Press Release

Dharwad Mishra Pedha And Food Processing Industry

September 17, 2019

Rating Downgraded and Assigned

Total Bank Facilities Rated* Rs. 35.00 Cr.

(Enhanced from Rs.25.00 Cr.)
ACUITE BB+ / Outlook: Stable
Long Term Rating
(Downgraded from ACUITE BBB- /Stable)
* Refer Annexure for details
Rating Rationale
Acuité has downgraded long-term rating to ‘ACUITE BB+’ (read as ACUITE double B plus) from ‘ACUITE BBB-’
(read as ACUITE triple B minus) on the Rs.25.00 crore and assigned long-term rating of ‘ACUITE BB+’ (read as
ACUITE double B plus) to the Rs.10.00 crore bank facilities of DHARWAD MISHRA PEDHA AND FOOD
PROCESSING INDUSTRY (Dharwad Mishra). The outlook is 'Stable'.

The rating downgrade reflects considerable capital withdrawal by its partners, leading to a significant
dip in its net worth, larger than expected capital expenditure leading to deterioration of its financial risk
profile. However, the rating continues to benefit from extensive industry experience of the promoters
and long track record of operations and steady sales growth in the last few years. The rating also
factors in working capital intensity and intense competition in the industry.

Established in 1933, Dharwad Mishra Pedha and Food Processing Industry (Dharwad Mishra), a
Dharwad, Karnataka-based partnership firm is engaged in manufacturing of sweets and bakery
products. Dharwad was founded by Mr. Avadhbihari Mishra and currently it is being managed by
Mr. Ganesh Mishra and Mr. Sanjay Ganesh Mishra. The firm's operations are spread across Karnataka,
Maharashtra and Goa.

Analytical Approach
Acuité has considered the standalone business and financial risk profile of Dharwad Mishra to arrive at
the rating.

Key Rating Drivers

Strengths
• Experienced management and long track record of operations
Established in 1933, Dharwad Mishra Pedha and Food Processing Industry (Dharwad) has a long
operational track record of more than eight decades in the sweets and bakery business. Dharwad
has reputed customer base spread across Maharashtra, Karnataka and Goa. About 90 per cent of its
revenues are derived from outlets/franchise and remaining10 per cent comes from distributors and
agents. Further, the management of Dharwad over the years has also built a healthy relationship with
suppliers for procurement of raw materials. Acuité believes that proven long operational track record
and longstanding presence of the promoters and reputed brand name is expected to support in
improving its business risk profile over the medium term.

• Steady growth in revenues and profitability

Dharwad has reported revenues of Rs.95.82 crore (provisional) in FY2019 as against Rs.77.21 crore in
FY2018 and Rs.69.44 crore in FY2017. Over the past four years through FY2019, the revenue growth is at
a compound annual growth rate of about 15.61 per cent. This is backed by regular addition of
franchisees as well as distributors/agents spread across the territories of Karnataka, Maharashtra and
Goa; about 67 per cent, 13 per cent and 18 per cent of total revenues comes from sweets, bread
and bakery products and namkeen respectively. Further, the revenue growth is expected to improve
to Rs.110 crore - Rs. 140 crore over the medium term supported by recently expanded capacities for
foray into new products of batter, instant food mix among others, while increasing the existing
capacities for bread, namkeen and chips. To focus on the core business of sweet making, while
managing the revenue growth, the firm entered into a logistics arrangement with a third party for
distribution of the sweets and bakery products across the locations. This will support in reducing the
Acuité Ratings & Research Limited (erstwhile SMERA Ratings Limited) www.acuite.in
 future capex and operational stress on non-core business of transportation. The firm's operating
profitability margins are moderate and stable at about 9.0-10.0 per cent over the past three years
through FY2019. Acuité believes that the firm's revenues are expected to improve, while maintaining
the margins in line with the past trend.

Weaknesses

• Moderate financial risk profile

The financial risk profile of the firm is moderate marked by high gearing (debt-to-equity), total outside
liabilities to total net worth (TOL/TNW) as well as moderate debt protection metrics. Gearing and
TOL/TNW stood high at 2.42 times and 3.98 times as on 31 March, 2019 (provisional), respectively, and
the deterioration is higher-than Acuité's expectations, which was at 0.64 times and 1.84 times as on 31
March, 2018 respectively. Net worth is modest and deteriorated to Rs.14.62 crore as on 31 March, 2019
(provisional) as against Rs.17.21 crore as on 31 March, 2018, due to capital withdrawal by the partners
amounting to Rs.4.10 crore in FY2019 (provisional). The withdrawal of capital was to return the money
to the investors as the initial stake sale transaction in FY2018, was later found out not materialized.
Further, the firm has done aggressive capex to the tune of Rs.13.0 crore in FY2019 higher than
expected and continued capex for the last two years amounting to about Rs.22 crore (for
construction of building, addition of new and replacement of old machinery) funded out of term debt
of Rs.8.0 crore and rest out of internal accruals, which has exerted pressure on the short term working
capital besides regular withdrawal of unsecure loans.

Debt protection metrics of interest coverage ratio and net cash accruals to total debt (NCA/TD)
stood moderate at 2.09 times and 0.13 times, respectively, in FY2019 (provisional) vis-à-vis 2.24 times
and 0.40 times in FY2018. The firm reported cash accruals of Rs.4.50 crore for FY2019 and firm's cash
accruals are expected in the range of Rs.5 crore- Rs. 7 crore with repayment obligations amounting
to Rs.2.50 crore in the medium term. Acuité believes that the financial risk profile is expected to
improve marginally; however, it remains moderate on account of modest net worth, modest
accretion to reserves, regular capex and moderate accruals to repayment obligations and working
capital intensity amid the growing business plans.

• Moderate working capital management

Dharwad's operations were efficiently managed with gross current asset (GCA) days of below 100
during FY2017 and 2018. However, with increasing size of operations through franchisee / outlets and
penetration into other territories of Maharashtra and Goa the GCA days, it have deteriorated to
about 132 days in FY2019 (Provisional); driven by increasing receivables (25-56 days) and inventory
levels of (49-63 days), respectively, for past three years. Its creditors are 60 days average for the past
three years. Working capital intensive operations and modest net worth led to high utilisation of its
bank lines at about 98 per cent over last six months through June 2019. Further, Dharwad is planning to
enhance its working capital limits, and timely sanction and availability of working capital limits are
critical for the growth in its operations. Acuité believes that Dharwad's operations will continue to be
working capital intensive over the medium term, owing to the growing business volumes, diversified
territories and foray into new products.
• Competitive and fragmented industry
The firm operates in a highly fragmented industry with large number of organised and unorganized
players resulting in low bargaining power with customers. The firm's plans of diversifying into new
products of batter, instant food mix and its business plans of making at least Rs.20 crore - Rs. 30 crore
from these new products amid competition from the existing players is a key rating sensitivity factor.

Liquidity Position
Dharwad's liquidity is stretched marked by moderate working capital intensive operations with
fully utilised bank lines, withdrawal of capital and unsecured loans and expected pressure on
working capital incremental working capital requirement for the growing operations. Its GCA has
deteriorated from about 100 in the past to 132 days in FY2019 and increasing revenues lead to highly
utilised bank lines at 98 per cent over past six months through June 2019. Net cash accruals stands
at Rs.4.88 in FY 2019 (Prov) with expected cash accruals of Rs 5 crore - Rs. 8 crore over medium term,
which should be sufficient against term debt obligation of Rs.2.5 crore over the medium term.
Current ratio is at 1.89 times as on March 31, 2019. Acuité believes that the liquidity of Dharwad is
expected to improve owing to expected moderation in capex and the firm's plans to go for
enhancement in its working capital limits.

Acuité Ratings & Research Limited (erstwhile SMERA Ratings Limited) www.acuite.in
Outlook: Stable
Acuité believes that the outlook on Dharwad will remain 'Stable' over the medium term on
account of its experienced promoters and long track record of operations. The outlook may be
revised to 'Positive' in case of significant improvement in its revenues, while maintaining the
profitability and improving its capital structure. Conversely, the outlook may be revised to 'Negative'
in case of any stretch in its working capital management or any significant unplanned debt -funded
capital expenditure or significant withdrawal of capital leading to deterioration of its capital structure
and liquidity.

About the Rated Entity - Key Financials

Unit FY19 (Provisional) FY18 (Actual) FY17 (Actual)
Operating Income Rs. Cr. 95.82 77.21 69.44
EBITDA Rs. Cr. 8.99 7.71 6.64
PAT Rs. Cr. 1.14 1.16 0.67
EBITDA Margin (%) 9.38 9.99 9.57
PAT Margin (%) 1.19 1.51 0.96
ROCE (%) 15.31 15.85 15.43
Total Debt/Tangible Net Worth Times 2.42 0.64 8.44
PBDIT/Interest Times 2.09 2.24 1.76
Total Debt/PBDIT Times 3.79 1.37 4.23
Gross Current Assets (Days) Days 132 99 90

Status of non-cooperation with previous CRA (if applicable)

Not Applicable

Any other information

Not Applicable

Applicable Criteria
• Default Recognition - https://www.acuite.in/view-rating-criteria-17.htm
• Manufacturing Entities - https://www.acuite.in/view-rating-criteria-4.htm
• Financial Ratios And Adjustments - https://www.acuite.in/view-rating-criteria-20.htm

Note on complexity levels of the rated instrument

https://www.acuite.in/criteria-complexity-levels.htm

Rating History (Upto last three years)

Name of Instrument /
Date Term Amount (Rs. Cr.) Ratings/Outlook
Facilities
Proposed Secured
29-Jun-2018 Long Term 25.00 ACUITE BBB- / Stable
Overdraft
(Assigned)

*Annexure – Details of instruments rated

Date of Coupon Maturity Size of the Issue

Name of the Facilities Ratings/Outlook
Issuance Rate Date (Rs. Cr.)
Proposed Secured Not Not Not
25.00 ACUITE BB+ / Stable
Overdraft Applicable Applicable Applicable
(Downgraded from
ACUITE BBB- /Stable)
Proposed Secured Not Not Not
10.00 ACUITE BB+ / Stable
Overdraft Applicable Applicable Applicable
(Assigned)

Acuité Ratings & Research Limited (erstwhile SMERA Ratings Limited) www.acuite.in
Contacts

Analytical Rating Desk

Srihari Adari Varsha Bist
Head - Corporate and Infrastructure Sector Ratings Manager - Rating Desk
Tel: 040-40042327 Tel: 022-49294011

[email protected] [email protected]

Bhavani Sankar Oruganti

Senior Analyst - Rating Operations
Tel: 040-4004 2327
[email protected]

About Acuité Ratings & Research:

Acuité Ratings & Research Limited (Erstwhile SMERA Ratings Limited) is a full-service Credit Rating Agency
registered with the Securities and Exchange Board of India (SEBI). The company received RBI
Accreditation as an External Credit Assessment Institution (ECAI), for Bank Loan Ratings under BASEL-II
norms in the year 2012. Since then, it has assigned more than 6,000 credit ratings to various securities, debt
instruments and bank facilities of entities spread across the country and across a wide cross section of
industries. It has its Registered and Head Office in Mumbai.

Disclaimer: An Acuité rating does not constitute an audit of the rated entity and should not be treated as a
recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent
assessment of whether to buy, sell or hold any security. Acuité ratings are based on the data and information provided
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data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect
to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or
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revision in ratings as and when the circumstances so warrant. Please visit our website (www.acuite.in) for the latest
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Acuité Ratings & Research Limited (erstwhile SMERA Ratings Limited) www.acuite.in