| Established track record of operations and experienced management
Coimbatore-based, Havukal Group (HG) was established in 1976; thus, the group has an operational track record of over four decades in the tea industry. The promotors of the group, Mr. Anandkumar Rengaswamy Mr. Ramaswami Nandakumar, Mr. Thangavelu Jayaraman, Mr. Karthik Narayan Jayaraman, Mr. Thangavelu Raghuraman and R. Ajaykumar have an experience of over three decades in the aforementioned line of business. The long track record of operations and experience of the management have helped the group develop healthy relationships with its customers. However, due to price fluctuations in the export market and difficulty in procuring raw materials there is continuous decline in operating margins from 11.48 percent in FY20 to 6.11 percent in FY21 and further declined to 2.84 percent in FY22. However, driven by savings on freight costs and production costs, operating profitability margins have recorded a significant improvement in 9MFY23 and are expected to reach back the FY2020 levels by year end.
Acuité believes that the experience of the management in the industry is also likely to favorably impact the business risk profile of the group over the near to medium term.
Efficiently managed working capital operations:
The group’s working capital operations are efficiently managed marked by Gross Current Asset days (GCA) of 71 days in FY22 against 76 days in FY21. The inventory days stood at 42 days in FY22 against 34 days in FY21. The inventory holding policy depends on the market conditions. Generally, the group maintains inventory holding policy of maximum 1 month. The debtors’ days stood at 21 days in FY22 as against 29 days in FY21 which is corresponding to normal terms with the customers. However, working capital bank lines remains utilized at ~35-40 percent for Havukal and 50-59 percent for Maris agro for last trailing 12 months ended December, 2022.
Average financial risk profile:
The financial risk profile of the group is moderate marked by moderate net worth and debt protection metrics. The net worth of the group stood at Rs.22.20cr as on March 31, 2022 against Rs.24.19Cr in previous year. This decline is on account of loss in FY22 The gearing level of the company is healthy at 0.35 times as on March 31, 2022 against 0.31 times in previous year. The Debt protection metrics of the group are moderate. The Interest coverage ratio stood at 3.33 times as on March 31, 2022 from 7.16 times as on March 31, 2021. Debt service coverage ratio declined to 1.33 times as on March 31, 2022 from 2.02 times in previous year and TOL/TNW stood at 0.52 times as on march 31,2022.
Acuite believes that with reduction in overall debt and improvement in absolute EBITDA in 9MFY2023, debt protection metrics and leverage levels are expected to improve by year end.
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| Stagnation in revenue and fluctuations in margins:
Havukal group’s revenue have remained stable over the last two years ended FY2022 as it stood at Rs.56.67 Cr in FY2022 and Rs.56.30Cr in FY21. The revenue stood at Rs.70.44 Cr in FY2020. The decline in revenue is primarily due to limited orders due to increasing competition. The operational margins of the group have been declining over the past three years, from 11.48 percent in FY20 to 6.11 in FY21 this was further declined to 2.84 percent in FY22. The decline is primarily due to increasing in raw material prices, high production costs and increasing freight costs. The group in 9MFY23 have recorded a significant improvement in profitability levels driven by modifications in production methods and moderation in freights costs and are expected to reach the pre-Covid levels of profitability by year end.
Acuite believes the Group’s ability to significantly and sustainably improve its scale of operations and profitability levels will remain a key rating monitorable.
Susceptibility to volatility in raw material prices.
The operating margins of the group are highly depended on raw material prices. Further, raw material price depends on various factors such as exposure to agro-climatic risk which could affect the availability of Tea leaves in adverse weather conditions. Thus inadequate rainfall could affect the tea plantation, further adverse change in the raw material price due to supply-demand scenario can lead to fluctuation in operational margins of all the players across the industry.
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