India Ratings Assigns Star Agriwarehousing and Collateral Management’s Bank Facilities ‘IND BBB’/Stable

Analytical Approach

Ind-Ra has taken a consolidated view of SACML to arrive at the rating, on account of its strong legal and operational linkages with its wholly owned subsidiary, Farmer Fortune (India) Private Limited (FFIPL).

Detailed Rationale of the Rating Action

The ratings reflect Ind-Ra’s expectation of an improvement in SACML's scale of operations and profitability over the medium term on account of its focus on shifting to an asset light model (ALM). The ratings are constrained by highly challenging business environment the company operates in, but the agency derives comfort from the company’s comfortable credit metrics and adequate liquidity.

List of Key Rating Drivers

Strengths

Focus on shifting to ALM to improve profitability

Integrated platform for post-harvest management solutions

Consolidated EBITDA margins remain stable; healthy standalone margins

Improvement in warehouse capacity utilisation to push up revenue growth

Comfortable credit metrics; likely to improve in medium term

Detailed Description of Key Rating Drivers

Focus on Shifting to ALM to Improve Profitability: SACML manages over 3.3 million metric tonne (MT) stock capacity across over 1,200 warehouses in 16 states, handling more than 40 commodities out of which its own warehouses account for 5%, franchised warehouses (40%) and leased warehouses (50%) of the total warehouses. Warehouse lease rentals are the main operating cost of SACML that accounted for 25%-30% of the operating income during FY22-FY23, whereas for the franchisee-based warehouses, the company has a revenue-sharing agreement in the ratio of 60:40 with franchise owners (warehouse owners) based on their capacity utilisation of the warehouse. The company is gradually shifting to the ALM by increasing its franchised warehouses where operational costs would entirely be based on the capacity utilisation of the warehouse, eventually resulting in an improved profitability. 

Integrated Platform for Post-harvest Management Solutions: SACML as a group offers agri commodity-based services starting from trade facilitation or procurement (15% of revenue), warehousing (50%), collateral management (15%-20%) and other allied services such as e-market, testing and certification, logistics, among others. It caters to customers including farmers, traders, processors, agro-industries, corporates and banks. Hence, the group acts as an integrated platform offering post-harvest management solutions and allied services. 

Consolidated EBITDA Margins Remain Stable; Healthy Standalone Margins: SACML’s consolidated operating EBITDA margins (after considering the lease rentals as it is the main operating cost) stood at 5.91% in FY23 (FY22:5.87%) while the standalone EBITDA margin (after considering the lease rentals) was 14.67% (11.92%), due to FFIPL's nature of business.  FFIPL receives only 1% of the value of the commodities procured as the fee but its revenue recorded pertains to the entire value of commodity. SACML’s EBITDA margin stood at 17.66% during 9MFY24. Ind-Ra expects the margins to have remained at the same level over FY24 and will improve over the medium term because of the increased focus on the ALM and a stable capacity utilisation of the warehouses. 

Improvement in Warehouse Capacity Utilisation to Push up Revenue Growth: In FY23, SACML’s standalone revenue grew to INR2,187.19 million (FY22: INR1,558.14 million), led by an increase in the average warehouse storage capacity utilised to 54.91% in FY23 (FY22: 48.73%) coupled with an increase in the warehousing capacity available with the company. Further, the company’s revenue stood at INR1,778.63 in 9MFY24, with the warehousing income contributing almost 66% of the total revenue. Ind-Ra expects the revenue to have increased in FY24 and will continue to increase in the medium term, owing to a likely increase in the utilisation levels of the warehouse capacity led by the growth in the industry. 

Comfortable Credit Metrics; Likely to Improve in Medium Term: The consolidated credit metrics improved in FY23, due to a decline in total debt to INR658.80 million (FY22: INR767.02 million), led by the repayment of its term debt and a decrease in the interest costs.  The gross interest coverage (operating EBITDA/gross interest expense) increased to 5.73x in FY23 (FY22: 2.13x) and the net leverage (total adjusted net debt/operating EBITDA) reduced to 1.55x (3.82x). Ind-Ra expects the credit metrics to improve in the near- to medium term in the absence of external term debt and any debt-funded capex. 

Highly Challenging Operational Environment: The agri warehousing industry indeed faces various challenges such as quality deterioration of stored commodities, thefts and frauds. Unusual climatic changes may also impact the agricultural output which may lead to poor business prospects at various locations for a prolonged period. However, this risk is mitigated as the nature of agreement with the warehouse owners is short term, usually less than a year so that it can terminate its service on such occurrence. Such short tenure agreements also pose a risk whereby the company could not be able to retain a strategic location despite greater business prospects.

Liquidity

Adequate: SACML’s average maximum utilisation of the fund-based limits and non-fund-based limits was around 88.38% and 74.46% over the 12 months ended February 2024, respectively. The working capital cycle decreased to 21 days in FY23 (FY22: 97), due to a marginal decline in the creditor days to 43 (53), as a result of a gradual change to franchised warehouses, and faster realisation of receivables resulting in a decline in debtor days to 64 (106). The company had cash and equivalents of INR8.46 million at FYE23 (FYE22: INR2.5 million). The cash flow from operations remained positive at INR256.53 million in FY23 (FY22: INR232.79 million). The free cash flow also remained positive at INR169.78 million in FY23 (FY22: INR158.75 million), owing to the absence of any major capex over the years. SACML is external term debt free as on December 2023 and also does not have any plans to avail any in the near future. Ind-Ra expects the liquidity to remain adequate over the medium term in the absence of any major capex plans and term debt.

Rating Sensitivities

Positive: A substantial improvement in the scale of operations and the profitability while maintaining the overall liquidity and credit metrics, on a sustained basis, will be positive for the rating. 

Negative: A substantial deterioration in the scale of operations or the profitability or weakening of the liquidity position or the interest coverage reducing below 2.5x, will be negative for the rating.

Any Other Information

Standalone Financials: SACML's operating revenue stood at INR1,778.63 million as of 9MFY24 (FY23: INR2,187.19 million) and the EBITDA margins at 17.66% (14.67%). The total debt stood at INR194.32 million in 9MFY24 (FY23: INR446.61 million), against cash and equivalents of INR67.15 million and INR8.46 million. The gross interest coverage was around 8.03x in 9MFY24 (FY23: 5.49x).

About the Company

SACML was established in April 2006 and specializes in third-party agri-warehousing and collateral management. SACML manages over 3.3 million MT stock capacity across over 1,200 warehouses in 16 states, handling more than 40 different commodities and collaborates with over 45 public and private banks for warehouse receipt financing. 

FFIPL, a wholly owned subsidiary of SACML, facilitates agri transactions for various stakeholders through effective supply chain management.