(Repeat for additional subscribers)
April 22 (The following statement was released by the rating agency)
Fitch Ratings has affirmed India-based agricultural processing and trading company REI Agro
Ltd's (REI) Long-Term Issuer Default Rating (IDR) at 'B+' and revised the Outlook to
Stable from Positive. The agency also affirmed the company's senior unsecured rating at
'B+'. At the same time Fitch has withdrawn REI's ratings because the agency
believes the ratings are no longer relevant to its coverage. Fitch will no
longer provide ratings or analytical coverage for REI.
The Outlook revision reflects Fitch's expectations that REI is unlikely to
maintain interest coverage (defined as EBITDA/gross interest expense) above the
2x threshold in the medium term. This is primarily because REI was unable to
issue a proposed US dollar bond in early 2013, it faces the impending payment of
most of its outstanding foreign currency debt in November 2014, and it had
weaker EBITDA margins because the sales mix shifted in favour of its trading
KEY RATING DRIVERS
Lower Profitability and Interest Cover: Fitch expects REI's interest coverage
ratio to remain below the 2x threshold over the medium term, and its EBITDA
margins to stabilise between 10%-12%, which is lower than the 15%-21% range in
the three financial years that ended March 31, 2013. REI's current business
risk profile combined with its lower interest coverage is in line with a 'B+'
Sales Mix to Stabilise: Sales from trading, which has lower profitability than
rice processing, accounted for nearly 60% of REI's revenue in FY13 compared with
54% in FY12. Fitch expects REI's sales mix to stabilise over the medium-term as
the company is likely to increase the utilisation of its spare manufacturing
Market-Leading Position, Lower Price Volatility: REI's 'B+' rating is supported
by its market-leadership and integrated business model in India's basmati rice
industry. This in turn, is supported by REI's well-known brand and strong
distribution network within India. The company is also expanding in key export
markets in the Middle East and has established a distribution network via its
subsidiaries to support its branded rice sales.
Branded basmati rice has historically exhibited lower price volatility compared
with most other agricultural commodities. This is due to the limited supply of
basmati rice, the lengthy time needed for processing and maturing, as well as
strong demand stemming from a niche segment of rice consumers.
Working Capital-Intensive Operations: REI's 'B+' rating also reflects its
working capital-intensive operations, which result in negative free cash flow
and high funds flow from operations (FFO) net leverage (FYE13: 3.7x). The
company's working capital intensity is driven by its need to hold processed
basmati rice in inventory for 18-24 months as part of the maturing process.
Fitch expects REI's free cash flow generation to turn positive from FY15 because
capex is likely to decline following a peak in FY12 and FY13.
Moderate Liquidity: Over INR10.6bn of REI's scheduled maturities fall due in
FY15. Over half of this consists of foreign-currency bonds issued in FY10, which
have an option for bondholders to convert their notes to common equity. However
these bonds are currently deep out-of-the-money and are unlikely to be converted
to equity by November 2014, which leads to refinancing risks for the company. As
a result, REI's average borrowing costs will increase, with the rise likely to
be exacerbated by rising domestic interest rates. However the company's highly
liquid inventory provides creditors with a solid buffer in a stressed scenario.