| Long track record of operations and experienced management
RFPL has a long operational track record of more than 15 years in the meat processing industry. Further, the promoter, Mr. Mohammad Saleem has extensive experience spanning over three decades in the meat industry. The company is a DGFT-certified three-star export house and is engaged in the processing of frozen boneless buffalo meat.
Acuite believes that the company’s long track record of operations and the promoter’s extensive understanding and expertise will benefit the company going forward, resulting in steady growth in the scale of operations.
Above average financial risk profile
The company’s financial risk profile is above average, marked by a healthy net worth base, moderate gearing, and moderate debt protection metrics. The tangible net worth of the company increased to Rs. 126.92 crore as of March 31, 2022, from Rs.108.95 Cr as of March 31, 2021, due to accretion of profits to reserves. The company follows a conservative financial policy, as reflected by its peak gearing of 1.75 times in the last 3 years. The gearing of the company stood at moderate levels at 1.55 times as of March 31, 2022, as against 1.75 times as of March 31, 2021, and continued to remain at moderate levels at ~1.27 times as on March 31, 2023 (Est). The Total Outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 1.83 times as of March 31, 2022, as against 2.16 times as of March 31, 2021, and is expected to decline further. Moreover, the debt protection metrics are moderate, with the Interest Coverage Ratio (ICR) at 4.33 times as of March 31, 2022, and Debt Service Coverage Ratio at 1.86 times as of March 31, 2022. The metrics would continue to remain at moderate levels in spite of a slight moderation in the earnings profile in FY2023. The Net Cash Accruals/Total Debt (NCA/TD) stood at 0.12 times as on March 31, 2022, and is expected to remain almost at the same levels in the near term.
Acuité believes that going forward, the financial risk profile of the company may continue to remain above average, backed by steady accruals and no major debt-funded capex plans.
Efficient working capital management
The efficient working capital management of the company is marked by an increased but comfortable Gross Current Assets (GCA) of 86 days in FY2022 as against 79 days in FY2021. The increased GCA days in FY2022 are mainly on account of increased advances to suppliers during the year. However, the inventory days improved and stood comfortably at 46 days in FY2022 as against 55 days in FY2021. Further, the debtor’s period stood comfortably at 20 days in FY2022 as against 21 days in FY2021. Acuité believes that the working capital management of the company will remain almost at the same level over the medium term, as evidenced by the efficient collection mechanism and low inventory levels.
However, Acuite notes that the GCA days have increased to 110 days in FY2023 (estimated) on account of the increased inventory holding level. The inventory days increased to 78 days in FY2023 (Est) from 46 days in FY2022 on account of stock pile-up due to fewer exports being made to Egypt and other stock-in-transit. Acuite believes that it is a temporary phenomenon, and the working capital operations of the company are likely to remain at comfortable levels in the near to medium term.
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| Dip in operating income in FY2023 and thin profitability margins
The operating income of the company moderated to Rs. 1319.44 crore in FY2022 as against Rs. 1361.96 crore in FY2021. The revenue further declined to Rs. 905.81 crore in 11MFY23 (Prov) due to decreased exports to Egypt in Q2-Q4 of FY2023 on account of stumbling foreign currency, while the Q1FY23 export to Egypt was satisfactory. The Egyptian pound has lost nearly 50 percent of its value against the US dollar over the past year. To safeguard against the currency devaluation risk in Egypt, the company subdued its exports to this country in FY2023. However, now the company has tied up with the Egyptian Government Authorised Agency for 100 percent advance payment for the exports being made, thereby mitigating the currency risk to some extent. Further, the company is also in the process of diversifying in Malaysia, thereby providing satisfactory revenue visibility in the near to medium term. Acuite believes that going forward, the company will be able to sustain its business risk profile backed by geographical diversification and the resumption of trade in Egypt.
The company’s operating profit margin is typically low owing to limited value addition in the buffalo meat processing business. The EBITDA margin increased to 3.34 percent in 11MFY23 (Prov) owing to a moderation in freight charges in 2HFY23. The increased freight cost did not affect the margin much in FY2022 as it got nullified by the simultaneous decline in the material cost, resulting in EBITDA at 2.89 percent in FY2022 as against 2,72 percent in FY2021. Acuite expects the operating margin to be around 3.3–3.5 percent in the near to medium term, considering the reduction in freight costs and improved availability of containers. The PAT margin moderated to 1.36 percent in FY 2022 as against 1.44 percent in FY 2021 on account of increased finance costs. The PAT margin is expected to be 1.45 percent in FY 2023 (estimated).
Highly competitive nature of the industry
The Indian meat processing industry is highly competitive, with the presence of a large number of players leading to a highly competitive industry and thus, putting pressure on the profitability margins of the companies. There are a number of abattoirs and meat processing plants registered with the Agricultural and Processed Food Products Export Development Authority (APEDA). Further, most of the meat processing and export-oriented units in the country are situated in U.P., Punjab, Maharashtra, and Andhra Pradesh.
Inherent business risks and regulatory risks
The business is exposed to significant challenges, such as disease outbreaks in the cattle population. Also, the industry is socially and politically sensitive in the country. Factors such as these can impact the availability and processing of buffalo meat. Moreover, as the company earns a major share of its revenue from the export market, its profitability remains exposed to the risk of any adverse regulatory development in the importing country.
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