Fitch Ratings has today assigned India's Laxmi Enterprises (Laxmi) a National Long-term rating of 'BB-(ind)' (BB minus(ind)) with a Stable Outlook. Fitch has also assigned a 'BB- (ind)' (BB minus(ind)) rating to Laxmi's long-term bank loans aggregating INR241.7m and a 'F4(ind)' rating to its INR384m fund based and INR10m non-fund based limits.
The ratings assigned to Laxmi reflect its large ongoing capex program compared to its operating cash flows. Capex of INR240m will be largely funded through long-term debt of around INR180m, with the rest financed through internal accruals. Consequently, Fitch expects Laxmi to exhibit higher leverage until FY10, when the new capacities are expected to become operational. Laxmi's ratings are also constrained by the firm's negative free cash flows during FY07 and FY08 as a result of high working capital requirements and capex. The liquidity risks are partly offset by unutilised fund-based limits of INR77m. The firm's performance in FY08 was also impacted due to adverse forex movements, which reduced operating cash flows. However, Fitch notes that this is likely to be a one-off impact, as the firm has moved towards a more conservative forex management policy. Although the partnership structure reduces the firm's financial flexibility, Fitch notes that the firm's assets and cash flows are ring-fenced from those of the partners by the partnership agreement. The agreement states that no lien/claim on the firm's assets and cash flows can be undertaken without the written consent of all partners, and Laxmi has confirmed that no such claims exist as of the present time.
Laxmi's ratings reflect the partnership's long operational track record, and the stable outlook on its spice business, driven by the stable outlook for Laxmi's key consuming sectors of food and food processing. The ratings also consider the strong, long-standing relationship that Laxmi enjoys with its customers and suppliers. The ratings further consider the strength and quality of management as well as the conservative policies followed by the partnership with regards to managing commodity price risks. The partnership purchases stocks only on confirmed orders, and most large purchases are undertaken in discussion with customers. This is reflected in the stable operating EBITDA margins (excluding forex) of the partnership in the region of 8.5%-10% in four of the past five years.
The agency notes that a successful completion of the capex programme, along with a demonstrated improvement in sales and margins, leading to an improved liquidity position, could act as a positive rating trigger. Any significant negative impact from working capital, which could substantially raise leverage levels, or any greater-than-expected decline in end-market demand, which could affect margins, could act as a negative rating trigger.
In FY08 Laxmi's net revenues grew 15.4% to INR607.6m, with an EBITDA margin of 4.3% (FY07: 9.5%) and a profit after tax of INR0.7m (FY07: INR29.1m). The partnership's net debt/EBITDA increased to 6.77x (FY07: 1.74x), primarily due to the impact of its capex programme. Laxmi has reported negative free cash flows for FY08, which Fitch expects to continue in FY09 and FY10 due to the ongoing INR240m capex programme, and the increased working capital requirements. Laxmi reported net revenues of INR725m with EBITDA margins of 6.6%, and an EBITDA/interest of 4.5x for the 10 months ended January 2009.
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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