Fitch Rates India's Gajanan Industries 'B+(ind)'/'F4(ind)'

Fitch Ratings has today assigned India's Gajanan Industries (GI) a National Long-term rating of 'B+(ind)' and a National Short-term rating of 'F4(ind)'. The Outlook is Stable. Fitch has also assigned ratings to GI's bank loans, as follows:

• Term Loans totalling INR5.3m: 'B+(ind)'; 
• Cash Credit (CC) Limit totalling INR100m: 'B+(ind)'; 
• Sub-limits under CC (Packing Credit, Overdraft against Book Debts): 'B+(ind)/F4(ind)'; and 
• Exports Bills Negotiation totalling INR5m: 'F4(ind)'.

GI's ratings are underpinned by the strong track record of its promoters in the highly competitive rice milling industry, a strong presence in the Andhra Pradesh (AP) market, and modest but stable revenues and operating margins, and comfortable leverage.

The key concerns for the ratings emanate from GI's small scale of operations, its concentration risk in the AP market, inadequate brand recall and high competition. Also, India's rice milling industry is very working capital intensive and is susceptible to fluctuating raw material prices and vagaries of monsoons.

The industry is subject to intervention by regulatory authorities by way of policy changes. The Government of India may direct sales of rice to government agencies, restrict sales of rice in the open market and may prohibit exports. Also, the state government may restrict movement of rice within the state (district to district) and to other states. Fitch also notes that the rice industry is historically a low margin business.

There has been a steady increase in demand for processed rice - both unbranded and branded, given that it is a staple commodity in several countries including India. Furthermore, the opening up of export markets could increase demand further, and push up prices.

Negative rating triggers are a deterioration in operating margins, interest coverage falling below 1.3x and financial leverage (Total Adjusted Net Debt/Op. EBITDAR) exceeding 7.0x. Positive rating triggers are a significant increase in revenues and operating margins on a sustainable basis.

GI is a partnership firm that was set up in 1969. GI (capacity of 5 tons per hour) and Gujarat Agro Mills Pvt Ltd (capacity of 8 tons per hour) are both rice mills belonging to the Gajanan Group in Andhra Pradesh. During the 12 months to end March 2009, GI's revenues, EBITDA and net income were INR312m, INR23m (EBITDA margin of 7.3%) and INR0.5m (net income margin of 0.2%) respectively. The interest coverage and net debt /EBITDA were 1.3x and 5.3x, respectively.

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.

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