Brief Rationale Soaring Spirits Private Limited November 8, 2017 Rating Amount Facilities Rating1 Rating Action (Rs. crore) CARE BB; Stable Long-term Bank Facilities 6.00 Assigned (Double B; Outlook: Stable) Total 6.00 (Rupees Six crore only) Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Soaring Spirits Private Limited are tempered by the small scale of operations although increasing total operating income during review period, geographic concentration risk and highly regulated user industry with change in government policies. The ratings, however, derive its strengths from long track record of the company and experienced management, satisfactory profit margins albeit fluctuating during review period, comfortable capital structure and debt coverage indicators, moderate working capital cycle during review period and positive demand prospect of distilleries. Going forward, ability of the company to increase the scale of operations, along with efficient management of working capital requirements are the key rating sensitivities. Detailed Description of the key rating drivers Key Rating Weaknesses Small scale of operations although increasing total operating income during review period Despite having a long track record, the scale of operations are relatively small marked by total operating income (TOI) of Rs. 15.01 crore during FY17(Prov.) with moderate networth base of Rs. 8.12 crore as March 31, 2017(Prov.) as compared to other peers in the industry. The total operating income has been increasing during review period FY15-FY17. The company witnessed significant increase in TOI from Rs. 8.93 crore in FY16 to Rs. 15.01 crore in FY17(Prov.) due to addition of more customers resulting in addition of 2 new machinery worth Rs. 3.25 lakh in FY 16 which has further enhanced the production levels. Highly regulated user industry with change in government policies The company is running a distillery – blending and bottling unit which is highly regulated market, controlled by state government rules and regulations. Further, the prices of key raw material of the company i.e. ENA is also subjected to price fluctuations which are regulated as per the MSP’s (Minimum support prices) and further prices of the final products are affected by increasing amount of excise duty levied by the govt., other policy changes. Such volatility in the product prices impact the profitability margins to a large extent. Geographical concentration risk The liquor products produced by SSPL are being supplied to John Distilleries Private Limited, MS Biotech Private Limited, M & S Bottling Company and Sun Pure Oranges as per the agreements, which in turn is supplied to dealers and shops located in Andhra Pradesh region through Andhra Pradesh State Beverages Corporation Limited. Due to the geographic concentration of the company’s supplies to a single state, any changes in the government rules and regulations in terms of liquor manufacturing and sale may affect the company’s revenues. However, the company is planning to expand their operations and supply their products to Telangana state also with necessary approvals and licenses from Telangana State Beverages Corporation Limited from the next financial year (FY18), which would mitigate the risk of geographical concentration of the company. Key Rating Strengths Long track record of the company and experienced management SSPL was established in the year 2004 and promoted by Mr. Venkateswara Raju Bhupathiraju, Mr. V S V S Raju and Mr. A Krishnam Raju, who have rich exposure of alcohol manufacturing business for more than two decades. All the directors are actively involved in the day to day activities of the business. Furthermore, the top management is assisted by second line of management having adequate experience in the industry. Satisfactory profit margins albeit fluctuating during review period 1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 Credit Analysis & Research Limited Brief Rationale The PBILDT margin of the company stood satisfactory although fluctuated in the range of 20%-29% during review period due to the nature of work undertaken by the company as the company generates 100% revenue from job work for multiple companies where realization per case differs from company to company. PAT margin improved from 1.94% in FY15 to 12.81% in FY16 due to increasing sales realization and absorption of fixed overheads on account of increasing scale of operations. However, the PAT margin decreased to 8.97% in FY17 (Prov.) due to increase in depreciation provisions from Rs. 0.46 lakh in FY16 to Rs. 1.51 lakh in FY17 (Prov.). However, the company achieved cash accruals of Rs.2.86 crore in FY17 (Prov.) compared to Rs.1.72 crore in FY16. Comfortable capital structure and debt coverage indicators The capital structure of the company remained comfortable during review period. The debt equity ratio remained below unity for the last three balance sheet date ended March 31, 2017(Prov.) on account of increase in tangible net worth due to year-on-year accretion of profit along with low long term debt levels. Furthermore, the overall gearing ratio of the company also stood comfortable though deteriorated from 0.85x as on March 31, 2016 to 0.93x as on March 31, 2017 (Prov.) due to increasing unsecured loans from related parties and higher outstanding working capital facilities as on closing balance sheet. The company availed unsecured loans from related parties in order to support the increase in scale of business operations and to meet working capital requirement. The debt coverage indicators marked by interest coverage and TD/GCA have been comfortable in FY17 (Prov.). TD/GCA improved from 4.61x in FY15 to 2.64x in FY17(Prov.) due to increase in gross cash accruals. Despite increase in interest cost, the interest coverage ratio of the company improved from 6.48x in FY15 to 7.21x in FY17 (Prov.) due to increasing PBILDT levels and stood comfortable. Moderate working capital cycle during review period The company’s working capital cycle remained moderate during review period. However, the operating cycle of the company deteriorated from 9 days in FY15 to 67 days in FY17 (Prov.) at the back of increased collection days from 9 days in FY15 to 55 days in FY17 (Prov.) due to increasing scale of operations with increasing debtors as on account closing dates. Furthermore, the company receives the payment from the clients within 45-60 days after the stocks are purchased by the retailers/licensees. The company purchases the raw materials from domestic suppliers and makes immediate payment to its creditors resulting in nil credit periods from raw material suppliers. The company holds inventory levels for about 1-2 weeks to meet production requirements. The average utilization of working capital limit was at 90% in the past 12 months ending September 2017. Nevertheless, going forward, the ability of SSPL to manage its working capital cycle would be critical from the credit perspective. Positive demand prospect of distilleries Extra Neutral Alcohol (ENA) is the key raw material for IMFL (Indian made Foreign Liquor) manufacturers, the IMFL segment, comprising 36% of the Indian alcoholic beverages industry. As India has huge youth population, the demand of alcohol would remain high in the coming years. Pan-India, the undivided AP and Tamil Nadu accounted for the highest share of 21 per cent share in the IMFL space, followed by Karnataka with 18 per cent. These three geographies account for a major 60 per cent of the total IMFL sales in the country. State division has given a fresh boost to the IMFL market, which otherwise has seen marginal growth in the last couple of years, as the scope for market expansion has been created for a variety of reasons. In the present scenario, both AP and Telangana may together bypass Tamil Nadu to become the largest IMFL market in the country. Analytical Approach: Standalone Applicable Criteria: Criteria on assigning Outlook to Credit ratings CARE's Policy on Default Recognition Rating Methodology-Manufacturing Companies Financial ratios – Non-Financial Sector About the company Incorporated in August 2004, Soaring Spirits Private Limited (SSPL) was promoted by Mr. Venkateswara Raju Bhupathiraju, Mr. V S V S Raju and Mr. A Krishnam Raju. The company is engaged in the business of distillation, blending and bottling of alcohol, primarily Indian-made foreign liquor (IMFL). The company derives 100% revenue from job work. The company has entered into one year agreement (can be mutually extended) with John Distilleries Private Limited (rated BWR A-/BWR A2+; Outlook: Stable) for job work of 25000 cases/month and for which it receives Rs. 56/case. Also, with MS Biotech Private Limited, it produces 75000 cases/ month and receives Rs. 60/case. SSPL has also agreements with M & S Bottling Company and Sun Pure Oranges for producing of 7500 and 10000 cases/ month respectively for which it receives Rs.56 & Rs. 73/case respectively. 2 Credit Analysis & Research Limited Brief Rationale The company’s plant facility is located at West Godavari in Andhra Pradesh. Initially, the factory was equipped with 3 production lines. Subsequently, the production lines increased to 5 lines in 2016 out of which 3 are fully automated and 2 being semi-automated line with a total installed capacity of 1.21 lakh cases per month. Brief Financials (Rs. crore) FY16 (A) FY17 (P) Total operating income 8.93 15.01 PBILDT 2.60 3.16 PAT 1.14 1.35 Overall gearing (times) 0.85 0.93 Interest coverage (times) 5.99 7.21 A-Audited, P-Provisional 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.