McLeod Russel shares continued to be under pressure, dropping by 8.9 per cent to Rs 37.85 on the BSE, as the firm faced its second credit rating downgrade and pledging of shares by promoters increased.
While ratings agency Icra downgraded the firm’s term loans as well as fund-based bank facilities from Icra A to Icra BBB-, with a negative outlook, the non-fund based bank facilities has been revised from Icra A2+ to Icra A3. Prior to this downgrade, the ratings agency had revised credit rating and outlook on this company on April 2.
According to Icra, the rating revisions have factored in further deterioration in McLeod’s liquidity profile due to a slower-than-anticipated progress on asset monetisation and continued pressure on the profitability of the core tea operations of the company. The agency reasoned while a majority of the proceeds from the sale of the second tranche of tea estates has been received recently with a delay, McLeod’s overall leveraging remains high. Moreover, its high exposure to weak group companies, including McNally Bharat Engineering has been largely funded by short-term debt, which has further aggravated the tight liquidity position and exposed company’s significant refinancing risks. Sources said a significant part of McLeod’s debt would come up for repayment in the next 3-6 months, which would keep its liquidity position under stress. As on March 31, 2018, exposure to group firms was Rs 650 crore, which increased to Rs 1,000 crore by March 31, 2019, said sources. A major part of this debt is short-term.
Kaushik Das, analyst at Icra, said, “The liquidity pressure was expected to continue as short-term debts used to fund group exposure would come up for maturity in the upcoming period.”
In the recent past, McLeod Russel has sold 12 tea estates in Assam and has signed preliminary agreements to sell more gardens in Assam, Dooars and Africa. After the end of the sale, the firm would have capacity to manufacture 42 mkg of tea from own leaves.
Icra said, although McLeod used the proceeds from the sale of gardens to reduce debt, contrary to its expectation, the total debt outstanding still remains high on account of increased exposure to group companies.
McLeod’s total debt as on March-end is around Rs 1,600 crore and the company has received Rs 940-950 crore from the sale of gardens.
Icar said going forward, McLeod’s input costs pressure was expected to keep the operating profitability of the company under pressure, despite the cost control exercises undertaken.
The ratings agency reasoned that the outlook on the company has been kept negative because input cost pressure would continue to impact the operating profitability and cash flows from operation, which along with higher debt level, would keep coverage indicators depressed and liquidity stretched.