June 12, 2020 Suguna Foods Private Limited: Rating reaffirmed; rating watch removed and Stable outlook assigned; [ICRA]BBB+ (Stable) assigned to fresh borrowing programme Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) Non-convertible Debenture 185.00 185.00 [ICRA]BBB+ reaffirmed; rating watch Programme removed; Stable outlook assigned Non-convertible Debenture 0.00 230.00 [ICRA]BBB+ (Stable) assigned Programme Long Term-Term Loan Facilities 270.02 251.00 [ICRA]BBB+ reaffirmed; rating watch removed; Stable outlook assigned [ICRA]BBB+ reaffirmed; rating watch Long-term - Fund based facilities 885.00 935.00 removed; Stable outlook assigned Short-term - Non-fund based [ICRA]A2 reaffirmed; rating watch removed 18.00 18.00 facilities Long-term/Short-term - Proposed [ICRA]BBB+/[ICRA]A2 reaffirmed; rating 122.65 91.67 facilities watch removed; Stable outlook assigned Total 1,480.67 1,710.67 *Instrument details are provided in Annexure-1 Rationale The resolution of rating watch follows an improvement in market supply-demand dynamics for the poultry industry and Suguna Foods Private Limited (SFPL) with an increase in average realisations for broiler chicken to Rs. 110 per kg in May 2020 from the record low levels of Rs. 30 per kg in March 2020. Given the Covid-19 pandemic and the rumours of chicken as possible vector of the disease, there was a sharp decline in domestic broiler demand during February–March 2020. With the time lag involved in adjusting the supply levels, this fall in demand lead to a sharp correction in realisation and huge losses for all poultry players. Average production cost of Rs. 75–80 per kg vis-à-vis the average realisation of ~Rs. 30 per kg for SFPL in March 2020 impacted the FY2020 performance, with the company incurring a net loss of Rs. 350 crore in FY2020 (provisional). SFPL’s debt levels stood at ~Rs. 1,250 crore as on March 31, 2020 compared to Rs. 903.9 crore as on March 31, 2019. Its capitalisation and coverage metrics were also impacted by significant losses and high borrowings in FY2020. This situation has started to correct in Q1 FY2021, with some pickup in demand, improvement in logistics situation across the country and lower supply in the market leading to higher realisations. With the decline in realisations of broiler birds in February–March 2020, SFPL, like other industry players, reduced chick placements, the impact of which was visible from May 2020. Improved demand coupled with lower supply led to better realisations. Thus, the losses arising on account of high input costs and low farmgate prices, which continued until April, started reversing with an uptick in revenues. While mortality has been higher than usual in early Q1 FY2021 due to logistics impacting business operations, the cost of production is expected to reduce over the next few months, aided by the fall in input cost for feed, maize and soya. Moreover, the turmoil in the poultry industry in the last few months has temporarily removed smaller industry players, which has resulted in higher market share (upwards of 20%) for organised players like SFPL. Given the company’s extensive promoter experience and a well-established brand, along 1 with ability to align itself with changing market conditions, ICRA expects it to be better placed to withstand near-term headwinds. The ratings positively factors in SFPL’s established market position in the Indian poultry industry and its pan-India presence supported by the extensive experience of the promoters and a strong management team. The company is the largest integrated poultry player in India with 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 it in achieving operational efficiencies over the years. Further, development of in-house broiler pureline (Sunbro) is expected to improve the medium-term margins. 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. 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 a large number of contract farmers spread across 19 states, access to latest technology in poultry breeding and established in-house feed production capabilities. It has strong presence across the value chain in the poultry industry from procurement of raw material, manufacturing feed, in-house 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 in-house breeder – The company has large scale of operations (~Rs. 8,700 crore for FY2020; provisional) with integrated presence across the value chain, resulting in strong operational efficiencies. SFPL has also developed in-house broiler breed, Sunbro, which is expected to improve its profitability 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 a track record of over three and half decades. Credit challenges Exposure to cyclicality – In the past, the Indian poultry industry has been periodically affected by record high feed prices and unfavourable broiler realisations. The highly volatile broiler realisations are a consequence of the seasonal nature of higher chick placements in the market from organised and unorganised players, leading to an oversupply and a sharp correction in realisations. Further, the profitability remains vulnerable to fluctuations in feed prices with maize/soya forming ~65–70% of raw material cost. In FY2019 and 9M FY2020, broiler realisation moderated owing to the increase in chick placements and this coupled with an increase in feed prices led to a dip in margins. The trend is again getting reversed currently as the broiler supply has reduced owing to lower chick placements in February–March 2020, leading to better realisations. Also, the maize prices have come down, thereby improving the profitability of poultry players. This trend in the profitability of the industry exposes the company to earnings risk during the period of industry downturn as 2 witnessed in Q4 FY2020. The current pandemic has also impacted demand in the market, which is expected to decline in FY2021. Financial profile characterised by significant losses for FY2020; further moderation expected in top line in FY2021 impacted by lockdown – With fall in demand and significant drop in realisations, especially in March 2020, the company is estimated to have incurred a net loss of ~Rs. 350 crore for FY2020. As against this, its debt levels rose to Rs. 1,250 crore as on March 31, 2020, impacting SFPL’s capitalisation and coverage metrics in FY2020. While there was a gradual recovery in demand starting April 2020, restricted logistics due to lockdown led to supply glut in the local market, impacting the overall performance in Q1 FY2021, which is one of the strong quarters for the industry. This is expected to moderate the overall top line for FY2021. With the improvement in realisations, the company is expected to report a profit of ~Rs. 30 crore for Q1 FY2020. Inherent risks in poultry business – The poultry industry is exposed to diseases such as Avian Influenza (bird flu) outbreaks. In 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. 66 crore as on May 31, 2020 and undrawn lines of credit of ~Rs. 758.0 crore (part of which is available for immediate drawdown and the rest shall be available post documentation). 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. SFPL has availed 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. Further extension has been announced on May 22, 2020, which provides 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 – The rating could be upgraded, if the company witnesses sustained improvement in demand with supportive realisations leading to an increase in profitability and reduction in debt levels. Negative triggers – Negative pressure on SFPL’s rating could result with any decline in demand or realisation, impacting profitability. Significant deterioration in capitalisation and coverage metrics or elongation in working capital cycle could also lead to negative pressure on ratings. 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. 3 About the company Suguna Foods Private Limited (SFPL; erstwhile Suguna Foods Limited) was incorporated up in 1984 as a backyard farm in Udumalpet (Tamil Nadu). It is based in Coimbatore and operates in over 19 states. Promoted by Mr. B. Soundararajan and his younger brother Mr.