47.00 PCFC BWR BBB-/A3** Long BWR A4+ (Pronounced as Term/ Stand by credit limit 9.40 9.40 (Pronounced as BWR Triple B Short BWR A Four Plus) minus/A Three) term PC - 13.00 Outlook:Stable

Total 56.40 69.40 Rupees Sixty Nine Crore Forty Lakh Only

**Note: Annexure I provides details of the credit facilities . *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings ​ ​ Rationale/Description of Key Rating Drivers/Rating sensitivities: Brickwork Ratings has essentially relied upon the audited financials upto FY18, provisional financials for FY19 and projections upto FY21, publicly available information and information/clarifications provided by the company’s management. The ratings upgrade factors the improved operational and financial performance of the company.The ratings continue to factor the promoters’ extensive experience in the fish meal and oil products business, established client base and locational advantages of its plant in Mukka, , facilitating easy and timely procurement of raw materials. The ratings also positively factor the average financial profile marked by moderate gearing and comfortable debt coverage indicators. However, the ratings continue to be constrained by the limited value-additive nature of operations, intense competition from domestic players as well as other low-cost countries, resulting in low operating margins, exposure to inherent volatility in raw material availability and prices and susceptibility to adverse changes in government regulations. The ratings are

1 14 May 2019 further constrained by the large working capital requirements, vulnerability of margins to foreign currency risks and climatic changes. Going forward, the ability of the company to increase its scale of operations, improve profitability, strengthen its liquidity and credit profile, efficiently manage its supply chain and manage its working capital efficiently would be the key rating sensitivities.

Key Rating drivers

Credit Strengths: ​ ● Promoters’ experience and established operations: MSFIPL has an operational track record of over five decades in the seafood industry. The company benefits from the promoters’ extensive experience in the sea food industry, understanding of the dynamics of the industry and established relationships with customers and suppliers. MSFIPL ​ exports fish oil, fish meal and fish soluble paste to its clients in Vietnam, Taiwan, Saudi Arabia, Bangladesh, etc.

● Moderate financial risk profile: MSFIPL’s revenue marginally declined to Rs.285.89 Cr during FY18 from Rs.302.23 cr in FY17, due to volatility in raw material prices in line with the global market trend. However, on a provisional basis, the company has achieved sales of around Rs.421 Cr, during FY19. Debt servicing capabilities have improved, reflected by ISCR of 6.47 times in FY18 as against 2.71 times in FY17. ​ Tangible net worth was Rs. 37.29 crore as on 31st March 2018 as against Rs. 21.37 crore ​ st as on 31 March​ 2017, on account of retention of profits in the business. MSFIPL’s ​ leverage ratios are comfortable with Total Debt to Tangible net worth of 1.15 times as on ​ ​ st 31 ​ March 2018. ​ ​

Credit Constraints: ​ ● Susceptibility of profitability to volatility in raw fish prices: Seafood industry’s ​ profitability margins are highly correlated with fluctuations in raw fish prices and are susceptible to various risks like perishability, need for high adherence to quality, exchange rates, availability during a particular period etc. Net profit margin was 5.55% for FY18 as ​ ​ against 1.06% for FY17 and Operating profit margin was 5.02% for FY18 as against 3.46% for FY17. Furthermore, the company does not have any long-term contracts with suppliers with regard to either quantity or price, however it has several years of relationships.

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● Intense competition - The industry is characterised by the presence of a large number of players manufacturing fish meal and fish oil and the company also faces competition from international players. Owing to this, the company’s ability to pass on the increase in raw material prices to its customers gets limited. However, the long-term association with its reputed customers ensures repeat orders and mitigates the competition risk to some extent.

● Exposure to forex fluctuations: Profitability is exposed to forex rates as around 80% ​ revenue is derived from exports. However, forex risk is mitigated by way of natural hedging, as the company has availed Packing Credit facility in foreign currency.

● Susceptibility to risks inherent in the seafood industry and changes in government regulations: The industry is characterized by low entry barriers and intense competition from unorganized players. Volatility in prices, diseases, climatic vagaries, etc affect supplies and hence, prices. The seafood industry is affected by demand-supply ​ imbalance as seafood is a depleting commodity; tightened regulations on fishing have made supply conditions more irregular. Moreover, many export destinations such as the US, Japan, and European countries implement regulations (including anti-dumping duty, food safety regulations, and quality requirements) that need to be met and any detrimental regulation could impact profitability. Indian exporters also face intense competition from cheaper varieties sourced from countries such as Bangladesh, Thailand, Indonesia, etc. Moreover, any change in Government policies would adversely impact the players’ revenues and margins.

Liquidity - Moderate: Working capital utilisation remained high with an average utilisation of ​ around 95% over the last one year, owing to the nature of business. As such, there is limited ​ buffer to meet working capital needs. Current ratio was 1.08 times as on 31st March 2018 as ​ ​ ​ against 1.11 times as on 31st March 2017. Net cash accruals to total debt was around 0.39 times ​ st st as on 31 March 2018. Cash & Cash equivalents were Rs. 5.11 crore as on 31 March​ 2018, ​ ​ however reduced to around Rs 30 lacs as on March 31 2019 (provisional). The operations are expected to remain working capital intensive and timely enhancement of working capital facilities will be critical for maintaining a comfortable liquidity position.

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Analytical Approach For arriving at its ratings, Brickwork Ratings has applied its rating methodology as detailed in the Rating criteria below (hyperlinks provided at the end of this rationale). ​

Rating Outlook: Stable Brickwork Ratings believes that Mukka Sea Foods Industries Private Limited ’s (‘MSFIPL’ or ​ ‘the company’) business risk profile will be maintained over the medium term. The ‘Stable’ ​ outlook indicates a low likelihood of rating change over the medium term. The rating outlook may be revised to ‘Positive’ in case the revenues and profit show sustained improvement leading to improvement in cash accruals and strengthening of financial risk profile. The rating outlook may be revised to ‘Negative’ if the revenues go down, profit margins show lower than expected figures, working capital cycle is stretched pressurizing the liquidity position or any major debt funded capital expenditure plan leads to stress on the financial risk profile of the company.

About the Company Mukka Sea Foods Industries Private Limited [‘MSFIPL’ or ‘the company’], Mangalore was ​ ​ originally established in 1960 as a proprietorship concern and in 2003, was reconstituted as a partnership firm. Later in 2010, the partnership firm was reconstituted into this company. The processing unit is at Mukka, . The company is involved in the production of fish meal, fish oil and fish soluble paste from raw fish. Exports are to countries like Taiwan, Vietnam, Bangladesh, etc. The processing facility is certified with Hazard Analysis and Critical Control Points (HACCP), ISO: 22000, ISO: 9001and GMP+. The company has also received Two Star Export Certificate from GOI.

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Financial Performance MSFIPL’s revenue marginally declined to Rs.285.89 cr during FY18 from the FY17 figure of Rs.302.23 cr, due to volatility in raw material prices. Profit after Tax was Rs. 15.98 crore for FY18 as against Rs. 3.20 crore for FY17. The increase in PAT during FY 18 was mainly due to income from investments. Tangible net worth was Rs. 37.29 crore as on 31st March 2018. On ​ a provisional basis, the company has achieved sales of Rs.421.89 cr, during FY19.

Key Financial Parameters Particulars 31 Mar 2017 31 Mar 2018 Audited Audited Net Revenue Rs. Cr 302.23 285.89

EBITDA Rs. Cr 10.47 14.36

Profit After Tax Rs. Cr 3.20 15.98

Tangible Net Worth Rs. Cr 17.48 21.22

Total Debt : Tangible Net Worth Times 21.37 37.29

Current Ratio Times 1.11 1.08

Rating History for the last three years

Current Rating Ratings History (2019) Facilities Amount 2018 Type Ratings (Rs. Cr) [06 March 2018] BWR BBB-/A3 * 47.00 PCFC (Pronounced as Long BWR A4+ BWR Triple B Term/Short (Pronounced as Stand by credit limit 9.40 minus/A Three) term BWR A Four Plus) Outlook:Stable PC (Single Txn Limit) 13.00 Upgraded Rs. 69.40 Cr (Rupees Sixty Nine Crore Forty Lakh Total Only)

Status of Non-Cooperation with other CRA: Ratings, vide its press release dated 05th October 2018, has maintained its ratings of the ​ bank loan facilities of the company in the Issuer Not Cooperating* category, as the company has not provided requisite information for monitoring the ratings.

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Any other information: Not Applicable

Hyperlink/Reference to applicable Criteria

● General Criteria ● Manufacturing Companies

● Approach to Financial Ratios ● Short Term Debt

Analytical Contacts Media

Rajee R [email protected] Senior Director – Ratings & Head – Ratings Operations Relationship Contact [email protected] [email protected] Phone: 1-860-425-2742

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Annexure I Bank Loan Facilities Previous Present Bank Facilities Tenure (Rs. Crs) (Rs. Crs) Fund Based Packing Credit in Foreign 47.00 47.00 Currency [PCFC] Canara Bank Long Balmatta Branch, Standby line of credit - PCFC Term/ 9.40 9.40 Mangaluru Short PCFC (Single Txn Limit) Term - 13.00

56.40 69.40

Note: LT and ST Ratings assigned based on the specific request of the bank and the ​ company.

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8 14 May 2019