January 28, 2020

Sonai Cattle Feed Pvt. Ltd.: Rating assigned

Summary of rating action

Current Rated Amount
Instrument* Rating Action
(Rs. crore)
Fund Based – Term Loan 13.8 [ICRA]BBB+(Stable); assigned
Fund Based – Working Capital Facilities 29.0 [ICRA]BBB+(Stable); assigned
Total 42.8
*Instrument details are provided in Annexure-1

Rationale
ICRA has taken a consolidated view of Indapur Dairy and Milk Products Ltd. (IDMPL) and its 100% subsidiary, Sonai
Cattle Feed Private Limited (SCFPL; referred to as the Group hereafter), while arriving at the ratings, since both the
companies draw operational and financial synergies from each other.

The rating reaffirmation reflects the track record of the promoters in dairy industry and established relationship of
the Group with key institutional clients leading to assured revenues from supply contracts. The rating also takes
comfort from established procurement base of IDMPL among dairy farmers supplemented by wide network of bulk
coolers and chilling centres, which ensure a regular supply of milk. The processing facility of IDMPL is one of the
largest single location milk processing capacities in the region, which provides scale benefit to the Group. The rating
favourably considers the diversified product portfolio with presence in liquid milk, milk powder and value-added
milk products (VADPs) like butter. The rating also accounts for significant growth in revenue in FY2019 (21% YoY
growth) owing to increased volume sale of skimmed milk powder (SMP), butter and clarified butter (ghee),
supported by export subsidy provided by Government coupled with growth in revenue from the cattle feed
business. The Group leverages its wide milk supplier base of farmers to sell cattle feed through SCFPL .
The rating is, however, constrained by lower profitability as about 80% of IDMPL’s sale is business-to-business
(B2B) in nature and is impacted by weak bargaining power with institutional customers. The Group’s debt
protection metrics though improved in FY2019, remained moderate owing to high debt level relative to its
revenues in SCFPL because of the high working capital requirement in the cattle feed business and debt-funded
capex in the last two fiscals. The TD/OPBITDA improved to 2.2x in FY2019 versus 4.3x in FY2018 supported by
decline in short-term debt as it has repaid the pledge loans taken to maintain the high inventory of SMP and butter
at end of FY2018. The same was liquidated in FY2019 supported by subsidy from the state and Central
Government.
The ratings continue to remain constrained by the commoditised nature of operations, highly competitive intensity
from organised co-operatives, private players and unorganised players as well as vulnerability of milk production
to external factors such as weather conditions and cattle diseases. Going forward, accruals from debt-funded
capacity expansion for cheese manufacturing, timely recovery of Government subsidiaries and maintaining
profitability at current levels remain key sensitivities.

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Key rating drivers and their description

Credit strengths
Established procurement base ensuring regular supply of liquid milk at competitive prices, supplemented by
network of bulk coolers and chilling centres - IDMPL has been in the dairy business for more than a decade and
has established relationships with dairy farmers in its area of operation, ensuring consistent supply of good quality
raw milk. It pays its suppliers on time as against delayed payments from co-operatives and also provides advisory
services to dairy farmers. These measures ensure loyalty and assured milk supply from dairy farmers. Presently,
the Group has tied up with 220 bulk cooling centres and operates 45 chilling centres spread mainly across Pune
district and other districts of Maharashtra.

Backward integration to cattle feed business, coupled with established customer base, provides stable revenue
support - In FY2018, IDMPL acquired 100% equity stake of its promoter group company, Sonai Cattle Feed Private
Limited (SCFPL) as a part of backward integration, at a consideration of Rs. 3.15 crore. SCFPL had set up a 500TPD
cattle feed manufacturing plant in Indapur. IDMPL leverages its existing supplier base of over four lakh dairy
farmers to sell cattle feed, which ensures a healthy revenue stream for SCFPL. The Group is mainly in the B2B
business, which drives about 80% of its revenue with its top 10 customers generating around 37% of its total
revenue in FY2019. The Group’s stable revenue base is supported by established relationships with institutional
clients, which includes large FMCG companies like Patanjali Ayurved Limited and Britannia Ltd. as well as large
dairy companies such as Dodla Dairy.

Moderate debt protection metrics - The Group’s debt protection metrics improved in FY2019, though remaining
moderate owing to relatively high debt levels at SCFPL. The TD/OPBITDA improved to 2.2 times in FY2019 over 4.3
times in FY2018 supported by decline in debt levels as it repaid the pledge loans coupled with improvement in
profitability. The pledge loans were taken in FY2018, to manage piled-up inventory of butter and SMP, which was
liquidated in FY2019 supported by subsidy from the state and Central Government. The debt levels in SCFPL are
relatively high as it needs to maintain high inventory owing to seasonal availability of raw materials (maize and de-
oiled rice bran) and has incurred debt-funded capex in the last two years to set up the business. ICRA expects the
improvement in debt protection metrics over the near term owing to debt repayment and steady internal accruals.

Credit challenges
High competitive intensity from organised co-operatives, private players and unorganised players coupled with
B2B business model leading to low operating margins - The Group’s operating margins were low at about 3.9% in
FY2019 as about 80% of the Group’s sale is B2B in nature, impacted by weak bargaining power with institutional
customers coupled with intense competition from other dairies .Though the share of the organised industry is
approximately 15% and is growing at a robust rate, the dairy co-operatives have a strong presence and hold over
the Indian dairy market with over 55% market share in the organised industry and poses a challenge for growing
corporate dairies when it comes to milk procurement.

Profitability remain vulnerable to agro-climatic conditions, cattle diseases and Government regulation - Like all
other agriculture-based products, production and pricing of milk and milk products is sensitive to environmental
conditions and Government regulations. In case of pouch milk, which generates about 10% of Group revenues, the
significant increase in milk procurement cost cannot be immediately passed on; although it may be passed on with
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a lag effect. However, in case of SMP the availability of liquid milk coupled with global demand and supply drives
the prices. At times when there is shortage of liquid milk, the demand for SMP increases, leading to significant
increase in its prices and vice versa. A steep decline in prices of SMP may lead to increase in inventory holding as
witnessed in Q4- FY2018. However, for other products the Group decides the price with the institutional customer
on the basis of procurement prices on a month-on-month basis, which help it to pass on the increased cost to
customers.

Liquidity position: Adequate

The Group’s liquidity on a consolidated basis is adequate with expected cash flow from operations of nearly Rs. 35-
40 crore, a capex commitment of about Rs. 48-50 crore for FY2020 (for which a loan of ~Rs 24.5 crore is already
tied up). IDMPL’s debt repayments at Rs. 10.6 crore in FY2020 also remain modest. The liquidity is further
supported by expected inflow of export subsidy of Rs 24.8 crore by March 2020.

Overall, ICRA expects the Group to be able to meet its near-term commitments through internal as well as external
sources of cash and yet be left with sufficient cash surpluses

Rating sensitivities
Positive triggers ICRA could upgrade Group’s rating if on a consolidated basis it demonstrates a significant
improvement in scale and maintains operating margins in excess of 5% and TD/OPBITDA of below 2.0 times on a
sustained basis

Negative triggers – Negative pressure on Group’s rating could arise if there is decline in revenue and profitability,
weakening debt protection metrics with consolidated TD/OPBITA increases above 2.7 times on sustained basis.

Analytical approach
Analytical Approach Comments
Applicable Rating Methodologies Corporate Credit Rating Methodology
Parent/Group Support Not Applicable
For arrival of rating ICRA has taken the consolidated financials of IDMPL and
Consolidation/Standalone
its 100% subsidiary SCFPL.

About the company

Sonai Cattle Feed Pvt ltd is a 100% subsidiary of Indapur Dairy and Milk Products Limited(IDMPL). The company is
into the trading and manufacturing of grain-based cattle feed. The company has manufacturing capacity of 500
MTPD cattle feed manufacturing plant in Indapur, Pune.

The parent company, IDMPL is a closely held company promoted by Mr. Dashrath Mane and family. IDMPL is
present across the supply chain of milk procurement, processing and marketing of liquid milk and milk products
under the brand, ‘Sonai’. The dairy products manufactured and marketed by the company include cow’s milk,
clarified butter, butter, skimmed milk powder, whole milk powder, flavoured milk and traditional desserts, etc

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IDMPL (Standalone): In FY2019, IDMPL reported a net profit of Rs. 17.3 crore on an operating income of Rs.
1,243.9 crore as compared to net profit of Rs. 5.8 crore on an operating income of Rs 1,062.5 crore. In H1 FY2020
(unaudited), the company reported a PAT of Rs. 20.3 crore on operating income of Rs. 719.1 crore.

SCFPL (Standalone): In FY2019, SCFPL reported a net profit of Rs. 3.1 crore on an operating income of Rs. 168.0
crore as compared to net profit of Rs. 1.7 crore on an operating income of Rs. 95.7 crore.

Consolidated: In FY2019, on a consolidated basis, IDMP reported a net profit of Rs. 20.3 crore on an operating
income of Rs. 1396.7 crore, as compared to a net profit of Rs. 7.0 crore on an operating income of Rs. 1158.1 crore
in the previous year.

Key financial indicators (audited)

FY2018(Consolidated) FY2019(Consolidated)
Operating Income (Rs. crore) 1158.1 1396.7
PAT (Rs. crore) 7.0 20.3
OPBDIT/OI (%) 3.3% 3.9%
RoCE (%) 13.5% 18.5%

Total Outside Liabilities/Tangible Net Worth

(times) 2.7 2.5
Total Debt/OPBDIT (times) 4.3 2.2
Interest Coverage (times) 2.6 3.0
DSCR 1.9 2.0

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years
Current Rating (FY2020) Rating History for the Past 3 Years
Instrument Amount Amount Rating FY2019 FY2018 FY2017
Type
Rated Outstanding
28-Jan-2020
[ICRA]BBB+
1 Term Loan Long Term 13.8 9.3 - - -
(Stable)
[ICRA]BBB+
2 Cash Credit Long Term 29.0 - - -
(Stable)
Amount in Rs. Crore; Amount outstanding as on 31st December 2019

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

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Annexure-1: Instrument details
Date of Amount
Instrument Issuance / Coupon Maturity Rated Current Rating
ISIN Name Sanction Rate Date (Rs. crore) and Outlook
NA Cash Credit 1 19.0 [ICRA]BBB+(Stable)
NA Cash credit 2 10.0 [ICRA]BBB+(Stable)
August- [ICRA]BBB+(Stable)
NA Term Loan 1 June-2018 11.50% 2.0
2023
NA Term Loan 2 July-2017 11.65% July-2025 8.8 [ICRA]BBB+(Stable)
NA Term Loan 3 June-2018 11.65% June-2025 3.0 [ICRA]BBB+(Stable)
Source: Sonai cattle feeds Private Limited

Annexure-2: List of entities considered for consolidated analysis

Company Name Ownership Consolidation Approach
Indapur Dairy and Milk Products Ltd. 0.0% Full Consolidation

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Analyst Contacts
Subrata Ray Gaurav Jain
+91 22 6114 3408 +91 20 6606 9922
[email protected] [email protected]

Pawan Mundhra
+91 20 6606 9918
[email protected]

Relationship Contact
Jayanta Chatterjee
+91 80 4332 6401
[email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
[email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

[email protected]

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ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
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Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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