Rationale

The resolution of the watch1 on the rating assigned to Parag Milk Foods Limited (PMFL) factors in the completion of the fundraising plan in May 2021. PMFL has raised equity capital of Rs. 125.0 crore from International Finance Corporation (IFC; ~Rs75 crore) and Sixth Sense Ventures Advisors LLP (Rs. 50 crore) in May 2021. Further, the company allotted convertible share warrants to promoters at a total consideration of Rs. 111 crore, of which the promoter infused 25% in May 2021 and will invest the rest over the next 18 months. Furthermore, the company has issued foreign currency convertible bonds (FCCBs) of $10.8 million (~Rs. 77.5 crore) to be used for capital expenditure and non-convertible debenture (NCD) of Rs. 150 crore as long-term source for working capital. The above fund-raising exercise will improve the liquidity profile of the company. The rating reaffirmation reflects PMFL's widespread scale of operations, strong brand position, expansive distribution network and diversified product profile with sizeable market share in certain value-added products (VADPs). The ratings continue to factor in the strong track record of the promoters in the dairy industry, leading to an established procurement base of dairy farmers, supported by a network of bulk coolers and chilling centres, ensuring regular supply of raw milk. The company is geographically diversified with a pan India presence through its strong marketing and distribution network. The sizeable fund infusion in the form of equity, share warrants, FCCB and NCD will support its capital structure and coverage indicators in FY2022. The ratings are, however, constrained by the high working capital intensity because of sizeable inventory levels and impact of Covid-19 on the company's financial performance. The company maintains high inventory of cheese, which requires a certain ageing process, and of butter, which is used as buffer raw material for the uninterrupted production of clarified butter (ghee). PMFL's revenue declined by 24.5% in FY2021 impacted by slowdown in the hotels, restaurants and catering (HORECA) segment due to lockdown across the country during the year, coupled with low revenue from liquid milk to institutional customers through modern trade channels amid the pandemic. PMFL's profitability was impacted in FY2021 with an OPBITDA margin of 6.8% versus 8.7% in FY2020 due to significant decline in revenue, leading to low absorption of fixed overheads. The company's performance in Q4 FY2021 was additionally impacted by rising milk prices in association with the above factors. ICRA expects PMFL's revenues and margins to improve in FY2022 supported by easing of restriction across the country; although any further lockdowns to curb the ongoing pandemic may negatively affect the company's performance. The Stable outlook reflects ICRA's belief that PMFL will continue to benefit from its extensive track record of operations, strong brand, diverse product portfolio, robust distribution network and improved liquidity profile.