Press Release

Kals Distilleries Private Limited

March 26, 2024

Facilities/Instruments Amount (₹ crore) Rating1 Rating Action

Long-term bank facilities 150.00 CARE BBB+; Stable Assigned

Non-convertible debentures
375.00 CARE BBB+; Stable Assigned
(Proposed)
Details of instruments/facilities in Annexure-1.

Rationale and key rating drivers

Ratings assigned to bank facilities and instruments of Kals Distilleries Private Limited (KDPL) derives strength from the company’s
long-standing presence and strong position in the Tamil Nadu market for Indian-made foreign liquor (IMFL) by its promoters’ vast
industry experience. Ratings also derive comfort from strategic acquisitions of backward-integrated entities – Thiru Arooran Sugars
Limited (TASL) and Terra Energy Limited (TEL), and their proposed merger with KDPL. Once completed, the merger is expected
to result in better control over its cost structure while saving tax outgo. Ratings further consider the significant improvement
expected in KDPL’s overall financial profile, led by recent and sizeable price hike by Tamil Nadu State Marketing Corporation
Limited (TASMAC). Planned refinancing of debt and availing additional debt is expected to improve KDPL’ liquidity profile, which
had worsened on the back of large-sized acquisitions in FY23.

However, ratings are constrained by the moderate leverage and debt coverage indicators on the back of delay in price hike by
TASMAC, while there had been significant increase in inputs costs. The large-sized debt-funded acquisitions, concentration risk
towards product and geography, volatile raw material prices, presence in a highly regulated industry, and refinancing risk
associated with the proposed non-convertible debenture (NCD) issue also constrain ratings.

Rating sensitivities: Factors likely to lead to rating actions

Positive factors
• Increasing total operating income (TOI) beyond ₹1,200 crore with profit before interest, lease rentals, depreciation and
taxation (PBILDT) margin of more than 15%.
• Improving debt/PBILDT below 2.50x.

Negative factors
• Significant delay in merger of TASL and TEL with KDPL.
• Inability to improve its debt/PBILDT below 3.50x by FY25-end.
• PBILDT margin below 13% in FY25.

Analytical approach: Consolidated

CARE Ratings has considered consolidated financials of KDPL, as there are strong operational, financial, and managerial linkages
among KDPL and its subsidiaries. Details of companies consolidated with KDPL is placed in Annexure-6.

Outlook: Stable
The stable outlook reflects CARE Ratings’ expectations of KDPL’s significantly improving revenue and profitability in the near term
on the back of sizeable price hike provided by TASMAC, which in turn, is expected to improve its leverage and debt coverage
indicators.

Detailed description of key rating drivers

Key strengths
Strong and longstanding market position in Tamil Nadu market
KDPL holds a strong market position among distilleries in Tamil Nadu, as the company had been one of the largest suppliers of
IMFL to TASMAC over the years, commanding about 12-14% of market share. It’s presence in the Tamil Nadu market dates back
to 2007.

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Complete definition of the ratings assigned are available at www.careedge.in and other CARE Ratings Ltd.’s publications

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Strategic acquisitions in the past and expected operational benefits

Over the years, promoters have gradually expanded capacity and added new products such as beer, sugar, bottles, among others,
to their product portfolio. To increase geographical presence, in FY19, promoters acquired a 2.5-million case IMFL capacity plant
from Netravati Distilleries under Kals Distilleries Carnataka Private Limited in Karnataka as a wholly owned subsidiary of KDPL.
Promoters further acquired a 4-million case brewery under Mount Shivalik Industries Limited (MSIL) in Rajasthan through the
National Company Law Tribunal (NCLT); the acquisition was approved in October 2021 and operations commenced in H2FY23.
Recently, promoters acquired TASL and TEL, which is an acquisition-cum-refurbishment project of a sugar crushing facility with
a 5,000-tonne cane crushed per day capacity, a 28.42-megawatt (MW) cogeneration plant, and a 60-kilolitre per day (KLPD)
distillery in Tanjore district, Tamil Nadu; these were acquired in May 2022 and January 2023, respectively, through NCLT.

With TASL and TEL commencing operations, about 60% of the extra-neutral alcohol (ENA) requirement of KDPL will be met
captively. Post-merger of TASL and TEL with KDPL, KDPL will also have sizeable savings of Goods and Services Tax (GST) on
procurement of extra-neutral alcohol (ENA), the merger of which is expected to be completed by FY25-end. Promoters acquired
Samyu Glass Private Limited (Samyu), a glass bottle manufacturing company, which is expected to meet about 80% of the glass
bottle requirements of KDPL going forward.

Significantly improving profitability expected on the back of recent price hike

Per regulations of the Tamil Nadu Government, the exclusive right of wholesale and retail of IMFL lies with TASMAC (government-
owned entity). Hence, 100% sales of KDPL are to TASMAC. There was some delay in revising IMFL prices, which was expected
in FY23, when input cost had gone up significantly, putting pressure on the company’s margins. After negotiations with
manufacturers, TASMAC has revised the rate upwards by ₹144 per case of IMFL from March 01, 2024. This increase in price with
benefit of backward integration for ENA and glass bottles is expected to significantly improve KDPL’s profitability, marked by
PBILDT of more than ₹180 crore in FY25 as against ₹32 crore in FY23.

Plans for debt refinancing with additional debt to improve liquidity profile
To fund the capex for refurbishing TASL’s units, funding its increased working capital requirement and fast-tracking the process
for merging TASL and TEL with KDPL, the management is at an advanced stage of raising ₹375 crore through NCD issue in FY24.
Tying-up the NCD issue on time and merging TASL and TEL will be key rating monitorable.

Promoter vast experience in the liquor industry

KDPL was promoted by S Vasudevan in 2009. Vasudevan has an overall experience of more than three decades in the liquor
industry. He has been involved in the group’s management and operations since inception and is well supported by other directors
– S Nadessan, S Rajasekaran, and V Arulmani Sekaran – all of whom have experience of more than two decades. The group has
a professional team of employees across functions with a strong know-how of the industry and its supply chain.

Liquidity: Adequate
The adequate liquidity is marked by refinancing and additional debt to be availed by KDPL for an aggregate amount of ₹375 crore
via NCD issue, which is expected to also meet the medium-term working capital requirements and capex requirements. KDPL will
have minimal term debt repayments in FY25 for outstanding term debt and NCD issue as against sizeable growth in its cash
accruals due to recent price hike of IMFL, providing comfort to its liquidity. KDPL’s working capital cycle stood comfortable at 28
days in FY23, however, it is expected to increase in the medium term, mainly due to higher inventory and receivables with TASL
and TEL commencing operations. KDPL receives payment from TASMAC against IMFL supply in about 15 days, against which
payments to creditors are made within 25-30 days. Working capital requirements are mainly funded through borrowings, leading
to an average utilisation of about 90% for last 12 months ended February 2024.

Key weaknesses
Product and geography concentration
KDPL manufactures IMFL under its own brands in the ordinary, medium, and premium segments, in Tamil Nadu. A single product
– Black Pearl brandy in the ordinary segment – contributed about 62% of its total income in FY23 and 70% in 9MFY24. Such high
concentration towards a single product and geography exposes KDPL to geographical concentration risk.

Moderate capital structure and debt coverage indicators

KDPL’s capital structure stood moderate, characterised by an overall gearing ratio of 1.23x as on March 31, 2023, deteriorated
from 0.54x as on March 31, 2022. KDPL completed sizeable acquisitions in FY23, whereby its operational performance was also
impacted due to delay in price hike by TASMAC, while inputs costs went up significantly. KDPL completed part of its acquisitions
from its internal accruals, leading to high working capital intensity. Owing to decline in profitability, debt coverage indicators have

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also deteriorated, marked by total debt (TD)/gross cash accruals (GCA) and interest coverage ratio (ICR) of 24.14x and 1.94x,
respectively, for FY23 (PY: 2.98x and 5.98x, respectively). TD/PBILDT also weakened to 10.06x as on March 31, 2023, against
2.03x as on March 31, 2022. Going forward, with refinancing of debt and expected improvement in profitability, TD/PBILDT is
expected to improve to below 3x by FY25-end.

Moderate profitability on the back of delayed price hike with rising input costs
KDPL’s profitability had been impacted through FY21-23 owing to the increase cost of ENA and glass, while IMFL prices remained
constant. PBILDT margin was reported at 12.49% in FY21, which declined to 10.73% in FY22, and further to 4.84% in FY23. The
cost of raw materials increased from 71% of the TOI in FY21 to 79% of the TOI in FY23. The moderation in profitability was
mainly due to the rising cost of ENA (key raw material) from ₹63 per litre in FY22 to ₹72 per litre in FY23. Sales volumes also
declined to 73 lakh cases in FY23 from 77 lakh cases in FY22 on the back of increasing MRP by the end-customer, TASMAC.

Highly regulated industry

The liquor industry is highly regulated in India, with each state controlling the production, sales, and duty structure independently.
While regulations act as high entry barrier, there are difficulties in the transfer of production from one state to another, with
substantial burden of duties and taxes. The state controls licenses for production, distributorship, and retailing. In Tamil Nadu,
where KDPL has major presence, the exclusive right of wholesale and retail of IMFL lies solely with TASMAC.

Volatility in raw material prices

Profitability margins are highly susceptible to volatile price of molasses and grains, which in turn, are governed by factors including
its supply, in turn, dependent on production, government regulations, demand from other sectors like biodiesel, among others.
Although the company maintains sufficient inventory of raw materials to shield itself from adverse movements in prices in the
short term, sustained high prices of raw materials affects its profitability.

Refinancing risk
KDPL has proposed to avail NCD of ₹375 crore for a tenor of five years. However, ₹145 crore of the NCD’s repayment obligation
at the end of the 18th month from the date of placement exposes KDPL to refinancing risk in FY26.

Applicable criteria
Consolidation
Definition of Default
Liquidity Analysis of Non-financial sector entities
Rating Outlook and Rating Watch
Manufacturing Companies
Financial Ratios – Non-financial Sector

About the company and industry

Industry classification
Macro-economic Indicator Sector Industry Basic Industry
Fast-moving consumer goods Fast-moving consumer goods Beverages Breweries and distilleries

Incorporated on November 12, 2007, KDPL is a closely held family-owned company. It commenced commercial operations in
2009 by setting up a distillery unit in Pudukkottai, Tamil Nadu. The company’s primary business activity is manufacturing of IMFL
products in Tamil Nadu. As on December 31, 2023, KDPL’s production capacity is about 10 million cases per annum of IMFL.

Brief Consolidated Financials (₹ crore) March 31, 2022 (A) March 31, 2023 (A)
Total operating income 665.83 664.67
PBILDT 71.43 32.18
PAT 41.16 8.31
Overall gearing (times) 0.54 1.23
Interest coverage (times) 5.98 1.94
A: Audited. Note: These are latest financial results available.

Status of non-cooperation with previous CRA: Not applicable

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Any other information: Not applicable

Rating history for last three years: Please refer to Annexure-2

Covenants of rated instruments/facilities: Annexure-3

Complexity level of instruments rated: Annexure-4

Lender details: Annexure-5

Annexure-1: Details of instruments/facilities

Rating
Date of
Maturity Size of the Assigned
Name of the Issuance Coupon
ISIN Date (DD- Issue along with
Instrument (DD-MM- Rate (%)
MM-YYYY) (₹ crore) Rating
YYYY)
Outlook
Debentures-
Non- 5 years from
CARE BBB+;
convertible Proposed Proposed 11% the date of 375.00
Stable
debentures placement
(Proposed)
Fund-based - CARE BBB+;
- - - - 45.00
LT-Cash credit Stable

Fund-based - CARE BBB+;

- - - 31/10/2028 105.00
LT-Term loan Stable

Annexure-2: Rating history for last three years

Current Ratings Rating History

Date(s) Date(s) Date(s) Date(s)

Name of the
and and and and
Sr. No. Instrument/Bank Amount
Rating(s) Rating(s) Rating(s) Rating(s)
Facilities Type Outstanding Rating
assigned assigned assigned assigned
(₹ crore)
in 2023- in 2022- in 2021- in 2020-
2024 2023 2022 2021
CARE
Fund-based - LT-
1 LT 45.00 BBB+;
Cash credit
Stable
Debentures-Non- CARE
2 convertible LT 375.00 BBB+;
debentures Stable
CARE
Fund-based - LT-
3 LT 105.00 BBB+;
Term loan
Stable
LT: Long term

Annexure-3: Detailed explanation of covenants of rated instruments/facilities

Name of the Instrument Detailed Explanation

A. Financial covenants -
B. Non-financial covenants KDPL’s TD should not exceed ₹525 crore

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Annexure-4: Complexity level of instruments rated

Sr. No. Name of the Instrument Complexity Level
1 Debentures-Non-convertible debentures Complex
2 Fund-based - LT-Cash credit Simple
3 Fund-based - LT-Term loan Simple

Annexure-5: Lender details

To view the lender wise details of bank facilities please click here

Annexure-6: List of entities consolidated

Sr. Name of Company/Entity Extent of Consolidation Rationale for
No. Consolidation

1 Kals Distilleries Carnataka Private Limited (KDCPL) Full These entities are
2 Mount Shivalik Industries Limited (MSIL) Full strategically important for
3 Thiru Arooran Sugars Limited (TASL) Full KDPL’s business and have
4 Terra Energy Limited (TEL) Full strong operational and
5 Sivachandra Industries Private Limited (SIPL) Full financial linkages with KDPL
6 Trinetra Beverages Private Limited (TBPL) Full

Note on complexity levels of rated instruments: CARE Ratings has classified instruments rated by it on the basis of
complexity. Investors/market intermediaries/regulators or others are welcome to write to care@careedge.in for any clarifications.

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Disclaimer:
The ratings issued by CARE Ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to
sanction, renew, disburse, or recall the concerned bank facilities or to buy, sell, or hold any security. These ratings do not convey suitability or price for the investor.
The agency does not constitute an audit on the rated entity. CARE Ratings has based its ratings/outlook based on information obtained from reliable and credible
sources. CARE Ratings does not, however, guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions
and the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE Ratings have paid a credit rating fee,
based on the amount and type of bank facilities/instruments. CARE Ratings or its subsidiaries/associates may also be involved with other commercial transactions with
the entity. In case of partnership/proprietary concerns, the rating/outlook assigned by CARE Ratings is, inter-alia, based on the capital deployed by the
partners/proprietors and the current financial strength of the firm. The ratings/outlook may change in case of withdrawal of capital, or the unsecured loans brought
in by the partners/proprietors in addition to the financial performance and other relevant factors. CARE Ratings is not responsible for any errors and states that it has
no financial liability whatsoever to the users of the ratings of CARE Ratings. The ratings of CARE Ratings do not factor in any rating-related trigger clauses as per the
terms of the facilities/instruments, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and
triggered, the ratings may see volatility and sharp downgrades.

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