ICRA has assigned an LBB (pronounced L double B) rating to the Rs 1.5 crore1 term loans and Rs 10.50 crore long term fund based limits and A4 (pronounced A four) rating to the Rs. 5 crore non fund based limits of Supreme Polymers Private Limited (SPPL). The outlook on the long term ratings is stable.

Credit Strengths

Established track-record and strong market position in the domestic poly woven sacks business Favourable demand outlook from fertiliser & cement sectors Strong customer profile comprising of leading players in the fertiliser and cement segment

Credit Concerns

Fragmented nature of poly woven sacks industry resulting in high competition Weak bargaining power with suppliers and customers could exert pressure on margins Moderate location disadvantage as the manufacturing plant is distant from raw material suppliers as well as major customers Vulnerability of profitability to the fluctuations in the prices of polymers High gearing levels and subdued debt coverage indicators, both on standalone as well as consolidated basis
 

Rating Rationale

While arriving at the ratings, ICRA has taken a consolidated view of Supreme Polymers Private Limited (SPPL), Siddharth Polysacks, Alliance Polysacks and Star Global Endura Limited due to significant operational, managerial and financial synergies amongst these companies. The ratings are constrained by the fragmented nature of the poly woven sacks industry; weak bargaining power with customers; location disadvantage as the plant is distant from raw material supplier; vulnerability of profitability to fluctuations in the prices of polymers and high financial risk profile on a consolidated basis. However the ratings positively factor in the Supreme Group?s strong market position in the poly woven bags for the fertiliser segment; favourable demand outlook arising from fertilizer and cement industries and its strong customer profile.

Business and Competitive Position:

Favourable demand outlook from fertiliser & cement sectors: The demand prospects for the conventional poly woven sacks are favourable on account of healthy growth expected in the cement and fertiliser sectors. ICRA notes that the demand for conventional poly woven sacks has for long been negatively impacted by the Jute Packaging Material Act (JPMA), which mandated packaging of food grains in jute bags. However, the industry has been deregulated for exports of food grains. Moreover, GoI has partly deregulated the packaging of food grains in poly woven bags for some states, which has opened new opportunities for the manufacturers such as SPPL. Directorate General of Supplies & Disposals (DGS&D) has been coming out with rate contracts on a periodic basis for procuring poly woven sacks due to shortage of jute bags, which has added to the domestic demand. ICRA notes that further deregulation in the packaging of food grains segment in the domestic market would offer a sizable upside for woven bags industry, however the likelihood of the same remains to be seen in light of strong lobby of jute industry.

Fragmented nature of poly woven sacks industry resulting in high competition:

The Indian poly woven sacks industry is characterized by high fragmentation and competitive intensity, resulting from low capital intensity. Since the cement customers are large players in terms of their size and operations, the company exhibits weak bargaining power with them, leaving it?s profitability vulnerable particularly in a scenario of increasing competitive pressures.

Established track-record and strong market position in the domestic poly woven sacks business:

The Supreme group has a combined capacity of 18400 tpa for manufacture of poly woven sacks, which makes them among the six largest players in the polywovensack/FIBC industry in India. SPPL has been in the business of poly woven bags since 1995 and has established its position as one of the major supplier of poly woven bags to the fertiliser industry in Northern India. The fertiliser segment accounts for about 43% of the revenues of SPPL, followed by cement (31%), and fodgrain (21%). SPPL has been historically focused on the fertiliser segment. Nevertheless, the same has declined significantly in 2009-10 due to increase in demand from the food grain and the cement sector. Chart 1: Segment wise break up of turnover 2008-09 and 2009-10

Strong customer profile comprising leading players in the fertiliser segment:

The company?s customers include leading fertiliser and cement companies. The company?s major customers include IFFCO, Lakshmi cements, KRIBHCO, Jaypee cements, RCF, RSSML. Location disadvantage as the manufacturing plant is distant from raw material source: SPPL manufacturing plant, at Jaipur in the state of Rajasthan, is distant from raw material sources i.e. Reliance Industries Limited (RIL) as well as some of the fertiliser customers. Additionally the company has poor bargaining power with suppliers as the latter are very large as compared to the SPPL. Vulnerable to volatility in polymer prices: SPPL remains exposed to the volatility in the prices of raw material: polymers, which vary in line with crude oil prices. In order to mitigate the price risks, the company follows cost escalation clauses with most of their customers. Besides, the company follows a back to back stocking arrangement in line with contracts to avoid price risk, which have largely protected its profitability in the past

Financial Risk Profile Healthy growth in sales and profitability:

Supreme?s sales have grown at a CAGR of about 24% from 2005-06 to 2009-10 led by favourable demand growth in the fertiliser & cement sectors as well as contract manufacturing arrangements made by company to overcome capacity constraints. The company?s operating margins have remained low (4-6%) during this period as it has been primarily focused on the fertiliser segment, where the competition tends to be higher. RoCE has been particularly low over the period FY06-FY08 (6-9%), however improved subsequently to 12% in FY10 due to contract manufacturing arrangements.

Gearing remains high due to high working capital borrowings and small net worth:

Supreme?s gearing remains high at around 3 times as on 30-Nov-10 due to high working capital intensity and also the small net worth of the company. ICRA notes that the company?s long term debt primarily includes optionally convertible preference shares, which have a maturity period of 20 years. Nevertheless, having adjusted for the preference shares, the adjusted gearing still remains high at upwards of 2 times. Due to high gearing, the debt coverage indicators remain moderate with interest coverage of around 3 times and NCA/Debt of 13% in FY10. Guarantees extended towards debt of group companies lead to high financial risk profile on a consolidated basis: Supreme has guaranteed the debt of it?s group companies: Siddharth Polysacks, Star Global Endura and Alliance Polysacks, totalling to Rs 28 crore. Out of these, Siddharth Polysacks has given a counter guarantee towards Supreme?s debt amounting to Rs 17.27 crore. Due to the common promoters, management and financial linkage involving these three entities, ICRA has considered the consolidated financial risk profile of the Supreme group, which stood high at 4.5 times as on 31-Mar-10 (2.5 times when adjusted for optionally convertible preference shares).