CRISIL SME TRACKER: West Bengal cold storages run into rental wall

Cold storages in West Bengal are under stress owing to a cap on rentals, a CRISIL analysis of over 250 micro and small enterprises (MSEs) reveals. During the current fiscal, rentals including labour charges, were estimated at Rs 1,600 per tonne in the state, versus Rs 2,100 in Uttar Pradesh, its largest peer.
 
However, lack of pricing autonomy has squeezed the profitability of units and left them vulnerable. Besides renting out, these cold storages also provide advances to farmers and traders in lieu of cold storage receipts, which account for two-thirds of the assets of cold storages in Bengal.
 

A greater dependence on external borrowings to fund these advances results in a highly leveraged capital structure, which shows in their high gearing and low interest cover — and signifying relatively weak credit profile — compared with their counterparts in Uttar Pradesh. The risk of capital erosion is also greater, given that advances are 3.5 times net worth. Not surprisingly, a steep decline in potato prices recently saw some failing to honour their commitments to lenders.
 
The rental cap has also disincentivised capacity addition. Going by ministry of food processing data, capacity in West Bengal logged a paltry 0.5 per cent CAGR between fiscal years 2009 and 2017.

 
Linking rentals to market rates would improve the units’ ability to pass on operating costs and also encourage investment. Also, unscrupulous practices would be discouraged, enabling better price discovery for farmers.  As a next step, these units could be encouraged to take accreditation from approved agencies, which could help in fair valuation of the collateral.