Sai Venkatarama Oil And Agro Products June 18, 2018 Ratings Facilities Amount Long-term Bank Facilities 6.00 Total Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers 6.00 (Rupees Six crore only) Rating 1 CARE B+; Stable (Single B Plus; Outlook: Stable) Rating Action Assigned The rating assigned to the bank facilities of Sai Venkatarama Oil And Agro Products (SVOAP) is tempered by small scale of operations with fluctuating total operating income during the review period, thin profitability margins, leveraged capital structure and weak debt coverage indicators, working capital intensive nature of operations and constitution of the entity as a partnership firm with inherent risk of withdrawal of capital. The rating, however, derives strength from long track record and the experience of the promoters for more than a decade in business, location advantage and stable outlook of cotton industry. Going forward, ability of the firm to increase its scale of operations and improve profitability margins, manage working capital requirements efficiently and improve the capital structure and debt coverage indicators would be the key rating sensitivities. Detailed description of the key rating drivers Key Rating Weaknesses Small scale of operations with fluctuating total operating income during the review period The firm has a track record of thirteen years; however, the total operating income (TOI) of the firm remained low at Rs.24.19 crore in FY17 with low net worth base of Rs.2.59 crore as on March 31, 2017 as compared to other peers in the industry. The small scale limits the firm s financial flexibility in times of stress and deprives it from scale benefits. The total operating income (TOI) of the firm has been fluctuating during the review period. TOI increased from Rs.29.54 crore in FY15 to Rs.36.35 crore in FY16 due to increase in price of cotton seed oil and DOC (Decorticated oil cake). However, TOI decreased to Rs.24.19 crore in FY17 due to impact of demonetization of Indian currency across sectors including ginning mills. The farmers sell cotton to the ginning mills majorly on cash basis. Due to the demonetization, there was shortage of cotton for ginning industry. Since SVOAP purchases cotton seeds from the ginning mills, there was shortage of raw material for SVOAP. However, TOI increased to Rs.29.23 crore in FY18 (Prov.) as the operations of the firm restored post the demonetization effects. Fluctuating profitability margins during the review period Profitability margins of the firm were seen fluctuating during the review period. The PBILDT margin of the firm declined from 4.38% in FY15 to 3.73% in FY16 due to increase in price of raw material i.e. cotton seeds. The same marginally increased to 3.86% in FY17 on account of decrease in power & fuel cost. However, the PBILDT margin has increased to 4.79% in FY18 (Prov.) due to the firm has stopped trading of cotton seed oil and DOC by purchasing from other 1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 Credit Analysis & Research Limited
manufacturers in Karnataka in which margins are relatively as compared to manufacturing activity. The PAT margin of the firm has been also fluctuating during review period i.e., in the range of 0.09%-1.07% on account of fluctuating operating profit along with interest costs depending upon usage of working capital limits. Leveraged capital structure and weak debt coverage indicators The capital structure of the firm stood leveraged during the review period marked by debt equity and the overall gearing of 0.44x and 2.87x as on March 31, 2018 (Prov.) mainly due to low networth and high utilization of working capital borrowings. However, the debt equity and overall gearing of the firm improved from 0.82x and 3.77x respectively as on March 31, 2015 due to repayment of term loans from NBFC s coupled with increase in net worth at the back of accretion of profits to reserves. The debt coverage indicators marked by interest coverage and TD/GCA remained weak during the review period. The interest coverage ratio and TD/GCA has deteriorated from 1.81x and 12.42x respectively in FY 15 to 1.61x and 17.04x in FY18 (Prov.) due to increase in interest cost at back of high utilization of working capital limits along with thin profitability margins and low cash accruals. Working capital intensive nature of business The operating cycle of the firm stood between (60-135 days) during review period due to high inventory period. The average inventory period of the firm was between 60-120 days during review period. The firm purchases excess raw material during the season (October-March) resulting in high inventory levels during the year end. Due to the above said reason, the firm has high inventory days i.e. 109 days and 116 days in FY17 and FY18 (Prov.) respectively. The firm receives the payment from its customers within one month from the date of invoice. Further, the firm generally makes the payment to its suppliers within 3-15 days from the date of invoice. The average utilization of CC facility was 95% for the last 12 months ended April 30, 2018. The firm has also utilized the adhoc Cash Credit limit of Rs.1.22 crore for 90 days in the month of March, 2018 for purchase of raw material. Constitution of the entity as a partnership firm with inherent risk of withdrawal of capital SVOAP, being a partnership firm, is exposed to inherent risk of the partner s capital being withdrawn at time of personal contingency and firm being dissolved upon the death/retirement/insolvency of the partners. Moreover, partnership firm business has restricted avenues to raise capital which could prove a hindrance to its growth. Key Rating Strengths Long track record and experience of the promoters for more than a decade in business Sai Venkatarama Oil And Agro Products (SVOAP) was established by Mr. P. Peda Babu, Mr. P. Subba Rao and Mr. P. Appa Rao in the year 2005. Mr. P. Peda Babu (Managing Partner) is a graduate by qualification (B.E-Mech.) and has 12 years of experience in manufacturing of cotton seed oil, decorticated oil cake and cotton seed hulls. Mr. P. Subba Rao has around 35 years of experience in the industry. Over the years, the partners have established long term relationship with their clientele. Location advantage SVOAP is located in Guntur, Andhra Pradesh, where availability of raw material is not expected to be an issue as the firm procures raw material (cotton seeds) from ginning mills located in and around Guntur. The firm, therefore, enjoys proximity to the cotton producing belt of Andhra Pradesh which results in ease of access to raw material and savings on logistics cost. Stable outlook for cotton industry Cotton plays an important role in the Indian economy as the country textile industry is predominantly cotton based. India is one of the largest producers as well as exporters of cotton yarn. The Indian textile industry contributes around 4 per 2 Credit Analysis & Research Limited
cent to country s gross domestic product 14 per cent to industrial production and 15 per cent to total exports earnings. The industry is also the second largest employer in the country after agriculture, providing employment to over 51 million people directly and 68 million people indirectly, including unskilled women. The states of Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Rajasthan and Punjab are the major cotton producers in India. Analytical Approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit ratings CARE's Policy on Default Recognition Financial ratios Non-Financial Sector Rating Methodology-Manufacturing Companies About the Company Andhra Pradesh based, Sai Venkatarama Oil And Agro Products (SVOAP) was established in 2005 as a partnership firm and promoted by Mr. P. Peda Babu, Mr. P. Subba Rao and Mr. P. Appa Rao. SVOAP is engaged in manufacturing of cotton seed oil, decorticated oil cake and cotton seed hulls from cotton seeds. The plant of the firm is located at Guntur (Andhra Pradesh). Apart from oil, decorticated oil cake and cotton seed hulls, the firm also sells by-products such as cotton lint and soap oil. The main raw material, cotton seed, is directly procured from local ginning mills located in Guntur district of Andhra Pradesh. The firm sells cotton seed oil to oil mills located in Hyderabad (Telangana) and Gujarat and DOC (decorticated oil cake) to fish feed manufacturers in Bhimavaram (Andhra Pradesh). Brief Financials FY17 (A) FY18 (CA Certified Prov.) Total operating income 24.19 29.23 PBILDT 0.93 1.32 PAT 0.02 0.27 Overall gearing (times) 3.35 2.87 Interest coverage (times) 1.38 1.61 A-Audited 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. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact Name: Mr Manish Kumar Tel: 040-67937415 Cell: + 91 99495 47551 Email: manish.kumar@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com 3 Credit Analysis & Research Limited
About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. Annexure-1: Details of Instruments/Facilities Name of the Instrument Fund-based - LT-Cash Credit Date of Issuance Coupon Rate Maturity Date Size of the Issue Rating assigned along with Rating Outlook - - - 6.00 CARE B+; Stable Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities 1. Fund-based - LT-Cash Credit Type Current Ratings Amount Outstanding Rating LT 6.00 CARE B+; Stable 2017-2018 Rating history 2016-2017 2015-2016 - - - - 2014-2015 4 Credit Analysis & Research Limited
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