Sonai Dairy invests in manufacture of value-added products such as casein, lactose and whey proteins.

India Ratings and Research (Ind-Ra) has taken the following rating actions on Indapur Dairy and Milk Products Limited’s (IDMPL) bank facilities:

Details of Instruments

Analytical Approach

To arrive at the ratings, Ind-Ra continues to fully consolidate IDMPL’s 100% subsidiaries, Sonai Cattle Feeds Private Limited (SCFPL; ‘IND A’/Positive), Sonai Eatables India Private Limited (SEIPL; ‘IND A’/Positive) and Sonai Milk India Private Limited (SMIPL; 100% owned by IDMPL), referred to as the Sonai group hereafter, in view of the strong strategic, legal and operational linkages among them. 

Detailed Rationale of the Rating Action

The affirmation reflects Sonai group’s resilient operational performance at a consolidated level in FY24 as reflected in volume growth, despite a fall in sales realisation in the dairy segment. Despite a 7%-8% yoy fall in sales realisation along with a strong base of FY23, the dairy segment volumes reported a double-digit growth in FY24. The consolidated EBITDA margin also recovered in FY24 and improved further to 6.62% in 1QFY25 (1QFY24: 5.97%) as IDMPL benefitted from favourable raw material prices. Ind-Ra expects a further improvement in the operational performance over the near-to-medium term as SMIPL is likely to commence full-fledged operations from September 2024. In FY24, the credit metrics weakened on account of a higher utilisation of working capital facilities for the dairy segment and a delay in the commencement of commercial operations at SMIPL. Despite the higher utilisation in the dairy segment, the liquidity remains adequate and is likely to improve in the near term.

The Positive Outlook reflects Ind-Ra’s expectation of an improvement in the consolidated credit metrics in the near-to-medium term supported by incremental contributions from the existing units as well as newly set up units. Furthermore, reduced inventory cycle as of June 2024 has accelerated deleveraging.

List of Key Rating Drivers

Strengths

– Resilient operating performance in FY24 despite fall in realisations; stable profitability likely in FY25    
– Leverage remained elevated in FY24; although improved in 1QFY25 and is likely to remain healthy in mid-to-long run
– Integrated operations and diversified revenue stream strength business profile
– Liquidity to remain adequate due to likely positive cash flow from operations and healthy buffers in bank lines
– Diversified business profile

Weaknesses

– Intense competition

Detailed Description of Key Rating Drivers

Resilient Operating Performance in FY24 despite Fall in Realisations; Stable Profitability Likely in FY25: After an exceptional revenue growth of about 91% yoy in FY23, the consolidated revenue moderated to INR42,505 million in FY24 (FY23: INR45,834 million). This was mainly on account of about 12% yoy decline in dairy segment revenue to INR27,447 million in FY24, driven by about 15% yoy decline in realisations. Despite the weak realisation and high base effect of FY23, the consolidated volumes declined by merely 7.5% yoy in FY24. During 1QFY25, the consolidated revenue grew to INR12,453 million (1QFY24: INR10,820 million). Despite the fall in revenue in FY24, the consolidated EBITDA improved to INR1,982 million in FY24 (FY23: INR1,672 million) and EBITDA margin to 4.66% (FY232: 3.65%). During FY24, raw milk prices declined by INR10/litre to about INR29/litre, the benefit of which was partially retained by IDMPL, leading to the improvement in the margin. During 1QFY25, the consolidated EBITDA margin improved to 6.62% (1QFY24: 5.97%), mainly on account of inventory gains.

IDMPL, through SMIPL, has undertaken manufacturing of value-added products such as casein, lactose, and whey protein powder. SMIPL will start off its revenue generation from August 2024 and full-fledged operation is likely to start from September 2024. IDMPL’s established brand name and a decade-long relationship with its customers is likely to benefit SMIPL to ramp up its operations, especially in the value-added product segment. Ind-Ra believes the consolidated profitability is likely to be supported by an increasing contribution from the valued-added dairy products as well as cost-savings from the newly set-up solar power plant from FY25.  

Leverage Remained Elevated in FY24; Although Improved in 1QFY25 and Likely to Remain Healthy in Mid-to-long run: During FY24, the company received sanction of an additional working capital facility of INR500 million. Furthermore, the dairy segment witnessed an overall increase in working capital utilisation as management decided to procure higher inventory of raw milk and converted it to skimmed milk powder and butter to take advantage of falling raw milk prices. As of March 2024, the consolidated inventory level increased to INR4,954 million (FY23: INR3,288 million), of which INR3,746 million was in the form of dairy products (FY23: INR1,862 million). This resulted in higher utilisation of the fund-based working capital facilities. During April 2022-March 2023, the average utilisation of the consolidated fund-based facility stood at about 42%, against 72% for the corresponding period of FY24. The consolidated debt also includes new term debt of INR950 million for capex at SMIPL, which was drawn in FY24. This led to higher consolidated debt levels of INR6,430 million in FY24 (FY23: INR4,003 million; FY22: INR3,364 million, FY21: INR1,943 million). Despite the improvement in absolute EBITDA, the net leverage (net debt/operating EBITDA) deteriorated to 3.15x in FY24 (FY23: 2.38x) and the interest coverage EBITDA/interest) to 3.3x (7.30x), owing to the increase in consolidated debt and the consequent increase in the interest cost to INR603 million (INR229 million).

During 1QFY25, the inventory levels normalised as the company sold excess inventory. As on 30 June 2024, the consolidated inventory stood at INR3,014 million (FY24: INR4,954 million, 1QFY24: INR4,983 million), which has resulted in a substantial decrease in the working capital utilisation levels, leading to the consolidated net leverage falling below 1.0x. Furthermore, the company does not envisage any sizeable debt-funded capex over the medium term. Hence Ind-Ra expects the credit metrics to improve from FY25. Nevertheless, SMIPL’s ability to start commercial production and ramp up its operations will be key monitorable for deleveraging.

Integrated Operations and Diversified Revenue Stream Strength Business Profile: IDMPL has backward integrated operations through a 1,100 tonnes per day (TPD) of cattle feed plant under SCFPL. IDMPL has also expanded into the edible oil business through SEIPL (100% subsidiary) with a 500TPD solvent extraction plant near Indapur. Furthermore, in FY24, IDMPL undertook capex for production of casein, whey protein, and lactose. The full-fledged operations are likely to start from September 2024, which will strengthen the business profile further. The agency believes the integrated operations, along with diversified revenue stream offer business synergies and strengths the business profile.

Liquidity to Remain Adequate backed by Likely Positive Cash Flow from Operations and Healthy Buffers in Bank Lines: As per Ind-Ra’s estimates, the consolidated cash flow from operations is likely to turn positive in FY25 (FY24: negative INR387 million; FY23: INR158 million) with a likely improvement in working capital cycle and a steady profitability. Ind-Ra also expects the free cash flow to also turn positive in FY25 (FY24: negative INR2,215 million, FY23: INR861 million) on the back of limited capex out flow in SMIPL. Moreover, of the total planned capex of INR2,300 million, INR2,040 million was incurred in FY24.

The average utilisation of the fund-based working capital facilities for the 12 months ended March 2024 was 72% on a consolidated basis. During 1QFY25, the utilisation level remained low due to offloading of inventory; of the total sanctioned limits of INR4,750 million, the utilisation was INR808 million as of June 2024. IDMPL maintains sufficient drawing power and despite the seasonality in operations sufficient headroom will be maintained in working capital utilisation. At the consolidated level, IDMPL has scheduled debt repayment of INR603 million in FY25, INR737 million in FY26 and INR712 million in FY27.

Diversified Business Profile: IDMPL manufactures a diversified range of milk and dairy products. While the company has a wide range of value-added products such as cheese, cottage cheese, butter, ultra-high temperature (UHT) milk, butter milk, it caters mainly to B2B clients, with their revenue share being as high as 80% on a standalone basis. Thus, products such as skimmed milk powder (SMP) and whole milk powder continue to be the largest contributors to the revenue, with a share of 18% in FY24 (FY23: 19%, FY22: 24%, FY21: 32%), followed by butter at 17% (19% 15%, 13%), de oiled cake at 12% (4%, 0%), and cattle feed at 11% (14%, 16%). 

For its B2C business, most of the value-added products are sold under the Sonai brand, while cheese is sold under a separate brand, Derista. In FY23, IDMPL set up a 0.15MLPD UHT plant to offer milk and milk products such as flavoured milk, sweetened buttermilk, buttermilk, and milkshakes, which would be processed under the UHT technology. The company is also setting up a new plant under its wholly-owned subsidiary, Sonai Milk India Private Limited, to produce casein, whey protein, and lactose, that are high-margin products. 

Furthermore, the entry into the edible oil business in FY22 and continued ramping-up of the cattle feed business have further helped to diversify the revenue streams. Management and Ind-Ra expect the two segments to contribute substantially to the overall revenue over the medium term.

Intense Competition: IDMPL faces stiff competition from co-operative and private dairies for the procurement of milk from farmers. The company shares a common catchment area for with private and co-operative diaries for milk procurement. The ability to procure more milk ensures a higher market share, since the perishable nature of milk makes it unviable to transport over long distances. Therefore, the company needs to keep improving its procurement channels while investing in bulk milk coolers and chilling centres, and offering competitive prices to the farmers, thus ensuring a steady supply of milk.

Liquidity

Adequate: As per Ind-Ra’s estimates, the consolidated cash flow from operations is likely to turn positive in FY25 with an expectation of an improvement in working capital cycle and steady profitability. The agency also expects the free cash flow to also turn positive in FY25 due to limited capex outflow associated with the plant at SMIPL that will produce SMP (180TPD), casein (30TPD), whey protein concentrates (35TPD) and lactose (40TPD).

The average utilisation of the fund-based working capital facilities for the 12 months ended March 2024 was 72% on a consolidated basis. During 1QFY25, the utilisation level remained low due to offloading of inventory; of the total sanctioned limits of INR4,750 million, the utilisation was INR808 million as of June 2024. IDMPL maintains sufficient drawing power and despite the seasonality in operations sufficient headroom will be maintained in working capital utilisation. At the consolidated level, IDMPL has scheduled debt repayment of INR603 million in FY25, INR737 million in FY26 and INR712 million in FY27.

Rating Sensitivities

Positive: A continued increase in the revenue and product diversification, along with an improvement in the operating profitability, leading to the net leverage reducing below 2.0x and interest coverage exceeding 5.0x, both on a sustained and consolidated basis, could lead to a rating upgrade. 

Negative: Deterioration in the financial performance and/or unexpected debt-led capex, leading to the net leverage remaining above 2.0x or the interest coverage remaining below 5.0x, both on a sustained and consolidated basis, could lead to the Outlook revision to Stable.

Any Other Information

Standalone Operating Performance: In FY24, IDMPL’s revenue declined to INR27,447 million (FY23: INR31,173 million) on account of the fall in realisations. However, the EBITDA margins recovered to 4.45% in FY24 (FY23: 3.0%) on account of improved gross margins. The interest coverage (EBITDA/gross interest expense) moderated to 3.6x in FY24 (FY23: 8.7x, FY22: 5.1x, FY21: 5.7x) and the net leverage to 3.17x (2.72x, 2.17x, 3.2x) due to an increase in debt. IDMPL has extended corporate guarantee towards the loans sanctioned to its subsidiaries SCFPL, SEIPL and SMIPL.

About the Company

Incorporated in July 2002, IDMPL is promoted by Pune-based Dashrath Mane. The company is engaged in the manufacturing of milk and milk products, with milk handling capacity of 25LLPD.

Key Financial Indicators

Status of Non-Cooperation with previous rating agency

Not applicable

Rating History

Bank wise Facilities Details

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Complexity Level of the Instruments