Rating Rationale

SLN Coffee Private Limited

22 May 2019

Brickwork Ratings upgrades the ratings to ‘BWR BB+/A4+’ for the bank loan facilities
of Rs. 140.00 Crore of SLN Coffee Private Limited ​[‘SLNCPL’ or ‘the company’],
Kushalnagar, Karnataka

Particulars

Amount (Rs. Cr) Ratings*

Facilities Tenure
Previous Present Previous Present

Fund Based
OCC/ODBD 33.00 33.30 BWR BB+
BWR BB
TL/DPN 16.45 25.46 (Pronounced as
(Pronounced as
Long Term BWR double B plus)
TL/DPN BWR double B)
-- 31.54 Outlook: Stable
(Proposed) Outlook: Stable
Upgraded
FDB 30.00 5.00 BWR A4+
PCFC/PC 27.00 29.70 (Pronounced as
BWR A4
Short Term BWR A Four plus)
Non Fund Based Upgraded
BG 15.00 15.00
Total 121.45 140.00 INR One Hundred Forty Crores Only
**Note: Annexure I provides details of the credit facilities
*Please refer to BWR website ​www.brickworkratings.com/​ for definition of the ratings

Rationale/Description of Key Rating Drivers/Rating sensitivities:

Brickwork Ratings has essentially relied upon the audited financials upto FY18, provisional
financials for FY19 and projections upto FY20, publicly available information and
information/clarifications provided by the company’s management.
The ratings upgrade factors the increasing presence of the Company in the instant coffee
manufacturing segment ( from 55% in FY18 to 88% in FY19(P)) and the launch of their brand
“Levista”, which is gaining acceptance in the domestic market. The rating also factors the
established presence of the company in the coffee trading and manufacturing industry with a
long operational track record, extensive industry experience of the promoters, healthy order
book for manufacturing division, reputed and diversified clientele in domestic & export markets
and moderate financial risk profile of the Company. The ratings, however, continue to be
constrained by the thin operating margins, large working capital requirements and high
leverage. The ratings also remain constrained by the ​intense competitive pressure in the coffee

1 22 May 2019
industry, exposure to price volatility of coffee in the domestic and export markets and
commoditized nature of the price sensitive instant coffee business with substantial dependence
on certain geographies.
The premises of the company were subject to investigation by the Income Tax authorities during
April 2017. BWR understands that till date, no notice of demand has been received by the
company. The ratings continue to factor the risks pertaining to the lack of clarity on the Income
Tax investigation and the likelihood that the Company’s credit profile may weaken on account
of the potential Income Tax claims and liabilities. The conduct of the bank account is, however,
reported to be regular.

Going forward, the developments in the Income Tax investigation and the impact of any claims
& liabilities arising in this connection on the credit profile of the Company remain a key rating
sensitivity. The company is required to furnish timely information to BWR on the status of the
Income Tax department investigation. Further, the ability of the Company to strengthen its client
base for the manufacturing division, achieve its targeted turnover and profitability and manage
its working capital effectively would be the key rating sensitivities.

Key Rating drivers

Credit Strengths​:
● Long operational track record and experienced promoters- ​The promoters have
extensive industry experience and the SLN group has an established presence in the
coffee trading and manufacturing business, ​leading to established relationships with
customers and suppliers.
● Reputed and diversified clientele in domestic & exports markets - ​The Company has
diversified and reputed clients for its domestic sales of instant coffee powder such as
Hindustan Unilever, Unilever Exports Ltd, ITC Ltd, CocaCola India (P) Ltd, Duncans
Tea, Delecto Foods Pvt Ltd etc. The Company’s export buyers are Kingsgate Pty Ltd,
Simplex Coffee Ltd, Treber Marketing Ltd, SIA Unisel & Co, Sofracom SAS, etc. The
Company exports Instant Coffee to countries like Singapore, France, Latvia, Switzerland,
Japan, Turkey, Malaysia, UK, UAE, Germany, Moldova, Vietnam, etc. The top 5
customers in the export and domestic markets have contributed 50% of the total export
sales and 90% of the total domestic sales respectively.
● Healthy order book for manufacturing division- ​The Company has orders on hand for
coffee manufacturing division to the extent of ~Rs 200 Crs, for execution during the next
6-8 months.
● Value added business - Currently, the company is mainly concentrating on its valued
added businesses. The company has launched its own brand of instant coffee
“LEVISTA” in the domestic market in December 2017. Significant brand building
exercises have been initiated for promotion of this brand. The Product has 4 variants in
instant coffee as, Pure, Premium Strong and Super strong in SKUs which are being well
accepted by the trade and consumers. The trade margins are reported to be attractive and
the products are competitively priced.

2 22 May 2019
Credit Constraints​:
● High gearing levels with average debt protection metrics - ​The company’s coverage
metrics were moderate with relatively high gearing levels. Total debt/ tangible net worth
stood at 2.09 times as on March 31, 2018. ISCR and DSCR, though adequate at 2.19
times and 1.41 times respectively during FY18 have declined significantly in FY19,
mainly on account of reduced profitability.
● Highly competitive coffee business
The company operates in a highly competitive business environment. It faces stiff
competition from both organised and unorganised players. Further, the constant need for
diversification of the blends and flavours in accordance with the ever-changing customer
tastes and preferences, demands higher investment in inventory. The intense competition
in the coffee manufacturing industry is likely to limit the pricing, the flexibility of the
Company and place pressure on margins.
● Susceptibility of the Company’s revenues & margins to successful coffee crop
harvest and international coffee prices
The Company meets most of its coffee requirements through imports from Uganda,
Vietnam, Kenya and China. The Company depends on domestic and international
supplies of coffee, hence, the Company’s margins are highly susceptible to volatility in
raw material prices and crop harvest. The margins are also susceptible to ​fluctuations in
coffee bean prices, intense competition, volatility in foreign exchange rates and increased
expenses for developing new blends and flavours.
● Exposure to forex fluctuations​:
Profitability is exposed to volatility in forex rates as around 60% revenue is derived from
exports. However, forex risk is partly mitigated by way of natural hedging and PCFC
facilities.

Liquidity - Moderate: ​Working capital utilisation remained high with an average utilisation of
around 100% over the last one year, owing to the nature of business. ​As such, there is limited
buffer to meet working capital needs​. ​Inventory days are around 86 days (FY19) and are
expected to remain high as processing and developing of blends involve time. The operations
are expected to remain working capital intensive and timely enhancement of working capital
facilities will be critical for maintaining a comfortable liquidity position. Current ratio was 1.03
times as on 31​st March 2018 as against 0.99 times as on 31​st March 2017. Cash & Cash
equivalents were Rs 4.51 crore as on 31​st ​March 2019 against Rs. 5.57 crore as on 31​st ​March
2018. Net cash accruals to total debt was around 0.12 times as on 31​st March 2018. The
company’s debt repayment obligation for FY20 and FY21 are in the range of Rs.8.00 crore to
Rs.9.00 crore. It is expected that any shortfall in cash accruals for debt servicing would be met
through funding from the promoters.

3 22 May 2019
Analytical Approach
For arriving at its ratings, Brickwork Ratings has applied its rating methodology as detailed in
the Rating criteria below (hyperlinks provided at the end of this rationale)​. ​The company does
not have any subsidiaries.
Rating Outlook: Stable
Brickwork Ratings believes that SLN Coffee Private Limited ’s (​‘SLNCPL’ or ‘the company’)
business risk profile will be maintained over the medium term. The ‘Stable’ outlook indicates a
low likelihood of rating change over the medium term. The rating outlook may be revised to
‘Positive’ in case the revenues and profit show sustained improvement leading to improvement
in cash accruals and strengthening of financial risk profile. The rating outlook may be revised to
‘Negative’ if the revenues go down, profit margins show lower than expected figures, working
capital cycle is elongated pressurizing the liquidity position or any major debt funded capital
expenditure plan leads to stress on the financial risk profile of the company.
About the Company
Karnataka based SLN Group, is engaged in coffee plantation, curing, trading in coffee beans,
manufacturing of instant coffee powder and also roast and ground coffee powder. The Group has
coffee plantations, since 1960, spread over 315 acres and has been in coffee trading and
manufacturing business for over 18 years. In addition to the Coffee business, the Group also has
interests in real estate and Hotels & Resorts business.

SLN Coffee Private Limited (SLNCPL), the flagship company of SLN Group, was incorporated
in April 2004 at Kushalnagar, Karnataka, to trade in green coffee and manufacture soluble
instant coffee powder. The trading division of the Company has been hived off into another
Company by the name “SLN Coffee and Spices Exports Pvt Ltd” with effect from 1st July 2016.
SLN Coffee Private Limited is presently engaged only in the manufacturing activities of soluble
instant coffee powder and roast and ground coffee powder. Currently, the Company has 3
divisions namely Instant Coffee Division,Curing Division and Levista Division.Spray Dried
instant coffee powder and Agglomerated instant coffee are the two major product lines of the
company under instant coffee division. The curing division takes up job work of coffee
processing for the known brands. The Levista division focuses on retail segment and cafes. The
Company’s instant coffee manufacturing division at Kushalnagar, Kodagu District has a total
capacity of 7200 MTs per annum and the capacity utilization is around 80%.

The Company had launched its brand of instant coffee called “Levista” in the first week of Dec
2017 in Tamil Nadu & Karnataka for its retail customers. Currently the company has 307
Distributors across Tamilnadu and Pondicherry, 186 distributors across Karnataka state for
general trade covering over 85000 retail outlets. It is planning to expand the distribution network
to Andhra and Telangana by June 2019.

Mr. N. Sathappan and Mr. N. Vishwanathan are the full time directors of the company.

4 22 May 2019
Financial Performance

SLNCPL’s revenue declined to Rs.311.90 cr during FY18 from Rs.767.13 cr in FY17. This is
mainly due to the gradual discontinuation of the green coffee trading business. Export sales
contributed 54% to total revenues in FY18 followed by domestic sales (46%). Profit after Tax
was Rs. 3.30 crore for FY18 as against Rs. 18.80 crore for FY17.
On a provisional basis, the company has achieved sales of around Rs.232 Cr, during FY19, of
which ~ Rs.204 cr was contributed from sales of instant coffee and coffee curing, against the
FY18 figure of Rs.175.89 cr. Total revenue from sales of instant coffee and coffee curing has
increased during the period. Discontinuation of the green coffee trading business has impacted
the profitability and during FY19 (provisional), the company has booked a net loss of ~ Rs.20
crore mainly due to significant advertisement and business promotion /brand building expenses
(by around Rs 20 Crs) for “LEVISTA”.

Key Financial Parameters

Particulars 31 Mar 2017 31 Mar 2018

Audited Audited

Net Revenue Rs. Cr 767.13 311.90

EBITDA Rs. Cr 37.02 22.93

Profit After Tax Rs. Cr 18.38 3.30

Tangible Net Worth Rs. Cr 56.43 59.71

Total Debt : Tangible Net

Times 2.33 2.09
Worth

Current Ratio Times 0.99 1.03

5 22 May 2019
 Rating History for the last three years

Present Rating (2019) Rating History

Facilities Amount
Aug 2,
(Rs. Cr) Type Ratings Dec 22, 2017 Sep 11, 2017 May 11, 2017
2016

Fund Based

OCC/ODBD 33.30 BWR BBB-

BWR BB
[Placed on
BWR BB+ Downgraded
TL/DPN 25.46 CreditWatch BWR BBB-
Long (Pronounced as BWR BB and migrated to
with (Stable)
Term BWR double B plus) Reaffirmed Issuer Not
Developing Assigned
TL/DPN Outlook: Stable Cooperating*
31.56 Implications]
(Proposed) category

FDB 5.00 BWR A4

BWR A3
Downgraded
BWR A4+ [Placed on
PCFC/PC 29.70 BWR A4 and migrated to
Short (Pronounced as CreditWatch BWR A3
Reaffirmed Issuer Not
Non Fund Based Term BWR A Four plus) with Assigned
Cooperating*
Developing
category
BG 15.00 Implications]

Total 140.00 INR One Hundred Forty Crores Only

*Issuer did not cooperate; based on the best available information

Status of Non-Cooperation with other CRA:

ICRA, vide its press release dated 22​nd March 2019, ​has issued a rating update for delay in periodic
review of rating as the company has delayed in giving information..

Any other information: Not Applicable

Hyperlink/Reference to applicable Criteria

● General Criteria ● Manufacturing Companies

● Approach to Financial Ratios ● Short Term Debt

6 22 May 2019
Analytical Contacts Investor Contacts

Rajee R
Senior Director - Ratings
B :+91 80 4040 9940 Satish Nair
rajee.r@brickworkratings.com Director - Global Market Development & Investor
Relations
M : +91 7738875550
Naveen S B : +91 80 6745 6666
Ratings Analyst satish.n@brickworkratings.com
B :+91 80 4040 9940
Ext :346
naveen.s@brickworkratings.com

1-860-425-2742

Annexure I

Bank Loan Facilities

Amount
Bank Facilities Type Tenure
(Rs. Cr)

OCC/ODBD 33.30

TL/DPN Long Term 25.46

Canara Bank TL/DPN Fund Based 31.54

Main Branch, (Proposed)
Madikeri
FDB 5.00
PCFC/PC Short Term 29.70
BG Non Fund Based 15.00

Total 140.00

7 22 May 2019
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8 22 May 2019