Fitch Ratings has today assigned National Short-term ratings of 'F3(ind)' to India's LMJ International Limited's (LMJ) fund based limits aggregating INR1602.5m and its non-fund based limits aggregating INR1195.5m.
The ratings reflect LMJ's long track record in trading agricultural commodities with a large product portfolio, well-established infrastructure facilities, as well as its backward integration through the set up of processing units for tea, coffee, rice and oil. The company is further insulated from counterparty risk as 90% of its sales are backed by letters of credits from banks. In addition, LMJ carries low inventory and pricing risk on account of back-to-back transaction based contracts for its bulk orders; although for retail orders, it is required to maintain some level of inventory.
LMJ's ratings further benefit from the trading of processed commodities which constitutes c. 35% of export sales and c. 10% of domestic sales, resulting in better price realisations as reflected by the yoy improvement in EBIDTA. Fitch learns that LMJ has plans to increase its capital expenditure through the set up of more processing units cum warehouses for pulses, wheat flour and basmati rice. Notwithstanding the potential risks from the increased capex, the ratings draw comfort from the fact that LMJ has managed its inventory well by giving warehousing space for rent to the farmers and earning nominal rent.
A rating constraint is the competitive nature of LMJ's trading business, as reflected in its low EBITDA margins and high working capital requirement, further compounded by its consistently high net leverage (measured by Total Adjusted Net Debt/Operating EBITDAR); even though it was on a declining trend from 9.5x in FY06 to 6.5x in FY08 and has further declined to 3.5x in FY09 (provisional) on account of increasing EBIDTA. Also, LMJ's 85% exports are made to Bangladesh, Tunisia and U.A.E, thereby exposing it to geographical concentration risk. The trading business is also exposed to government regulations.
The ratings may be upgraded if there is a consistent improvement in the EBIDTA margins, resulting in a net debt/EBIDTA below 3.5x on a sustained basis. Conversely, a significant decline in revenues and EBIDTA margin combined with liquidity pressures taking Net Debt/EBIDTA above 4.5x on a sustained basis, could move the ratings downwards.
Based on the provisional financial figures provided by LMJ, it has achieved revenues of INR10,195m in FY09 (INR10,091m in FY08), with EBIDTA margins improving to 3.1% in FY09 (2.1% in FY08). Free cash flow also turned positive in FY09 as compared to negative cash flows in FY07 and FY08 due to better realisation of debtors, and an increase in creditors' days to 38 days in FY09. However, Fitch expects the net free cash flow to remain negative in the short-to-medium term, given the working capital trading nature of the company. Furthermore, interest coverage has remained constant at 2.4x in FY09 (FY08: 2.4x).
Incorporated in 1992, LMJ is an agriculture-based export house. It exports a large commodity basket comprising tea, coffee, wheat, rice, soya bean and iron ore etc, and import commodities like edible oil and pulses.
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