| 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 operat ing performance:
The group’s revenue has grown with a Compounded annual growth rate (CAGR) of 13 percent during past 3 years. The group has reported revenue of Rs.4985.27Cr in FY23(Prov.) against Rs.4698.40Cr of previous year. Further the group has sustained similar growth in revenue during the first 6 months of FY24. SF alone has reported revenue of ~Rs.2500Cr till september, 2023 while Sneha foods has registered sales of ~Rs.613Cr for the same period. 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’s EBITDA margin has been declining over the past 3 years. During FY23the group has reported EBITDA margin of 8.20 percent which was declined from 11.62 percent in FY22. This 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 as per the Q1FY24 figures the group’s EBITDA margins stood at ~22 percent and due to the advantages of a vertically integrated business model that generates SG, the operating margins are expected to remain in the range of 10–12 percent over the medium term.
Healthy financial risk profile:
Financial risk profile of the group is healthy marked by healthy networth, capital structure and gearing level. The net worth of the group stood at Rs.1422.83 Cr as on 31 March, 2023 (Prov.) against Rs.1191.47Cr of previous year. The improvement is primarily on account of accretion of net profit to the reserves during the period. The group has healthy gearing level (debt-equity) at 0.69 times as on 31 March, 2023(prov.) against 0.59 times as on 31 March, 2022. Debt protection metrics of the company are healthy with Interest coverage ratio and debt service coverage ratio at 6.07 times and 2.57 times respectively as on March 31, 2023 (Prov.) against 9.95 times and 3.42 times respectively in previous year. Total outside liabilities to tangible net worth stood at 0.94 times as on March 31, 2023 (Prov.) as against 0.87 times of previous year. Debt to EBITDA has deteriorated marginally to 2.25 times as on March 31, 2023 (Prov.) against 1.24 times as on March 31, 2022. The deterioration was on account of infusion of debt towards capex and also towards ongoing project in Sneha Gold Proteins. Total debt as on March 31, 2023(Prov.) consists of long term debt of Rs.238.54Cr and short term fund based limits of Rs.647.07Cr. The consortium of banks has sanctioned enhancement in fund based working capital limits from existing limits of Rs.700Cr to Rs.1000Cr and planned debt funded capex might result in slight deterioration in Debt to EBITDA in the medium term.
Efficient working capit al operations:
SG group’s working capital operations are efficiently managed which is evident from the Gross Current Assets (GCA) days of 88 in FY23 (Prov.) 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 material like Maize, Soy seeds and biological assets like Day old chicks, hatching eggs, eggs, broilers, layers. As on March 31, 2023 (prov.) the biological assets value is at Rs.412Cr. The huge value of inventory maintenance has led to high utilization of fund based working capital limits which were utilized at an average of ~82 percent during past 12 months ending August, 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.
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| Project execution and stabilisation risk associated with the on-going debt funded capital expenditure:
SGPPL has embarked upon a large capex of around Rs. 309 Cr for construction of Soya solvent extraction plant having a capacity of tonnes per day (TPD) with refinery unit having a capacity of 100 tonnes per day (TPD) for manufacturing of Soya De Oiled Cake (DOC) and Soya Oil. The entire capex is scheduled to be concluded by March, 2025 and expected Commercial operations date (COD) is May, 2025. The capex is being funded by term loans of around Rs. 236 Cr and the balance through equity/unsecured loans from its parent company. The project is at its nascent stage with financial closure is achieved recently. However, the track record of the group and promoters are expected to enable the company to complete the said project within the envisaged timelines and cost. Demand risk is partly mitigated by current capacity being utilised fully and steady demand. Ability of the company to swiftly ramp up new capacities while maintaining operating margin will be a rating monitorable. Acuité believes that material cost savings expected from the ongoing capex are likely to result in healthy cash accruals, going forward, positively impacting the Group’s overall credit profile.
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.
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