CRISIL Rating for GCMMF

Gujarat Co-operative Milk Marketing Federation Ltd
Rating Reaffirmed

 

Total Bank Loan Facilities RatedRs.5689 Million
Long Term RatingCRISIL AAA/Stable(Reaffirmed)
Short Term RatingCRISIL A1+(Reaffirmed)

*(Refer to Annexure 1 for details on facilities)

CRISIL’s ratings on the bank facilities of Gujarat Co-operative Milk Marketing Federation Ltd (GCMMF) continue to reflect GCMMF’s dominant market position in the Indian dairy industry, marked by a strong brand image, diverse product portfolio, and well-connected distribution network. The ratings also factor in the federation’s satisfactory financial risk profile, marked by strong financial flexibility and adequate debt protection metrics. These rating strengths are partially offset by GCMMF’s exposure to government regulations, to epidemic and environmental-related factors which influence the agriculture-related sectors and to risks related to milk supply on account of volatility in global milk powder prices.

GCMMF has a strong brand Amul, a wide product portfolio, a well-connected distribution network, and an aggressive marketing strategy. The federation has established Amul as a leading prominent dairy products brand in India. GCMMF has been proactive in maintaining its leadership position in the dairy products segment by launching new products, and undertaking research and development initiatives as well as innovative sales strategies, to enhance customer satisfaction. The federation’s turnover increased at a healthy five-year compound annual growth rate (CAGR) of 21 per cent, backed by the federation’s superior market position and regular retail price hikes. However, during 2015-16 (refers to financial year, April 1 to March 31), the decline in global skimmed milk powder (SMP) prices led to domestic oversupply of liquid milk and hence, kept the retail milk prices stable unlike in the past. Going forward, CRISIL believes that the volume growth will be sustained driven by steady demand and capacity expansion in new geographies. The realization growth is expected to be muted in the near term and pick-up gradually as the demand-supply mismatch corrects over the medium to long term.

GCMMF, being the apex marketing federation of the unions as part of the cooperative structure, has strong control over its procurement cost, and the flexibility to adjust procurement cost at the year-end based on the marketing surplus earned for the year. The federation also has a satisfactory financial risk profile, supported by strong financial flexibility, healthy liquidity and cash accruals, and adequate debt protection metrics. GCMMF’s cash and bank balances were healthy at Rs. 4.18 billion as on December31, 2015. During 2014-15, GCMMF borrowed and lent Rs.3.7 billion short term loans to its member unions. Further, in 2015-16, the working capital borrowings of the federation have increased due to high inventory. This resulted in an increase in gearing to an expected 1.5 times as on March 31, 2016 from 0.42 times as on March 31, 2014. The debt protection metrics have also deteriorated with expected interest coverage and net cash accruals to total debt ratios at 5.7 times and 0.19 times, respectively for 2015-16 vis-à-vis 14.1 times and 0.85 times, respectively for 2013-14. Going forward, CRISIL expects the capital structure and debt protection metrics to gradually improve driven by liquidation of inventory.

GCMMF is exposed to risks inherent in the dairy industry. For instance, during 2015-16, the global price crash of SMP, coupled with unseasonal rains in April- May 2015 led to surplus procurement which translated into high inventory in the federation’s books along with corresponding increase in working capital borrowings. While the inventory is expected to be liquidated gradually over the near to medium term, leading to corresponding decline in working capital borrowings, any material delays in inventory liquidation will be a key rating sensitivity factor.

Further, the prices of raw materials in the dairy industry are sensitive to changes in government policies and environmental conditions. The manufacturers are also exposed to risks related to failure in milk production because of external factors, such as cattle diseases. Although GCMMF’s sales have not been adversely affected by thesefactors, the federation remains exposed to the risk, more so because it sources most of its milk from a single state, Gujarat. GCMMF also has the flexibility to source supplies from other states, which could help mitigate the impact of a supply shortage, if any. Besides, GCMMF is in the process of expanding its operations into other states through its member unions.

Outlook: Stable
CRISIL believes that GCMMF will maintain its dominant market position in the dairy industry over the medium term, supported by its strong milk procurement capability and distribution network. Its financial risk profile is also expected to remain adequate over the medium term, supported by its strong financial flexibility and healthy cash flows. The outlook may be revised to ‘Negative’ if GCMMF’s inventory liquidation takes longer-than-expected leading to further increase in working capital borrowings which in turn would result in deterioration of capital structure and debt protection metrics or if there is any significant pressure on cash flows resulting from intense competition. Mismatch in retail prices and prices paid to farmers may also lead to a revision in outlook to 'Negative'.

About the Federation
Set up in 1973, GCMMF is India’s largest dairy product marketing organization. The federation procures milk from over three million farmers, who are its members. GCMMF has 18,536 active village dairy cooperative societies, and is the apex marketing federation of 17 district cooperative milk unions in Gujarat. The products of its member unions are marketed and distributed under the Amul and Sagar brands. The federation is the largest exporter of dairy products in India.

GCMMF reported a profit after tax (PAT) of Rs.412.90 million on net sales of Rs.207.33 billion for 2014-15, vis-à-vis a PAT of Rs.378.12million on net sales of Rs.181.43billion for 2013-14.

Annexure 1 - Details of various bank facilities

Current Facilities
Previous Facilities
Facility
Amount (Rs. Million)
Rating
Facility
Amount (Rs. Million)
Rating
Cash Credit
359
CRISIL AAA/Stable
Cash Credit
789
CRISIL AAA/Stable
Cash Credit*
1600
CRISIL AAA/Stable
Cash Credit#
1000
CRISIL AAA/Stable
Cash Credit#
1000
CRISIL AAA/Stable
Packing Credit@
400
CRISIL AAA/Stable
Inland/Import Letter of Credit**
500
CRISIL A1+
Inland/Import Letter of Credit**
500
CRISIL A1+
Short Term Bank Facility
300
CRISIL A1+
Short Term Bank Facility
300
CRISIL A1+
Term Loan
430
CRISIL AAA/Stable
Term Loan
1700
CRISIL AAA/Stable
Working Capital Demand Loan@
1000
CRISIL AAA/Stable
Working Capital Demand Loan@
500
CRISIL AAA/Stable
Working Capital Demand Loan
500^
CRISIL AAA/Stable
Working Capital Demand Loan
500
CRISIL AAA/Stable
Total
5689
--
Total
5689
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*Interchangeable with Short Term Advance Limit;
**Interchangeable with Inland Guarantees
#Interchangeable with WCDL
@Interchangeable with Cash Credit
^Interchangeable with Packing Credit