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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 36.82 | ACUITE BB+ | Stable | Downgraded | - |
| Bank Loan Ratings | 2.10 | - | ACUITE A4+ | Downgraded |
| Total Outstanding Quantum (Rs. Cr) | 38.92 | - | - |
| Rating Rationale |
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Acuité has downgraded the long-term rating to ‘ACUITE BB+’ (read as ACUITE double B plus) from ‘ACUITE BBB-’ (read as ACUITE triple B minus) and the short-term rating to ‘ACUITE A4+’ (read as ACUITE A four plus) from ‘ACUITE A3’ (read as ACUITE A three) on the Rs.38.92 Cr bank facilities of Kanco Tea and Industries Limited (KTIL). The outlook remains ‘Stable’.
Rationale for rating downgrade The rating downgrade is primarily driven by the significant deterioration in the operating performance of KTIL in H1FY2024 as compared to H1FY2023. The rating is further constrained by the decline in the profitability margins in September 2023, as compared to June, 2023. However, the rating continues to factor in the long track record of operations of KTIL and the above average financial risk profile of the company. |
| About the Company |
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Incorporated in 1983, Kanco Tea and Industries Limited (KITL) is based in Kolkata and promoted by Mr. Umang Kanoria and Mrs. Anuradha Kanoria. The company primarily produces black tea of CTC (crush, tear, curl) variety, which it sells in the domestic market through a mix of auction and private sales. The company owns three tea estates in upper valleys of Assam named as Mackeypore, Bamonpookrie and Lakmijan.
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| Unsupported Rating |
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Not Applicable
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| Analytical Approach |
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Acuité has taken the standalone view of the business and financial risk profile of KTIL to arrive at the rating.
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Key Rating Drivers
| Strengths |
| Long operational track record and experienced management
KTIL has long operational track record of more than thirty five years in the tea manufacturing business. The company is engaged in the manufacturing of Black tea (CTC). Acuite believes that the long operational track record of the company has helped it to mechanize the operations like plucking, uprooting and spraying of pesticides which has improved labour productivity and reduced cost. The day to day operations of the company are managed by Mr. Umang Kanoria and Mrs. Anuradha Kanoria, who are the promoter directors and is associated with the company since inception. In addition to this, the operations are managed by experienced professionals having associated with the company over two decades. Acuite derives comfort from the experience of the directors and top management of the company. Above average financial risk profile The company’s financial risk profile is marked by improving networth, comfortable gearing and debt protection metrics. The tangible net worth of the company increased to Rs. 53.06 Cr as on March 31, 2023 from Rs. 48.56 Cr as on March 31, 2022. Gearing of the company stood comfortable at 0.61 times as on March 31, 2023 as against 0.58 times as on March 31, 2022. The Total outside Liabilities/Tangible Net Worth (TOL/TNW) stood at a moderate level of 1.05 times as on March 31, 2023 as against 1.00 times as on March 31, 2022. The comfortable debt protection metrics of the company is marked by Interest Coverage Ratio at 5.25 times as on March 31, 2023 and Debt Service Coverage Ratio (DSCR) at 2.83 times as on March 31, 2023. Net Cash Accruals/Total Debt (NCA/TD) stood at 0.28 times as on March 31, 2023. Acuite believes that going forward the financial risk profile of the company will remain above average over the medium term, in absence of any major debt funded capex plans. |
| Weaknesses |
| Weakening of the business risk profile in H1FY2024
The company’s scale of operations and profitability margins deteriorated significantly in H1FY2024 as compared to H1FY2023. The revenue came down to Rs. 54.25 Cr in H1FY24 from Rs. 73.46 Cr in H1FY23. The revenue profile was impacted due to the loss of crops owing to seasonal changes and also due to the company stopped purchasing bought leaves on account of quality issues. In addition to this, the operating income was also hampered due to the prevailing industry scenario whereby the cost of raw materials surged more than the increase in the tea prices. The profitability margins are also impacted due to the decline in the revenues as against the increase in the cost of materials and labour cost. The operating margin declined to 14.35 per cent in H1FY24 from 36.11 per cent in H1FY2023. Also, the PAT margin dipped to 8.02 per cent in H1FY2024 from 32.43 per cent in H1FY2023. Further, on a quarter on quarter basis, the company’s profitability margins remain impacted in September, 2023 as against June 2023 due to the high labour cost. Acuite believes that, going forward, improvement in the business risk profile will be a key sensitivity factor. Sensitivity of profitability to fluctuations in tea prices and changing weather conditions The prices of tea are linked to the auctioned prices and further to prices of tea in the international market. Significant price movements in the international market may affect the company’s profitability margins. Further, tea prices fluctuate widely with demand-supply imbalances in the domestic and international market. Tea is a perishable product and demand for it is relatively priced inelastic as it caters to all segments of society. While demand has a strong growth rate, supply can vary depending on climatic conditions in the major tea growing countries. Tea being a seasonal product, the yield mainly depends on rain. Further, the production declines during poor weather conditions. Unlike other commodities, tea price cycles have no linkage with the general economic cycles, but with agro-climatic conditions.
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| Rating Sensitivities |
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Improvement in the scale of operation
Improvement in the profitability margins Sustenance of the financial risk profile |
| All Covenants |
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None
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| Liquidity Position |
| Adequate |
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The company’s liquidity position is adequate marked by steady net cash accruals of Rs.9.18 Cr as on March 31, 2023 as against long term debt repayment of Rs.2.07 Cr over the same period. The cash and bank balances of the company stood at Rs.5.72 Cr as on March 31, 2023. However, the current ratio stood low at 0.60 times as on March 31, 2023 as compared to 0.0.62 times as on March 31, 2022. The working capital management of the company is moderate in nature marked by Gross Current Assets (GCA) of 81 days in 31st March 2023 similar to that on 31st March 2022.
Acuite believes that, going forward, the liquidity position is likely to remain adequate due to steady accruals. |
| Outlook: Stable |
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Acuité believes that the outlook on KTIL will be 'Stable' over the medium term on account of the long track record of operations, experienced management, the above average financial risk profile and adequate liquidity profile. The outlook may be revised to 'Positive' in case of significant growth in revenue while achieving improvement in operating margins, capital structure and working capital management. Conversely, the outlook may be revised to ‘Negative’ in case of further decline in the company’s revenues or profit margins, or in case of deterioration in the company’s financial risk profile and liquidity position or further elongation in its working capital cycle.
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| Other Factors affecting Rating |
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None
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| Particulars | Unit | FY 23 (Actual) | FY 22 (Actual) |
| Operating Income | Rs. Cr. | 105.89 | 83.45 |
| PAT | Rs. Cr. | 7.05 | 12.30 |
| PAT Margin | (%) | 6.66 | 14.74 |
| Total Debt/Tangible Net Worth | Times | 0.61 | 0.58 |
| PBDIT/Interest | Times | 5.25 | 5.65 |
| Status of non-cooperation with previous CRA (if applicable) |
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Not Applicable
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| Any other information |
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None
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| Applicable Criteria |
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• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm • Manufacturing Entities: https://www.acuite.in/view-rating-criteria-59.htm • Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
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