Rationale

 The rating action for Desai Brothers Limited (DBL) factors in its comfortable financial risk profile, as evident from its steady revenue growth, healthy internal accrual generation and strong liquidity position in FY2024. ICRA expects that the same would sustain over the near term, supported by DBL’s established position in its key business segment. DBL’s revenue rose to Rs. 1,667.3 crore in FY2024 (from Rs. 1,563.8 crore in FY2023), driven by a 23% growth in its snacks division, even as the beedi division continued to witness a modest growth of 6%. Despite continued volatility in raw material prices, DBL was able to sustain its operating margins by increasing the operating leverage and because of its established position in the beedi division. The company’s capital structure also continues to remain comfortable with sustained net debt negative position. Its liquidity position remains strong, aided by healthy accrual generation. The rating continues to factor in DBL’s position as one of the leading players in the fragmented beedi industry in India, supported by its established operational track record and extensive experience of its promoters in the business, the company’s established brand presence with strong loyalty, and its wide distribution network. The company has maintained its market position despite competition from the unorganised beedi segment, other tobacco products, along with restrictions on sales promotions for tobacco products. However, the rating is constrained by DBL’s revenue concentration in a highly regulated beedi manufacturing industry on the back of health-related concerns. While revenue contribution from the snacks division has grown at a healthy pace to 11% in FY2024 from 3% in FY2019 and is expected to continue to grow further (resulting in increased business diversification), the beedi business is expected to remain the mainstay, accounting for the lion’s share of the company’s revenues. DBL also remains exposed to regulatory framework with regards to procurement of tendu leaves, sales, and distribution of beedi, along with requisite packaging norms. It also faces intense competition from the unorganised sector. Owing to persistent adverse weather conditions during this fiscal, ICRA expects a further rise in the cost of the key raw material (tendu leaves), which may last till FY2025, moderating the company’s overall profitability. The impact will be partially offset by softening of tobacco prices and annual price hikes undertaken by the company in the beedi division. The Stable outlook on the rating reflects ICRA’s opinion that the company will continue to benefit from its established track record and strong brand presence with a wide distribution network, enabling it to generate healthy cash accruals and sustain its strong liquidity profile.