February 23, 2017 Protac Foods International Private Limited Instrument Amount Rating Action (Rs. crores1) Long term - Fund based – Term Loan 18.00 [ICRA]B (Stable); assigned Long term - Fund based – Cash Credit 4.00 [ICRA]B (Stable); assigned Total 22.00 *Instrument Details are provided in Annexure-1 Rating Action ICRA has assigned the long term rating of [ICRA]B (pronounced as ICRA B)2 to Rs. 18.00 crore term loan and Rs. 4.00 crore cash credit facilities of Protac Foods International Private Limited (PFIPL / the company). The outlook on the long term rating is stable. Rationale The assigned rating is constrained by PFIPL’s limited track record and small scale of operations, resulting in limited operational and financial flexibilities. The rating is also constrained by sizeable debt repayment obligations on account of high dependency on external funding for construction of the processing plant; combined with modest net worth levels, resulting in high gearing level of 3.70 times as on 30th November, 2016. With low capacity utilization during the initial months of operations, the cash accruals remained negative, straining the liquidity position of the company. Going forward, the ability of the company to ramp up its volumes and achieve the desired operational efficiency within a short span of time remains critical to ensure timely servicing of debt obligations. ICRA further notes vulnerability of the company to inherent risks in poultry industry like disease out breaks, seasonal nature of business, volatility in broiler prices and processed chicken prices, and competition from large number of organised and unorganized players exerting pressure on the margins. The rating, however, favorably factors in the experience of the promoters in the food processing and poultry industry, proximity of the plant to poultry farms and its diversified customer base of reputed clients. ICRA notes receiving of exports approvals and other certificates such as Agricultural and Processed Food Products Export Development Authority (APEDA) and Food Safety and Standards Authority of India (FSSAI) enhances the business growth prospects. ICRA also takes note of healthy long term demand prospects for the domestic poultry industry on back of favourable socio-economic factors. Key rating drivers Credit Strengths Experience of the promoters in the food processing and poultry industry Favourable location of the plant with close proximity to poultry farms Diversified customer base with customers from institutional as well as retail markets Favorable demand prospects for the domestic poultry industry, given the limited per capita animal protein consumption in India, and favorable socio-economic factors APEDA and FSSAI certification enhances business prospects 1 100 lakhs = 1 crore = 10 millions 2 For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications Credit Weakness Nascent stage of operations with company reporting losses at operational level as of November, 2016 Limited track record and small scale of operations Weak capital structure with low net-worth and significant term loan debt Strained liquidity profile due to sizeable scheduled repayments on the term loans; request for enhancement in the working capital loans is yet to be sanctioned Vulnerability of operations to inherent risks of poultry industry like disease out breaks, seasonal nature of business, volatility in broiler prices and processed chicken prices, high competitive pressure, etc. Description of key rating drivers highlighted above: The company processes live birds for the production of fresh and frozen chicken. The promoters of PFIPL were in the related line of activities prior to the establishment of the company, due to which they have gained significant industry experience. The plant location is in a region where there are many poultry farms, which ensures adequate and continuous availability of live birds and the company benefits from easy procurement. The company’s products cater to institutional as well as retail markets. PFIPL currently supplies products at restaurants, fresh provisions shops, wet markets and supermarkets in the domestic market and proposes to sell at international markets as well. The company has received supply orders of its products from multinationals like Vista Processed Foods Pvt. Ltd. (Subsidiary of McDonald), KFC, METRO, Licious and Big Basket. Also, the poultry meat demand in India has witnessed growth on account of favorable socio economic factors such as changing eating habits, higher purchasing power, urbanization, growing numbers of fast food chains, increasing health consciousness, thus giving ample opportunity for growth. The company started its operations in July 2016 and has been reporting losses at operating level as of November, 2016. Due to limited track record of operations, the ability of the company to ramp up its production levels, increase the capacity utilization and break even, is yet to be demonstrated. There has been high dependency on external funding for the capital expenditure incurred towards construction of the processing plant, resulting in a weak capital structure with a gearing of 3.70 times as on November 30, 2016. Also, with additional debt funding planned for the incremental capital expenditure and working capital requirements, the capital structure is likely to weaken further. PFIPL has sizeable debt repayment obligations in the near term. With negative accruals as on date and repayment of term loans already having begun, timely servicing of debt is dependent on the ability of promoters to bring in additional funds. While, the company has requested for enhancement in the working capital limits to ease the liquidity constraint and meet the increasing working requirements of the growing business, the same is yet to be sanctioned, posing significant funding risk. Links to applicable Criteria Corporate Credit Rating –A Note on Methodology About the company: Incorporated in February 2014, Protac Foods International Private Limited (PFIPL) started its commercial operations from July 2016. The company is engaged in processing of poultry birds for production of dressed and frozen chicken. The product portfolio of the company consists of fresh chilled chicken, frozen chicken, chicken cut parts (whole, boneless and portions) and ready to eat product (marinated chicken pieces). The company’s processing plant is located in Kolar district of Karnataka and has an installed capacity of processing 6000 birds per hour. However, with certain capital expenditure yet to undertaken, the current operational capacity stands at 2500 birds per hour. As per provisional results for FY2017, the company reported a net loss of Rs. 5.64 crore on an operating income of Rs. 10.96 crore for the period from July 2017 to November 2017. Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: S.No Name of Current Rating Chronology of Rating History for the Instrument past 3 years Type Rated Month- Month- Month- Month- amount year & year & year & year & (Rs. Crores) Rating Rating in Rating in Rating in FY2016 FY2015 FY2014 February - - - 2017 1 Cash Credit Long Term 4.00 [ICRA]B - - - (Stable) 2 Term Loan Long Term 18.00 [ICRA]B - - - (Stable) 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 www.icra.in Annexure-1 Details of Instrument Name of the Date of Coupon rate Maturity Date Size of the Current Rating instrument issuance issue and Outlook (Rs. Cr) Cash Credit - - - 4.00 [ICRA]B (Stable) Term Loan November, - November, 2024 18.00 [ICRA]B 2015 (Stable) Name and Contact Details of the Rating Analyst(s): Analyst Contacts K Ravichandran R Srinivasan +91 44 45964301 +91 44 45964315 [email protected] [email protected] Nikhil Mathew Kashika Khiani +91 080 49225569 +91 080 49225571 [email protected] [email protected] Name and Contact Details of Relationship Contacts: Jayanta Chatterjee +91 80 4332 6401 [email protected] About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. For more information, visit www.icra.in © Copyright, 2017, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources