­Acuité has consolidated the business risk and financial risk profile of SFPL and SFFPL to arrive at the rating. The consolidation is in view of common management, presence in the same line of business and significant financial and operational linkages between the group entities. The group is herein referred to as “Sneha Group” (SG).

Established track record of operations along with experienced promoters
The Sneha Group commenced its operations in 1994 and thus has a long track record of operations spanning nearly three decades in the poultry business. Further, in addition to the poultry business, the group has continuously diversified their business into various streams over the years, for instance, oil extraction, in-house feed production for chicken, fish, and dog feeds, frozen and marinated food, retail shops, the sale of eggs, etc. Moreover, the group has a strong presence across the southern region of India, with operations in Andhra Pradesh and Telangana. The group has also ventured into the edible oil business in the state of Maharashtra. The promoters of the group, Mr. Ramreddy, Mrs. Anuradha, Mr. Varun Reddy, and Mr. Gopal Reddy, are seasoned industry veterans who have been associated with the poultry industry for over three decades. The established presence of the group, along with experienced management, has helped in maintaining long-term relationships with its customers and diversifying its customer base, which has resulted in a healthy scale of operations.

Acuité believes Sneha Group will continue to benefit from its long track record of operations, repeated orders from customers, and the rich experience of the management over the medium term.

Improving operating performance:
The group’s operating income improved significantly in FY2022 to Rs. 4698.40 crore from Rs. 3441.10 crore in FY2021. The improved scale was sustained in FY2023, with an estimated revenue earning of Rs. 4978.19 crore for the year. The revenue growth is driven by the higher consumption trend noted in respect of eggs and chicken post-COVID-19 pandemic compared to during the pandemic. During the pandemic, due to the integrated nature of SG's operations, when demand was low, SG stored broiler chicken in processed forms in its units. Post-pandemic, with the re-opening of the markets, SG was able to meet the increased demand and improve its overall market share. Further, for perishables like broiler chicken and eggs that were not processed, prompt deliveries were maintained at their respective outlets via in-house logistic facilities.

The group reported an operating margin of 11.62 percent during FY22, which declined from 13.29 percent in FY21. Further, the group is estimated to report an operating margin ranging between 10.10 and 10.50 percent for FY2023. This slight decline in operational margins is due to an increase in raw material costs of soy seeds, maize, etc. used for feed production and overall limited bargaining power for end products due to the market-driven nature of product pricing and their perishable nature. However, due to the advantages of a vertically integrated business model that generates SG, the operating margins are expected to remain in the range of 10–11 percent over the medium term.

In order to increase the group’s market share and capture the increasing demand, promoters are strategically planning for capex, through which the group is going to increase their feed plant capacity first rather than increasing the processing capacity straight away. Since feed plant capacity enhancement requires major work compared to increasing capacity in processing farms, layers, etc.

Diversification into the retail segment
As a part of its growth plan, the group is establishing its own retail brand in the name of "Snackster" for its processed food segment. The retail sales segment of processed food is expected to contribute 5–10 percent of the group's turnover during the initial years. The products are sold through its own outlets, supermarkets, and franchisee stores. The project is an initiative to add brand value, recognition, and goodwill to the group and increase its presence in the B2C segment.
The company is also on track to undertake its capex plan as per its schedule. SG’s management planned to incur capex of around Rs. 400–500 crore spread over the next five years towards scaling up operations, expansion of processing capacity and feed plant capacity,set-up of additional hatchery farms, laying farms, and brooding farms, enhancing silos storage, and extension of geography. Till FY2023, the company has already incurred Rs. 200 crore towards the expansion of its processing capacity and feed plant capacity.

Healthy financial risk profile:
The net worth of the group stood at Rs. 1199.45 crore as of March 31, 2022, and is estimated to be at Rs. 1511.71 crore as of March 31, 2023. The improvement is on account of the healthy accretion of net profit in the reserves during the period. The group has a healthy gearing level (debt-equity) of 0.60 times as of March 31, 2023 (estimates), compared to 0.57 times as of March 31, 2022. The debt protection metrics of the company are healthy, with the interest coverage ratio and debt service coverage ratio at 8.51 times and 3.4 times, respectively, as of March 31, 2023 (estimates), compared to 9.95 times and 3.42 times, respectively, in the previous year. Total outside liabilities to tangible net worth stood at 0.84 times as of March 31, 2023 (estimates), which is similar to the previous year. Debt to EBITDA is moderate at 1.72 times as of March 31, 2023 (estimates), compared to 1.24 times as of March 31, 2022. This slight deterioration in debt to EBITDA is due to an increase in short-term debt during FY23. Total debt as of March 31, 2022, consists of long-term debt of Rs. 264 crore and short-term fund-based limits of Rs. 424.10 crore.
Acuite believes that the financial risk profile of the group is expected to be healthy in the medium term on account of a healthy business risk profile.

Efficient working capital operations:
SG Group’s working capital operations are efficiently managed, which is evident from the gross current assets (GCA) days of 116 in FY23 (estimates) against 74 days in FY22. The group offers a credit period of 15–20 days to its customers and generally pays the creditors in less than 20 days. The inventory of the group consists of raw materials like maize and soy seeds and biological assets like day-old chicks, hatching eggs, broilers, and layers. As of March 31, 2023, the biological assets value was Rs. 376 crore. The huge value of inventory maintenance has led to high utilisation of fund-based working capital limits, at an average of 90 percent in the past 12 months ending February 2023. Acuité believes that, with the nature of business, working capital operations are expected to be comfortable over the medium term. Further, the group’s ability to improve stock rotation while efficiently managing capital operations will be a key monitorable aspect.

Competitive industry and susceptibility to fluctuations in raw material prices
Competitive industry and susceptibility to fluctuations in raw material prices The group operates in an industry marked by various organised and unorganised players with low product differentiation, which poses a challenge to retaining customers, maintaining margins and sales, etc. However, the same is mitigated to an extent due to the strong brand presence of the group and the procurement of major raw materials in peak seasons on an immediate payment basis, which aids in locking in major raw material costs. The main cost associated with the raw materials of the group is attributed to feed production, which contributes to around 80 percent of the total production cost of the group. The major ingredients of the feed are maize and soy, whose prices have remained fragile in the past few years. Therefore, the profitability of the group is directly dependent on the procurement costs. Also, the industry is vulnerable to outbreaks of diseases such as bird flu, which could lead to a decline in sales volume and the realisation of poultry players. Acuité believes that the group’s operating metrics are susceptible to intense competition and inherent risks in the poultry industry.