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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 23.00 | ACUITE BB- | Stable | Upgraded | - |
| Total Outstanding Quantum (Rs. Cr) | 23.00 | - | - |
| Rating Rationale |
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Acuité has upgraded the long-term rating to ‘ACUITE BB-’ (read as ACUITE double B minus) from 'ACUITE B-' (read as ACUITE B minus) on the Rs. 23.00 Cr bank facilities of SFS Global Limited (SGL). The outlook is ‘Stable’.
Rationale for rating upgrade The rating upgrade of SGL takes into account stable operating performance of the company marked by an increase in its operating income and profitability margins. It also draws comfort from company’s experienced management with an established track record of operations, long standing relationship with Tata Consumer Products Limited (TCPL) and moderate financial risk profile. The rating is however constrained by the company’s working capital intensive operations, customer concentration risk and exposure to agro-climatic risk. Going forward, ability of the company to maintain its scale of operations and profitability margins along with improving its working capital cycle will remain a key rating sensitivity factor. |
| About the Company |
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SGL incorporated in the year 1995 by Mr. J. K. Saboo & Mr. Ram Prakash Saboo, is a Delhi based company engaged in blending and packaging of tea. In 2012, the company entered into a long-term contract of 10 years (renewable for another two terms of 10 years or part at the option of lessor/lessee) with TATA Consumer Products Ltd (TCPL) to provide its facility on lease. As per the contract, SGL would also provide various auxiliary services like receiving the raw material (Raw Tea) at its warehouse, blending of various varieties of tea, packaging, storing, management and releasing the same as when demanded by TCPL.
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| Analytical Approach |
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Acuité has considered the standalone business and financial risk profiles of SGL to arrive at the rating.
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Key Rating Drivers
| Strengths |
| Experienced management and established track record of operations
SGL is promoted by Mr. J.K. Saboo and Mr. Ram Prakash Saboo, who are engaged in varied line of businesses with more than four decades of experience. The day-to-day operations of SGL are currently managed by Mr. Ratik Saboo who is ably assisted by an experienced second line of management. Over the years, company has developed healthy relations with TCPL which has helped them to get repeated orders. Acuité believes that SGL will continue to benefit on the back of its experienced promoters and healthy relationship with the counterparty. Long standing relationship with Tata Consumer Products Limited SGL has entered into a long-term contract with Tata Consumer Products Limited (TCPL) since 2012 under which the company has agreed to provide its facility located in Haryana on lease for a period of 30 years. The tenure of the initial agreement executed by both the parties was for period of 10 years starting from April 2012 to March 2022, further which it is being renewed every year for a period of 11 months. As per terms of agreement, TCPL provides for all the fixed expenses and variable expenses such as lease rent, storage rent, manpower expenses, insurance premium and packaging expenses, to name a few and reimburses it on monthly basis. This enables the company to focus on timely delivery, quality control, cost control and process improvements leading to betterment of profitability. Moderate financial risk profile Financial risk profile of SGL is moderate marked by moderate networth, moderate gearing and average debt protection metrics. The tangible networth of the company stood improved at Rs.22 Cr as on 31 March, 2023 (Provisional) as against Rs.18 Cr as on 31 March, 2022 due to accretion to reserves. Despite of improvement in the company’s networth, the gearing (debt-equity) however stood increased at 1.63 times as on 31 March, 2023 (Provisional) as against 1.56 times as on 31 March, 2022 due to an increase in the overall debt profile during the year. The increase in the company’s debt profile is on account of increase in the long-term bank borrowings and unsecured loans from directors availed for the purpose of undertaking the construction of a housing project in Delhi. The gearing of the company is however expected to improve further and remain low over the medium term in the absence of any additional debt funded capex. The total debt of Rs.36 Cr as on 31 March, 2023 (Provisional) consists of long term bank borrowings of Rs.33 Cr, unsecured loans from directors of Rs.2 Cr and short term bank borrowings of Rs.1 Cr. The interest coverage ratio stood improved at 3.62 times for FY2023 (Provisional) as against 2.83 times for FY2022, however the DSCR stood moderated at 1.52 times for FY2023 (Provisional) as against 1.83 times for FY2022. The Net Cash Accruals to Total debt stood at similar levels of 0.13 times for FY2023 (Provisional) and for FY2022. The Total outside liabilities to Tangible net worth stood at 1.98 times for FY2023 (Provisional) as against 2.00 times for FY2022. The Debt-EBITDA ratio stood high at 4.54 times for FY2023 (Provisional) as against 4.24 times for FY2022. Acuité believes that the financial risk profile of SGL is expected to improve further and likely to remain moderate over the medium term. Stable operating performance The operating performance of SGL is stable marked by an increase in the company’s operating income of Rs.28 Cr for FY2023 (Provisional) as against Rs.26 Cr for FY2022 due to an overall increase in the rental and commission income, packing charges and reimbursement of expenses received from TCPL, which further led to an increase in the company’s operating and net profit margin of 28.38 percent and 14.13 percent in FY2023 as against 25.03 percent and 10.77 percent in FY2022. Acuité believes that the ability of SGL to maintain its scale of operations and profitability margins over the medium term will remain a key rating sensitivity factor. |
| Weaknesses |
| Working capital intensive operations
The working capital operations of SGL are highly intensive marked by its Gross Current Assets (GCA) of 309 days for FY2023 (Provisional) which however stood improved as against 331 days for FY2022. The company’s receivables cycle stood at 41 days for FY2023 (Provisional) as against 39 days for FY2022. The average bank limit utilization for 6 months’ period ended April 2023 however stood lower at ~29 percent. Acuité believes that the ability of SGL to improve and maintain an efficient working capital cycle over the medium term will remain a key rating sensitivity factor. Customer concentration risk The company’s 100% of the revenue has been contributed by TCPL. Any deviation in terms of the contract with TCPL upon renewal may unfavourably impact the business operations, exposing the company to risk of concentration in the customer portfolio. Exposure to agro-climatic risk Raw Tea is the main raw material for the company, production of which mainly depends on agro climatic conditions. In case of poor weather conditions, there is a risk of deterioration in production as well as the quality of tea. The crop is also exposed to pest attack issues, inherent to any agricultural produce. The company also faces competition from various brands of the other big players in the market like Hindustan Unilever, Wagh Bakri, Dabur etc. |
| Rating Sensitivities |
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| All Covenants |
| Not applicable |
| Liquidity Position - Adequate |
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SGL has adequate liquidity position marked by sufficient net cash accruals (NCA) to its maturing debt obligations. The company generated cash accruals in the range of Rs.4 Cr to Rs.5 Cr during FY2021 to FY2023 (Provisional) against its debt repayment obligation in the range of Rs.1 Cr to Rs.4 Cr during the same period. Going forward, the NCA are expected of ~Rs.9 Cr for the period FY2024-FY2025 against its debt repayment obligation of ~Rs.4 Cr during the same period. The working capital operations of the company are highly intensive marked by its gross current asset (GCA) days of 309 days for FY2023 (Provisional). Current ratio stands at 2.47 times as on 31 March 2023 (Provisional). The company has maintained cash & bank balance of Rs.0.29 Cr in FY2023 (Provisional).
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| Outlook: Stable |
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Acuité believes that SGL will maintain 'Stable' outlook over the medium term on account of its experienced management with an established track record of operations and its strong relationship with Tata Consumer Products Limited (TCPL). The outlook may be revised to 'Positive' in case of significant and sustained growth in revenue and profitability while effectively managing its working capital cycle and keeping the debt levels moderate. Conversely, the outlook may be revised to 'Negative' in case of lower than expected growth in revenue or deterioration in the financial and liquidity profile most likely as a result of higher than envisaged working capital requirements.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 23 (Provisional) | FY 22 (Actual) |
| Operating Income | Rs. Cr. | 27.56 | 25.85 |
| PAT | Rs. Cr. | 3.89 | 2.78 |
| PAT Margin | (%) | 14.13 | 10.77 |
| Total Debt/Tangible Net Worth | Times | 1.63 | 1.56 |
| PBDIT/Interest | Times | 3.62 | 2.83 |
| Status of non-cooperation with previous CRA (if applicable) |
| Not applicable |
| Any other information |
| None |
| Applicable Criteria |
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• Service Sector: https://www.acuite.in/view-rating-criteria-50.htm • Default Recognition: https://www.acuite.in/view-rating-criteria-52.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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