October 04, 2021

Villupuram District Co-Operative Milk Producers Union Limited: [ICRA]BB(Stable);

assigned
Summary of rating action

Current Rated Amount

Instrument* Rating Action
(Rs. crore)
Long-term/Fund-based – Cash credit 20.00 [ICRA]BB(Stable); assigned
Total 20.00
*Instrument details are provided in Annexure-1

Rationale
The assigned rating factors in the strategic importance of Villupuram District Co Operative Milk Producers Union Limited
(VDCMPUL / union) in the co-operative value chain of Tamil Nadu dairy industry. The rating draws comfort from the
operational support from the Tamil Nadu Co-operative Milk Producers Federation Limited (TCMPF) in the form of assured
offtake, need- based advances and policy directions. The rating also draws comfort from the union’s established
procurement network of dairy farmers, which ensures regular supply of milk. The rating factors in its long track record and
established brand name of ‘Aavin’ in Tamil Nadu and favourable demand prospects of milk and milk products in India.

The rating, however, is constrained by the moderate financial profile of VDCMPUL, characterised by low profitability, which
led to moderate coverage indicators. The rating also considers the risks inherent to the society nature of the union’s
constitution (like inadequate disclosures), commoditised nature of operations and intense competition from organised co-
operatives, private and unorganised players and its unions following fixed-pricing model unlike private dairies. Moreover,
milk production remains vulnerable to external factors such as weather conditions, cattle diseases and Government-imposed
regulations.

The Stable outlook on [ICRA]BB reflects ICRA’s belief that VDCMPUL will continue to benefit from the strategic importance in
the Tamil Nadu dairy value chain, a diverse product portfolio and a healthy demand for its products in the domestic market.

Key rating drivers and their description

Credit strengths

Established market position given its importance in co-operative value chain of TCMPF and robust procurement setup –
Dairy co-operatives in Tamil Nadu function under a 3-tier structure. Primary Milk Producers’ Co-operative Society (MPCS)
procures milk from the milk producing members at the village level and supplies to district unions. The milk producers form
the backbone of the dairy industry as they ensure adequate raw milk supply and are paid remunerative prices based on the
quality of milk procured from the farmers. The District Cooperative Milk Producers’ Union (DCMPU) procures milk from
MPCS, then processes and markets it to the consumers. Milk procured from MPCS is transported to the nearest bulk milk
cooler or chilling centre for further processing. The unions, after meeting their local demand, send milk to the TCMPF dairies
for processing and sale in Chennai while the surplus milk is used for conversion to margin accretive products like butter,
skimmed milk powder etc. VDCMPUL is one of the 25 district co-operative milk producers' unions in Tamil Nadu and has an
aggregate milk processing capacity of 1.5 lakh litres per day.
Support from TCMPF – Under the cooperative union pattern, through which the domestic dairy cooperatives largely operate,
the village cooperative societies are assured of sales to their respective district unions, and similarly the state-level apex
federation assures purchase of milk from the district-level unions. Thus, VDCMPUL benefits from being a part of this
cooperative structure with assured offtake from TCMPF, reducing its marketing risk. This enables the management to focus
on milk procurement and streamlining operations. Inherent to its business model, the union’s scope for expansion in margins
is restricted as milk procurement and selling prices are largely fixed. However, the unions derive support from TCMPF for
any

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need-based advances, apart from support towards operation and policy-related guidelines. Besides, it receives subsidies and
grants from the Government of Tamil Nadu and institutions such as the National Dairy Development Board for any capital
expenditure requirements.
Favourable demand prospects – The demand outlook for the domestic dairy industry is favourable on the back of growing
population, rising disposable income, and rising health consciousness. Favourable demand augurs well for both private sector
and cooperatives. Supply related challenges are minimal as well as the country is the world’s largest milk producer.

Credit challenges
Average financial risk profile – The union’s financial risk profile is characterised by relatively low profit margins as the milk
procurement and selling prices are largely fixed. Moreover, given the commoditised nature of operations and intense
competition from organised cooperatives, private players and unorganised players, the margins remain low for the unions.
Vulnerability of earnings to Government regulations and environmental conditions – VDCMPUL’s revenues and earnings
are susceptible to Government regulations such as cap on selling prices, higher procurement prices, restrictions on SMP
exports, exogenous factors such as the Covid-19 pandemic, which resulted in closure of restaurants, hotels etc. Moreover,
the union is susceptible to agro-climatic factors such as drought, cattle diseases etc which may adversely impact milk
production. Further, the union’s margins are susceptible to changes in climatic conditions, with the excess supply of milk
during the flush seasons resulting in a decline in SMP prices.
Limited disclosures inherent to society nature of constitution – As inherent to the society nature of constitution of the
unions, associated risks like limited disclosures are prevalent.

Liquidity position: Adequate

The union’s liquidity position is adequate with a buffer of Rs. 2.1 crore in the working capital limits as on August 31, 2021,
moderate free cash and bank balances. However, the union does not have any major capex plans or any significant debt
repayment obligations in the near term.

Rating sensitivities

Positive factors – ICRA could upgrade the ratings if the union demonstrates a healthy improvement in revenues, earnings
and liquidity profile.
Negative factors – Pressure on the rating could emerge with material weakening in the credit profile due to a sizeable
contraction in revenues and earnings or any large debt-funded capex. Absence of adequate, timely support from TCMPF,
leading to a stretched liquidity, could also be a trigger for a rating downgrade.

Analytical approach
Analytical Approach Comments
Applicable Rating Methodologies Corporate Credit Rating Methodology
Parent/Group Support Not Applicable
For arriving at the ratings, ICRA has considered the standalone financials of the
Consolidation/Standalone
rated entity

About the company

Villupuram District Cooperative Milk Producers Union Ltd. (VDCMPUL), established as a cooperative society in 1972, is
involved in processing and manufacturing of milk and its byproducts. The Union sells products such as milks, curds, milk
powder, ghee, butter, ice cream, sweets, among others under the brand name. Aavin, predominantly in Tamil Nadu. It
consists of 1,178 member societies and has a milk processing capacity of 1.5 lakhs litres per day, ghee production capacity of
1,800 litre/day and curd production capacity of 1,000 litre/day.
The Department of Dairy Development in Tamil Nadu was set up in 1958. The Tamil Nadu Dairy Development Corporation
Limited was formed in July 1972 to manage milk procurement, processing and marketing of milk and milk products. Tamil
Nadu Co-operative Milk Producers’ Federation (TCMPF) was formed in February 1981 as an apex body of three-tier
cooperatives set
up in Tamil Nadu and the district level milk producer unions were formed in 1982. The commercial activities of Tamil Nadu
Dairy Development Corporation Ltd. were transferred to the newly registered TCMPF, popularly known as Aavin.

Key financial indicators (audited)

FY2019 FY2020
Operating Income (Rs. crore) 284.1 295.8
PAT (Rs. crore) -4.1 4.2
OPBDIT/OI (%) -2.0% 1.0%
PAT/OI (%) -1.5% 1.4%
Total Outside Liabilities/Tangible Net Worth (times) 1.7 1.1
Total Debt/OPBDIT (times) -5.5 7.3
Interest Coverage (times) - -
PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, Taxes and Amortisation;
Source: Company data, ICRA research

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Chronology of Rating History for the
Current Rating (FY2022)
past 3 years
Instrument FY2021 FY2020 FY2019
Amount Amount Outstanding Date & Rating in
Type
Rated as of Mar 31, 2021 Oct 04, 2021 - - -
1 Cash credit Long-term 20.00 - [ICRA]BB(Stable) - - -
Amount in Rs. crore

Complexity level of the rated instruments

Instrument Complexity Indicator
Long-term / Fund based – Cash credit Simple
The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analyzing an entity's financial, business, industry risks
or complexity related to the structural, transactional, or legal aspects. Details on the complexity levels of the instruments, is
available on ICRA’s website: www.icra.in
Annexure-1: Instrument details
Date of Coupon Amount Rated
ISIN No Instrument Name Maturity Current Rating and Outlook
Issuance Rate (Rs. Crore)
NA Cash credit NA NA NA 20.00 [ICRA]BB(Stable)
Source: VDCMPUL

Annexure-2: List of entities considered for consolidated analysis: NA

ANALYST CONTACTS
Shamsher Dewan Srikumar K
+91 124 4545328 +91 44 44964318
shamsherd@icraindia.com ksrikumar@icraindia.com

Nithya Debbadi Akshay Dangi

+91 40 4067 6515 +91 40 4067 6528
nithya.debbadi@icraindia.com akshay.dangi@icraindia.com

RELATIONSHIP CONTACT
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com
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Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)
info@icraindia.com

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