June 28, 2017

Dharampal Satyapal Limited

Summary of Rated Instruments

Instrument* Rated Amount Rating Action

(in Rs. crore)
Long-term fund based bank facilities 376.36 [ICRA]AA- (Stable)/reaffirmed
(reduced from 429.93)
Long-term non-fund based bank 5.00 [ICRA]AA- (Stable)/reaffirmed
facilities (reduced from 45.00)
Long-term unallocated 118.64 [ICRA]AA- (Stable)/reaffirmed
(increased from 50.07)
Short-term fund based bank facilities^ 400.00^ [ICRA]A1+/reaffirmed
(increased from 75.00)
Total 900.00
(increased from 600.00)
Commercial Paper (CP) 50.00 [ICRA]A1+/outstanding
Non Convertible Debenture (NCD) 16.67 [ICRA]AA- (Stable)/outstanding

*Instrument Details are provided in Annexure-1

^Short-term fund-based facility is interchangeable to the extent of Rs. 50 crore with non-fund based facility and to the extent of
Rs. 9 crore with cash credit facility with a long-term rating of [ICRA]AA- (Stable)

Rating action
ICRA has reaffirmed the long-term and short-term ratings for the Rs. 900-crore1 (reinstated from Rs. 600-
crore earlier) bank facilities of Dharampal Satyapal Limited (DSL) at [ICRA]AA- (pronounced ICRA
double A minus)2 and [ICRA]A1+ (pronounced ICRA A one plus), respectively. ICRA also has a long-
term rating of [ICRA]AA- (pronounced ICRA double A minus) outstanding for the Rs. 16.67-crore NCD
programme, and a short-term rating of [ICRA]A1+ (pronounced ICRA A one plus) outstanding for the
Rs. 50-crore CP programme of DSL. The outlook on the long-term ratings is ‘Stable’.

Rationale
The ratings continue to take into account DSL’s strong operational and financial profile, which is
supported by its established brands, leadership position in the premium pan-masala segment which
supports its ability to pass on cost increases and pan-India presence through a strong distribution network
of about 1 million retailers. The company continues to enjoy reasonable pricing power given the strong
brand loyalty its customers exhibit and presence in a largely price-inelastic product segment (pan-masala).
As a result, despite the steep increase of about 40% in price of ‘Rajnigandha’ pan-masala during the past
three years, sales volume increased by about 30%. Thus, while ICRA notes that the tax incidence on pan-
masala manufacturers will increase considerably under the Goods and Services Tax (GST) regime, DSL’s
demonstrated ability to successfully implement price hikes without impacting sales volumes provides
comfort. Overall, DSL’s financial profile is expected to remain strong with a healthy profitability, capital
structure (expected TOL/TNW of ~0.5x for Mar’18), and debt-coverage indicators (expected Total
Debt/OPBDITA of ~0.8x for FY2018).

1
100 lakh = 1 crore = 10 million
2
For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications.
The ratings, however, continue to be constrained by vulnerability of DSL’s revenues and profits to
regulatory risks. Although the company is gradually transferring the tobacco business to another group
entity, it will continue to remain exposed to regulatory risks associated with pan-masala segment. Further,
over the years, the DS group has been diversifying into various business activities, the major being
hospitality business. Given the strong cash accruals, DSL has been supporting these diversification plans
of the group by way of investments in these ventures. As a result, DSL’s investments in group entities
stood at ~56% of its net worth as on Dec’16. Nevertheless, ICRA draws comfort from the fact that some
of these investments are discretionary in nature, and are subject to availability of cash flows.

While ICRA expects DSL to continue to generate strong cash accruals, quantum of financial support to
group entities along with its funding pattern, as well as scale of any major debt funded capex will remain
key monitorables. Besides, any changes in regulatory framework related to sale, marketing, taxation rate
or taxation mode of DSL’s products, and impact thereof will continue to be a key rating sensitivity. In this
context, ICRA will continue to monitor the exact impact of GST on DSL’s credit profile.

Key rating drivers

Credit strengths
 Established core brand, ‘Rajnigandha’, through which DSL holds leading market share in the
premium pan-masala segment in India
 Strong pan-India distribution network, along with track record of successful launch of new variants
with demonstrated ability to push sales
 Strong financial profile characterised by comfortable capital structure and strong debt-coverage
indicators
 Reasonable pricing power given the strong brand loyalty its customers exhibit and presence in a
largely price-inelastic product segment (pan-masala); despite the steep increase in price during past
three years sales quantity continues to grow
 Gradual shifting of tobacco-based products to a group entity starting December 2014, mitigates
vulnerability to adverse government regulations on tobacco products; however regulatory risk
associated with pan-masala segment continues

Credit weaknesses
 Product concentration towards Rajnigandha and its variants (~85% of total revenue), which will
increase further (to ~90%) with shifting of sales of tobacco-based products to promoter group entity
 Seasonality in working capital requirements, due to variation in production levels and payment of
statutory dues, which results in high utilisation of working capital limits during certain months
 Regulatory risks due to adverse impact of pan-masala and tobacco products on health
 Continuous deployment of cash accruals in diverse ventures which currently do not contribute
meaningfully to profits

Description of key rating drivers:

DSL is one of the leading players in the pan-masala industry, with a strong brand portfolio, widespread
distribution network and a demonstrated track record of successfully launching new products and
variants. Further, as the consumers of pan-masala exhibit strong brand loyalty, DSL has been able to
increase volumes and maintain its market leadership position despite increasing product prices over the
years.

DSL’s flagship brand in pan-masala segment is ‘Rajnigandha’, through which it is estimated to hold
~90% market share in the premium pan-masala segment; with premium pan-masala segment estimated to
be ~10% of the total pan-masala segment. Being a premium product, ‘Rajnigandha’ enjoys a strong brand
loyalty and healthy pricing power, resulting in a somewhat inelastic demand. However, ICRA notes that
any ban on pan-masala advertisement by the government can pose challenges to sale growth.

Pan-masala and tobacco products due to their adverse impact on health remain susceptible to changes in
government policies related to their sale. The government also disincentivises the consumption by levying
high taxes and periodically increasing the tax rates on sale of these products. Thus, ability of the
companies to pass on these hikes in taxes remains critical for their sales growth and profits. Apart from
taxation, the government also prohibits the sales of these products to dis-incentivise their consumption.
The instance of ban on chewable tobacco sales in Delhi in March 2015 and ban on sale of gutkha reflects
these risks.

While reaffirming the ratings, ICRA has taken a note of the increase in tax incidence on DSL under the
proposed GST regime. In this context, DSL’s demonstrated ability to successfully implement price hikes
without impacting sales volumes provides comfort. ICRA notes that DSL increased the price of its
flagship product by about 40% during past few years, despite which, the sales volumes increased by about
30%. Nevertheless, ICRA will continue to monitor the exact impact of GST on DSL’s credit profile.

DSL’s operating income grew by a modest 4.4% in FY2016 compared to a CAGR of 45% between
FY2013 and FY2015, largely owing to ongoing transfer of tobacco and related products to a group entity,
DS Chewing Products LLP3, in an effort to make DSL a tobacco free company. Although the pace of
growth in gross sales of pan-masala division also slowed to 25% in FY2016 compared to 49% in FY2015,
it remained healthy. Further, the growth in FY2016 was primarily volume-driven (17% growth in
volumes) vis-a-vis realisation-driven growth which affected volumes in the previous year. In FY2016 also
DSL had implemented a retail price hike, however, the impact of same on growth in sales volumes was
not observed, though it mitigated the impact of further increase in excise incidence.

The strong growth in DSL’s turnover since FY2013 was aided by healthy growth in sales quantity of both
pan-masala and tobacco products on account of DSL’s ability to push sales, aided in part by the ban on
sale of gutka. Also, the strong core profitability of DSL as reflected by Core ROCE of >40% is supported
by its leadership position in premium pan-masala segment. Although DSL generates cash accruals
significantly greater than required for its core business operations, its debt levels have not decreased over
the years on account of significant yearly incremental investments along with capex on a new corporate
office and a new integrated manufacturing facility. Nevertheless, its coverage indicators continue to
remain strong aided by strong operational cash flows.

Analytical approach: In addition to a detailed standalone operational and financial analysis of DSL,
ICRA takes a view on credit profile of the Dharampal Satyapal group while assigning ratings to DSL

Links to applicable Criteria

 Corporate Credit Rating Methodology

 Rating Methodology for Fast Moving Consumer Goods Industry

3 ICRA has [ICRA]A+(Stable) rating outstanding for bank facilities of DS Chewing Products LLP. Please refer to ICRA’s website
– www.icra.in., for detailed rating rationale
 About the company:
Incorporated in 1989, DSL is the flagship company of the DS Group, which has been in the tobacco and
pan-masala business for more than 80 years. DSL manufactures and markets pan-masala, mouth
fresheners, confectionaries, dairy products, and chewing tobacco, under the brands ‘Rajnigandha’,
‘Tansen’, ‘Pass Pass’, ‘Chingles’, ‘Pulse’, ‘Ksheer’, ‘Tulsi’ etc. The company, under its flagship brand
‘Rajnigandha’, is the leading player in the premium pan-masala industry in India on the back of its strong
brand appeal and a widespread distribution network. Pan-masala sales account for ~85% of the
company’s standalone revenues at present.

From December 2014 onwards, DSL began the process of shifting tobacco sales out of DSL and into a
newly formed entity within the group. With gradual transfers, its product portfolio is expected to become
tobacco-free by FY2019. During FY2014, DSL also demerged its food, beverage and packaging divisions
into separate companies along with transferring some of its investments in hospitality, real estate and
agriculture to new holding companies.

In FY2016, DSL reported an operating income (OI) OI of Rs. 4,392 crore, Operating Profit before
Depreciation, Interest and Tax (OPBDITA) of Rs. 770 crore and Profit after Tax (PAT) of Rs. 581 crore
against an OI of Rs. 4,205 crore, OPBDITA of Rs. 941 crore and PAT of Rs. 633 crore in FY2015.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for the last three years:

Table: Rating History
Current Rating Chronology of Rating History for the past 3 years
Name of Rated
S. Date & Date & Date & Date & Date & Date &
Instrument Type amount Date &
No. Rating Rating Rating Rating Rating Rating
(Rs. Rating
in FY2018 in FY2017 in FY2016 in FY2016 in FY2016 in FY2015
Crore)
June April April January August April April
2017 2017 2016 2016 2015 2015 2014
Fund Based: Long [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+
1 230.00
Cash Credit Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)
Fund Based: Long [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+
2 146.36
Term loans Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)
Non-fund Long [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+
3 5.00
based Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)
Short term Short
4 400.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1 [ICRA]A1
loans^ Term
Long [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+
5 Unallocated 118.64
Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)
Non
Long [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+
6 Convertible 16.67
Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)
Debenture
Commercial Short
7 50.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1 [ICRA]A1
Paper Term
^Short-term fund-based facility is interchangeable to the extent of Rs. 50 crore with non-fund based
facility and to the extent of Rs. 9 crore with cash credit facility with a long-term rating of [ICRA]AA-
(Stable)

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly
Complex". The classification of instruments according to their complexity levels is available on the
website www.icra.in
Annexure-1
Details of Instruments

Size of Current Rating

Date of Coupon Maturity
Name of the instrument the issue and
issuance rate Date
(Rs. Cr) Outlook
Non convertible
Dec 2010 11.15% Dec 2017 50.00^ [ICRA]AA-(Stable)
debenture
Cash credit - - - 230.00 [ICRA]AA-(Stable)
WCDL* - - - 300.00 [ICRA]A1+
Non-fund based limit - - - 5.00 [ICRA]AA-(Stable)
Short-term Loan 1 Jan 2017 - Jul 2017 50.00 [ICRA]A1+
Short-term Loan 2 Feb 2017 - Aug 2017 50.00 [ICRA]A1+
Term loan 1 Aug 2016 - May 2019 11.01 [ICRA]AA-(Stable)
Term loan 2 Mar 2016 - May 2021 35.35 [ICRA]AA-(Stable)
Term loan 3 Mar 2017 - Mar 2022 97.00 [ICRA]AA-(Stable)
Term loan 4 - - May 2019 3.00 [ICRA]AA-(Stable)
Unallocated - - - 118.64 [ICRA]AA-(Stable)
Source: DSL
^Rs. 16.67 crore outstanding
*WCDL facility is interchangeable to the extent of Rs. 50 crore with non-fund based facility and to the
extent of Rs. 9 crore with cash credit facility with a long-term rating of [ICRA]AA- (Stable)
Name and contact details of Rating Analyst(s):

Jayanta Roy Nidhi Marwaha

+91 33 7150 1100 +91 124 4545 337
jayanta@icraindia.com nidhim@icraindia.com
Deep Inder Singh
+91 124 4545 830
deep.singh@icraindia.com

Name and contact details of Relationship Contact:

L. Shivakumar
+91 22 6114 3406
shivakumar@icraindia.com

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Contents may be used freely with due acknowledgement to ICRA
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