SME Digest Cover - careratings.com Digest... · I am proud to present this fifth issue of CARE SME...

�Impact investment: A new concept in SME financing

�Trend of PE investment in SME segment

�SME Stock Exchange: A grand success?

�Rupee depreciation – impact on SMEs

SMECARE

October 2013

DigestSMALL MEDIUM ENTERPRISES

CARE SME Digest October 2013

2

About CARECARE Ratings commenced operations in April 1993 and over nearly two decades; it has established itself as the second-largest credit rating agency in India. With the rating volume of debt of around Rs.48,250 bn (as on March 31, 2013), CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings has also emerged as the leading agency for covering many segments like that for banks, sub-sovereigns and IPO gradings.

CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

With majority shareholding by leading domestic banks and financial institutions in India, CARE’s intrinsic strengths have also attracted many other investors.

CARE’s registered office and head office, is located at 4th floor, Godrej Coliseum, Somaiya Hospital Road, Sion (East), Mumbai 400 022. It has also started its second office in Mumbai at Andheri since June 2013. In addition, CARE has regional offices at Ahmedabad, Bangalore, Chandigarh, Chennai, Hyderabad, Jaipur, Kolkata, New Delhi, Pune and international operations in Male’ in the Republic of Maldives. With independent and unbiased credit rating opinions forming the core of its business model, CARE Ratings has the unique advantage in the form an External Rating Committee to decide on the ratings. Eminent and experienced professionals constitute CARE’s Rating Committee.

Compilation Team

Mehul Pandya : Chief General Manager Email: [email protected] Cell: +91-79-40265656

Yogesh Shah : Dy. General Manager Email: [email protected] Cell: +91-79-40265603

Nitin Jha : Manager Email: [email protected] Cell: +91-79-40265619

Sameer Shaikh : Graphics Designer Email: [email protected] Tel: +91-22-6144 3510

CARE’s SME VerticalValue-added services for SMEs

• Wide product offering: MSE Rating, SME Rating, Bank Loan Ratings, Due Diligence Services• Data base of more than 6,000 SME entities • SME digest: A Quarterly publication for analytical inputs• SME Newsletter: Daily publication on news in SME sector• Operating from ten branches across India• MoU with leading banks for interest & rating fee concession • A team of qualified analysts


3

Table of ContentFrom DeskMr.D. R. Dogra, MD & CEO - CARE Ratings .............................................................................. 6

Mr. Mehul Pandya, Head - SME, CARE Ratings ......................................................................... 7

Research & Articles1. Impact Investment: A new concept in SME financing .................................................Page 10

2. SME Stock Exchange: A grand success? ........................................................................Page 13

3. Succession planning – Importance for SMEs ................................................................Page 17

4. Trend of PE Investments in SME segment ....................................................................Page 21

5. Rupee Depreciation – impact on SMEs ..........................................................................Page 23

Rating Guide1. Rating approach for SME/MSE ratings ..........................................................................Page 28

2. NSIC-CARE MSE Rating Scale & Definitions ...............................................................Page 31

3. SME Rating Scale & Definitions ......................................................................................Page 32

Leading SMEs1. Analysis of highly rated small-scale entities .................................................................Page 34

2. Summary profile of micro & small enterprises rated by CARE .................................Page 36

3. Profiles of top rated micro & small enterprises ............................................................Page 37

Recognition1. Testimonials from entities rated by CARE ....................................................................Page 55

Learning1. Case Study ..........................................................................................................................Page 57

Awareness Efforts1. Synopsis of seminars and events organised by CARE ................................................Page 60

2. Forthcoming event ............................................................................................................Page 62

3. New launches ....................................................................................................................Page 63

4. MSME News updates .......................................................................................................Page 65

This pag

e is i

ntentio

nally

left b

lank

From Desk


6

In the Mid-Quarter Monetary Policy announced on September 20, 2013 the RBI, in a move against market expectations, raised the key repo rate. Some liquidity tightening measures that were introduced since July 2013 were rolled back as expected. The Federal Reserve, on September 18-19 decided not to taper its US$ 85 billion per month asset purchase programme. This has prompted foreign investors’ perception of emerging market economy stocks to move back into the value territory. The raising of domestic interest rates would allow for additional interest rate differential, making local investment lucrative for foreign investors. Foreign inflows are critical for India to sustainably finance the CAD and to stabilize the exchange rate. The partial roll-back on liquidity tightening measures (reduction in MSF rate and minimum daily CRR requirement) are aimed at providing liquidity and softening short-term rates, thus restoring the yield curve.

The increase in repo rate will put pressure on banks to revise their deposit and lending rates. Higher interest rate will push up the savings; however the same will deter fresh investment in the economy. The SMEs in particular will be affected as the larger companies could still access funds at closer to the base rate or the ECB market.

The measures taken by RBI to control liquidity reflect that there are very less chances of interest rate reduction in near future. However, we might see interest rate going up. Therefore, the increase in interest rate or high interest rate had direct impact on profitability of SMEs, who normally have leveraged capital structure due to their dependence upon the banks for their finance requirements. The reliance on external borrowings in SME segment is almost 1.90 times its networth, which is comparatively higher than large corporates.

Some SMEs in India operate in niche segment; they are safer due to better bargaining power and sturdy competitive position. Apart from this, strong business fundamentals and best practices followed are other factors which keep them immune from such situation. In this issue of SME Digest, articles on Impact investment which is a new concept in SME financing, report on entities listed on SME exchange, why succession planning is important and SME segment which is fast becoming hot pick for PE investors are good read which I hope would encourage many of our clients to adopt the best practices and standards.

D.R. Dogra,MD & CEO, CARE Ratings

From MD’s Desk


7

I am proud to present this fifth issue of CARE SME Digest. Having started in September last year, the journey has been an evolving one for our team. We are indebted to our valuable readers whose genuine feedback has helped us immensely to improve our publication.

SMEs make significant contribution globally in enhancing economic dynamism, achieving balanced growth, innovation and job creation. Development of this sector has been widely acknowledged as a crucial policy initiative for growth - both in developed and developing economies. Recently, CARE undertook a study aimed to identify the effective policies in major Asian economies through a comparative analysis.

The study suggests that the policymakers need to prioritize the issues and identify effective policy options in the four key parameters (ease of doing business; adequacy of cash flows to flourish the business; strengthen entrepreneurship through education and training; and strengthening of networking and information dissemination) pertaining to the requirements of SMEs in their region. Another major outcome of the study is the need to focus on the implementation and effectiveness of the policy framework to ensure that its benefit reaches to the SMEs on a large scale. This is specifically applicable in India wherein the policies are in place but on the effective implementation front, it still has a long way to go to match the pace of development of some of its Asian counterparts.

The detailed study report can be accessed on our website.

“Consistently giving your best is a policy in itself”.

Mehul Pandya Head – SME, CARE Ratings

From Head-SME

This pag

e is i

ntentio

nally

left b

lank

Research & Articles


10

Impact Investment:A new concept in SME financingGlobally, innovative models are being explored to provide better funding alternatives to SMEs; one of them is Impact Investment. These investments are made into SME companies / organizations / funds with the purpose to produce quantifiable social and environmental impact alongside a financial return. The impact investors here target a range of returns - from well below the market up to market rate, depending upon the business model of the issuer. There are certain bodies and associations working for effective impact investing by building critical infrastructure and developing activities, education, and research that attract more investment capital to poverty alleviation and environmental solutions.

Importance of SMEs in Social sectorSocial sector is an inseparable element of any economy. As per the Indian Economic Survey for 2012-13, community, social and personal services contributed 14.3% to Indian GDP with a CAGR of more than 7% for the last five years. Many NGOs, trusts, proprietorship firms and companies are present in social sector, which is mainly dominated by the SME segment. India is estimated to have had around 3.3 million NGOs in 2009, just over one NGO per 400 Indians, and many times the number of primary schools and primary health centres in India. These SME entities including NGOs also provide infrastructure services to rural areas, education and healthcare services too. The main source of funds for these entities has been government spending and PSUs.

Further, hitherto non-tradable services including those in the government and social sectors are becoming domestically tradable. This really supports the new concept of impact investment as one of the new funding alternatives for these SMEs.

Concept developmentSocial entrepreneurship and impact investing are rapidly growing fields, not only in Asia but also globally. Both are relatively new fields. In fact, “impact investing” is not a term one would have heard five years ago. Part of the reason for the accelerated growth in these fields is a realization that, especially in these times of fiscal austerity in many parts of the world, there is simply not enough philanthropic and government spending to address the world’s most pressing issues. At the same time, there is a growing realization that the best way to address certain development issues is to harness the power of the private sector.

The persistence of poverty and its related challenges, rising inequality and mounting environmental concerns, coupled with a willingness to try new tools to address these concerns is what led to the development of the impact investing sector.

What is the Social Capital Market?Social Capital Market is a stock market for meeting the financial transaction needs of social enterprises & impact investors. Social Enterprises (SEs) are business-oriented, not-for-profit organizations or mission-oriented, for-profit entities having a social and/or environmental cause at the core of their work but seek to operate in a financially sustainable manner e.g. Micro Finance Institutions, SMEs in education, energy, health & agro-business, etc. Impact investors are generally seeking investments that create positive social and environmental impact beyond financial return e.g. social VC funds, microfinance investment vehicles, pension funds, mutual fund managers, institutional fund managers, sovereign wealth funds, endowments/family foundations, etc. All the transactions are routed through this Impact Exchange.


11

Modes of investment The impact investments can be in the form of private equity, loans, mezzanine finance etc. These investments can be made directly in the instrument or through funds or third-party managers/advisors, etc.

SharesFor-profit, Social Enterprises can access equity capital through offerings of shares on Impact Exchange. Investors can expect to receive an economic return through dividends (and potentially capital appreciation), as well as social returns, represented by the increased social impact generated by virtue of the investment.

Participating Social Enterprises will gain access to a source of equity capital to fund expansion at a valuation that should reflect both the economic and social/environmental values of their businesses.BondsBonds may be issued by for-profit Social Enterprises, which will pay interest and principal on the bonds from the profits generated in their businesses, as well as by not-for-profit Social Enterprises with income streams that provide a source for repayment of the bonds. Participating Social Enterprises can access a new source of capital to fund expansion, potentially at lower cost than other financing sources. Investors can expect to receive an economic return – through receipt of interest and eventual return of their principal – as well as social/ environmental returns.

Building social capital infrastructure In order to build an effective social capital infrastructure, the following four elements need focus. The first element would be platforms that connect SEs in search of capital and impact investors in search of strong projects to fund i.e. an Impact Exchange. Secondly, it also includes creating the impact assessment tools that help SEs measure and communicate their social and environmental impact to investors. Thirdly, we need to build a database about the sector. Fourthly, a detailed regulatory framework should be in place to prevent misuse of invested capital.

Stock Exchange: An Impact Exchange has to be established with clear listing criteria to promote and reward the best social purpose businesses in an environment that ensures transparency and accountability for investors. Exchanges must have to utilize criteria typical of a traditional exchange – e.g. corporate governance, accounting standards, operating track record, and financial performance and add requirements to limit inclusion to companies with core social or environmental missions and ensure that listed Social Enterprises do deliver a double – (financial and social) or triple – (financial, social and environmental) bottom line return.

Impact Reporting and Investment Standards (IRIS)IRIS is a set of metrics that can be used to describe an organization’s social, environmental, and financial performance. IRIS is designed to address a major barrier to the growth of the impact investing industry - the lack of transparency, credibility, and consistency in how organizations and investors define, measure, and track their performance. The IRIS initiative has three main components: (1) developing and refining IRIS; (2) increasing accessibility of IRIS promoting IRIS use; and (3) encouraging voluntary contribution of self-reported, anonymous IRIS performance data to provide additional market intelligence.

By using IRIS to track social, environmental, and financial performance, a wide range of investors and organizations can communicate their social, environmental, and financial performance using the same terms and definitions. This consistency helps investors evaluate and compare performance for more accurate assessment and comparison, and helps portfolio organizations track and improve their business and social performance.


12

ReportsEach listed entity will be required to provide investors with both regulated financial reports and social/environmental reports that will be audited by third parties.

Social/environmental reports will be based on criteria accepted by the Impact Investor and Social Enterprise communities and established by Impact Exchange.

DataImpact Exchange needs to offer a market data feed on Social Enterprises and players in the ecosystem to key news services, as well as to other interested parties and investors. This information will be vital to the Impact Investors, research firms, brokerage firms and others who will stimulate transactions on the exchange.

Global initiativesProf. Shahnaz is the founder of this concept and has actually implemented it in reality. After selling her business, she returned to Singapore from USA and began exploring the notion of creating a stock exchange for SEs that would eliminate many of the barriers to market opportunity that currently exist and help them scale to their full potential. While the idea was in its very early conception, the Rockefeller Foundation came across her writings on the topic and promptly became the first organization to support the creation of the first of its kind, Impact Investment Exchange Asia (IIX). IIX’s work is also supported by the Rockefeller Foundation, the Asian Development Bank (ADB) and the Economic Development Board of Singapore (EDB). Like a traditional stock exchange, Impact Exchange will provide liquidity to investors by supporting listing, trading, clearing and settlement of securities, issued by social enterprises. IIX anticipates launching Impact Exchange in the second half of 2013. Once operational, Impact Exchange will allow investors to purchase and trade shares issued by for-profit Social Enterprises and bonds issued by either for-profit or not-for-profit Social Enterprises.

South Africa-based advisory firm Nexii had been involved in creating Impact Exchange in that region and some regulatory material including development of IRIS. Recently, in a collaborative move to strengthen and standardize the impact investing sector, Nexii announced transfer of its role in Impact Exchange to IIX. Also, with effect from May 6 2013, IIX has taken over the cooperative management of Impact Exchange with the Stock Exchange of Mauritius (SEM). This Impact Exchange now aims at being a social stock exchange with significant global reach, from Africa to Asia, two regions in the most need of capital assistance for sustainable development.

Conclusion Impact Exchange is a pioneering effort to use public markets for developing Social Enterprises through investment capital. As per an estimate by J.P. Morgan, there is an investment opportunity of approximately USD 400bn to 1trillion over the next decade in housing, rural water delivery, maternal health, primary education, and financial services, where Impact Exchange can really make its impact. The initiative is good and efforts are really excellent as well as in the right direction. A speedy drive with regulatory support from various countries, including India, can boost one more source of finance for growing SMEs with impactful objective.

Contributed by: DR Dogra, MD & CEO, CARE Ratings

(This article was specially contributed by CARE to SME World magazine and was published in its Special Anniversary Issue in Sept 2013)


13

SME Stock Exchange:A grand success?Virtually one and half years have passed since the setting-up of two SME exchanges ‘BSE SME Exchange’ and ‘NSE Emerge’ in March 2012. Modelled on the efficacious running junior exchanges in developing as well developed countries, this step was in the right direction aiming to take care of the equity needs of SME segment. BSE management set an ambitious target of 100 listing in the first 15 months of launch. Without any doubt, the effort this time was more sincere taking all stakeholders into consideration. Hence, let us gauge the accomplishments till date.

Really helpful in funds mobilization across different sectorsSince BSE has introduced SME listing, it has recorded 32 initial public offerings (IPOs) worth Rs.250 crore till September 13, 2013. Further, the approvals for another three-four companies are in place and these offerings could be launched soon. These IPOs are ranging between Rs.2 crore to Rs.28 crore each. Though the number is quite lesser than the target, the beginning seems fine.

NSE Emerge, on the other hand, has seen three listings and few are in line and have filed DRHP for the same.

Sector -wise fund raising by SME Segment on BSE SME Exchange

Source: www.bsesme.com, www.bseindia.com. *Data includes companies who have filed DRHP for listing

The financial services sector makes the highest contribution in fund raising in the BSE SME IPO. It has raised Rs.118.66 crore (28%) of the total fund raised by the SMEs. Apart from financial services, consumer durable was the second-highest sector with 17% of the total funds raised by the SMEs. Miscellaneous sectors include industries like Media, Healthcare, Logistics, Textile and Technology companies. In total, these industries had raised Rs.124.71 crore, which is almost 29% of total amount.


14

Surprisingly better return than BSE Sensex in last nine months

*Till September 13, 2013

The above chart shows the relative performance of two indexes viz BSE Sensex and BSE SME IPO Index. We have considered December 2012 as the base month assuming 100 points for the month’s index value and have compared the returns on the scale. The comparison shows that a BSE SME index has clearly outshined BSE Sensex for the nine month period December 2012 to September 2013. While BSE Sensex has been almost on flat level, BSE SME IPO has given ravishing 150% returns to the investors.

Low volume & liquidityThough returns are high, we must also note that there is a huge difference in volume traded on S&P BSE Sensex and S&P BSE SME IPO. Due to recent economic uncertainty and huge volume of trading, BSE Sensex is very much volatile. Whereas BSE SME is in its initial stage and is having very low volume. As of now, the stocks listed on BSE SME exchange have very low liquidity starting from around a couple of thousand shares, and all stocks listed do not get traded every day.

To overcome this challenge, regulators have mandated market-making provisions to generate liquidity. Market making is a way of adding to the liquidity of individual stocks. Market makers are member brokers of stock exchanges registered specifically and they adhere to certain given criteria. The job of Market Makers is to essentially support the stock by giving two-way quotes on a daily basis and also to hold a minimum specified amount of capital or stock in the SME. They have to use only proprietary funds for this purpose; and if required, any designated nominee investors can land money and stock. As on date, there are around 60 different market makers which are registered with BSE SME. In most of the listed and DRHP-filed SMEs, average 86% of stake is held by the market makers; which provides visibility on liquidity fronts for SMEs. It is too early and one has to wait & watch for how liquidity picks up.

Quoting above issue priceDue to volatile economy and a poor GDP growth rate the BSE Sensex is fluctuating and is almost at the same level of the base month considered. However, most of the SME IPOs have been successful so far and have received good response from the market. Out of total 32 listed SMEs, more than 20 SMEs are trading above their issue price. Below table provides us details on returns on investment against the issue price.


15

Company Name Issue Price Current Market Price

Returns EPS PE

(In Rs.) (In %)

Bullish Stocks

GCM Securities Ltd 20 165 725 0.14 1203.22

Looks Health Services Limited 40 292 630 0.07 4000.00

SRG Housing Finance Ltd 20 102 410 0.78 130.17

Max Alert Systems Limited 20 90 350 1.43 62.93

Eco Friendly Food Processing Park Ltd 25 88.5 254 1.76 52.79

Esteem Bio Organic Food Processing Ltd 25 87.35 249 1.71 51.07

HPC Biosciences Limited 35 116 231 1.87 62.03

Samruddhi Realty Limited 12 35 192 2.20 15.9

Comfort Commotrade Ltd 10 26.5 165 0.11 239.65

Sunstar Reality Development Ltd 20 42.7 114 0.10 423.92

eDynamics Solutions Limited 25 47.5 90 0.02 2488.70

Ashapura Intimates Fashion Limited 40 71.5 79 1.75 39.34

Channel Nine Entertainment Ltd. 25 44.45 78 0.09 516.97

RCL Retail Ltd 10 16.95 70 0.14 124.94

India Finsec Limited 10 15.8 58 0.38 42.67

Jupiter Infomedia Limited 20 25.8 29 0.26 97.66

Bothra Metals & Alloys Ltd. 25 30 20 2.40 12.5

Anshu’s Clothing Limited 27 31.2 16 0.32 97.27

Sangam Advisors Limited 22 24.95 13 0.17 146.42

Money Masters Leasing & Finance Limited 15 17 13 0.55 31.17

Tiger Logistics (India) Ltd 66 69.1 5 10.99 11.01

Kushal Tradelink Limited 35 35.75 2 1.72 20.50

BCB Finance Limited 25 25.25 1 0.86 29.44

Bearish Stocks

Lakhotia Polyesters (INDIA) Limited 35 34 (3) 0.27 126.68

Jointeca Education Solutions Ltd 15 14.5 (3) 0.28 51.98

Silverpoint Infratech Limited 15 13 (13) 0.25 52.59

Kavita Fabrics Ltd 40 33.6 (16) 0.28 120.42

VKJ Infradevelopers Limited 25 18.5 (26) 0.07 262.17

GCM Commodity & Derivatives Limited 20 14.6 (27) 0.33 44.68

Alacrity Securities Limited 15 8.6 (43) (0.40) (21.59)

Bronze Infra Tech Ltd 15 7.4 (51) 1.37 5.39

Onesource Techmedia Limited 14 4.6 (67) 0.22 20.94Source: www.bsesme.com, www.bseindia.com, share price of stocks are updated as on September 13, 2013

From the above table we can see more than 70% of the total listed SMEs have benefited due to listing. To be precise, GCM Securities Ltd and Looks Health Services Limited has a promising stock price. Stocks of these two companies have jumped by 725% and 630% to Rs.165 and Rs.292 against their issue price of Rs.20 and Rs.40 respectively. Other stocks like Max Alert Systems and SRG Housing Finance Ltd have also shown remarkable growth of 410% and 350% each to Rs.102 and Rs.90 against its issue price of Rs.20. The reason behind surging market price of these stocks was remarkable growth in the operations of these companies for the financial year 2012-13. The operating profit has shown an impressive rise as against the preceding year. With an improved networth and almost zero debt level, the capital structure has also been very strong resulting in strong solvency position. Due to listing, these companies got the visibility in the capital market and have helped them to grow their business resulting in higher stock price of stocks.

Other 30% companies stocks have seen a bearish sentiment. The share price of BCB Finance Limited surged by a mere 1% to Rs.25.25 against its issue price of Rs.25 whereas Alacrity Securities Limited, Bronze Infra Tech Ltd


16

and Onesource Techmedia have seen their stock prices deteriorating by 43%, 51% and 67% respectively. Here, it should be noted that some of these companies have not published their financial reports on their website; hence it is not possible to understand the financial position of the company. This could be one of the reasons towards sluggish movement of their stocks. Further, the current price even looks skeptical as it is difficult to calculate the valuation of the stock without annual report or financial statements.

High PE and low EPS If we consider the PE and EPS ratios of these companies, then the stocks look overvalued. However, it’s been less than a year that these stocks got listed on exchange and hence there is not enough track record to judge the performance on these parameters.

Investing in SME entails high risks with potentially high returns. Let’s take an example of Esteem Bio Organic Food Processing Ltd, a company that has stood out with its performance in these volatile markets. This company was listed at a price of Rs.25 and has seen price rising more than threefold to Rs.87.35 since then. It is now looking to raise capital by means of a Rights issue.

SME Fundamental Grading seems helpfulSME fundamental grading is an independent and professional opinion on the fundamentals of the issuer. The grade assigned to any individual issue represents a relative assessment of the ‘fundamentals’ of that issuer. CARE assesses the overall fundamentals of an IPO on a five-point scale where five represents “strong fundamentals” and one represents “poor fundamentals”. Fundamental grading would involve an in-depth assessment of the various quantitative and qualitative parameters of the issuer. Quantitative parameters include growth prospects of the industry, financial strength & operating performance of the issuer whereas, qualitative parameters primarily include management capability, promoters’ evaluation, accounting policies and corporate governance practices. Grading based on such a detailed analysis is expected to provide inputs for investment decision. The issuer would also be benefited as it would help them in benchmarking themselves in the market place.

CARE Ratings has assigned SME Fundamental grade 4/ 5 indicating very good fundamentals to Ashapura Intimates Fashion Limited (AIFL). AIFL is engaged in the business of designing, branding, marketing and retailing of intimate garments through a well-developed & wide distribution network. Just for information, the stock of this company has jumped by almost 80% to Rs.72 against its issue price of Rs.40.

ConclusionTo conclude, earlier, although many benefits were associated with public listing, the SMEs were not able to access the capital markets through the existing Stock Exchange platforms due to the stringent regulatory, disclosure and financial requirements. Dedicated SME stock exchange platforms have allowed the SMEs to access capital markets easily, quickly and at lower costs. The BSE SME Exchange has also provided better, focused and cost-effective service to the SME Segment. The Exchange has provided easy access for raising funds and future financing opportunities to SMEs. Highlight of the SME listing has been the increased visibility of the organization. It also facilitates growth via mergers and acquisitions on a larger platform.

However, to increase the trading volume in the exchange, the regulator should take some initiatives like mandatory fundamental grading for the companies desiring to get listed on exchange. This will safeguard the interest of the companies, investors as well as market intermediaries.

Contributed by: Jagrut Khairnar, Manager


17

Succession planning:Importance for SMEsSuccession planning –What it means The term ‘succession planning’ connotes the identification of second rung of leaders from amongst the organization’s top performers to be groomed towards occupying the top management slots, in the event the present set of top rung managers vacate their positions. The need to vacate the positions may arise owing to retirement, resignation, to pursue other interests or owing to unforeseen/natural causes such as disease/death which renders them incapable of discharging the critical top managerial responsibilities.

Most professionally managed organizations have clear succession plans which are laid out a number of years before the key top managerial roles become vacant, so that there is a seamless transfer of responsibilities to the successors with minimum disruption to the business, with the successors being trained by the top management in various nuances of management.

SMEs –Family-owned vs first-generation entrepreneurHowever, taken in the context of SMEs, succession planning seems to be still in very early stages of evolution. SMEs are typically managed by the promoter, who is either a first-generation technocrat entrepreneur or part of a family which has been engaged in the same line of business for a few decades. In the case of the latter, being family-owned business, the offspring of the promoters invariably take to the family business. Here also issues of continuity may arise when the latest generation is not entrepreneurially bent and wants to take up salaried vocation or has other business interest disconnected from the family line of business.

Business passionately nurtured by promoters’ personal drive In case the promoter is a first-generation entrepreneur, the risks associated with continuity of business and therefore disruption in case the promoter is unable to concentrate on the business is relatively high. As the key person in charge of the business, he/she has taken the full onus of growing the business over a period of time. The money invested is the promoter’s. Purely through his/her technical expertise /professional acumen/business sense as well as the personal drive to excel, the promoter normally passionately nurtures his business. The drive exhibited by the promoter in some instances cannot be replicated by the next rung which simply executes the instructions of the promoter.

Though these risks are more pronounced in proprietorship business, in the case of partnership also, where a strong active partner decides to dissociate himself from the firm, the same disruption may be expected where the other partners have not really been involved in the day-to-day operations of the firm/are not people of vision.

Empirical evidence from studies Based on a study of SMEs in the UK undertaken by Legal & General and unbiased.co.uk, the death of the promoter would impact the business the most, as 43% of the SME respondents selected this as the most disruptive scenario, followed by reasons such as severe damage from fire (23%) and critical illness of promoter (14%). Almost 12% of the SME owners in this study had responded that the business might cease operations immediately as a result of death/critical illness of the promoter himself/herself or the key employee. 42% of the SME owners predicted that the business would ultimately cease operations owing to these reasons, although 25% of the same expected ceasing of operations within the first year, 6% within the second year and 11% after


18

two years. Despite this more than half (57%) of SMEs in the UK, based on the study, do not have any form of protection to safeguard the business against the risks associated with losing the promoters.

This scenario, despite 27% of SMEs predicting, that it could take between three to six months, to be able to find and train a suitable replacement following the loss of a key worker, while almost 24% felt that the time could extend between six to twelve months. 8% felt it could take one year to 18 months.

The reasons attributed include cost of protection (27% of respondents), whereas 17% had not even considered the need to put in place such protection /safeguards.

In another research study conducted by Scottish Widows Survey, more than 50% of the SMEs were found to be in the risk of ceasing to trade if and when confronted with loss of one or more critical people to illness, death, or their impairment in capacity to engage in business. Despite such grave risk to business continuity, only about 17% of the respondents had protected themselves against this risk through insurance.

At the same time, over 75% of the respondents to the Scottish Widows survey believed there is at least one such critical employee in the organization, whose loss would seriously impair profitability/survival of the business. Despite this 77 per cent of the respondents admitted to never having sought any advice on business protection insurance.

SMEs are operating in an uncertain economic environment wherein promoters are focusing on meeting the day-to-day operational hurdles and hence important strategic issues such as succession planning for long-term survival of business seem to have taken a back seat. This observation is supported by the Scottish Widow Survey, wherein nearly 70 per cent of companies identified ‘delivering on commitments and promises to customers’ as the most important aspect of their business. Nearly a third (32%) of firms felt that covering their fixed overheads was one of the top priorities.

In contrast, insuring against the death of a key person was picked out by just 3 per cent as their biggest priority. The results were almost identical when it came to insuring against a key person suffering a critical illness or long-term incapacity.

Over three quarters of respondents to the report are an owner, founder, partner or all three of the company, and 82 per cent are micro businesses made up of fewer than ten employees.

Katya MacLean, Protection Specialist at Scottish Widows, said: “Companies need to look carefully at succession planning and all the risks posed to a business regardless of how likely they are to happen to ensure they can continue to meet what they consider their key business priorities, whatever the eventuality”

Succession planning is required and critical Despite the zeal for doing business and having grown in to a sizeable level, the promoters also age with time. Their ability to move along with the times does come down. Age and disease may catch up with the promoters. Further with passage of time, the promoters sometimes get into a time warp and are unable to think of new ideas/avenues. All these reasons require them to plan ahead. Having taken such pains to establish the business, no promoter would want it to die the day he dies. The business essentially is a legacy which promoters would want to continue beyond their life span.


19

A mini case study Let’s look at a hypothetical example to drive home this point. Mr Sharma has been involved in manufacturing of plastic containers which have varied domestic storage applications. Mr Sharma runs the business as a proprietorship and has been involved in this business for almost four decades, having established it immediately after completing his graduation in engineering. Being about 65 years old, Mr Sharma is well respected among his corporate clients as well as suppliers. They have been associated with him right from his early days in setting up the business.

The business has now grown to about Rs.5 cr in turnover and though by scale it is small, it has been making continuous and healthy profits. While Mr Sharma has been fully focused on his business, his only son is not entrepreneurially bent. He has completed his MBA in Finance and is employed in a bank. Nobody else in Mr Sharma’s extended family is interested in this business. Also, Mr Sharma has only a trusted deputy Mr Varma, as overall administrative in charge. He is also 60 years old.

The moulding facility with about 500 tons production capacity is managed with about 15 employees who are basically good at following instructions.

The bankers have been telling Mr Sharma to look for successors indirectly, given his age and the bankers need to ensure smooth repayment of their debt obligations. The bankers have already decided, internally, not to enhance working capital limits any further and not to assist his capex programs going forward.

Mr Sharma suffers his first heart attack at the age of 66 years. With tremendous will power he resumes his duties in a period of four months, but not before significant loss of confidence from all stake holders. The suppliers start calling up his wife, for their dues, while customers start looking at alternative vendors. Banks started running down their limits slowly. The admin incharge, Mr Varma is totally out of depth, having lived in Mr Sharma’s shadow for decades. Production and sales plummeted by 50% for the captainless ship. Profitability and cash accruals are hit. Payment obligations to creditors and banks are not honoured on time amidst this confusion while nobody follows up with customers for collection. Raw material inventory piles up with production cuts.

What was a smooth sailing growing, wealth-creating enterprise has come to a crippling halt in a matter of four months –thankfully Mr Sharma is back but his health both physical and mental peace have taken a severe beating. He has to start from scratch to bring things back to ship-shape and it could take another 18 months to do it, provided he is healthy enough to manage the physical and mental stress. But not all nightmares have such a relatively happy ending.

So plan for your successor So, specifically in case of SMEs, promoters require to do succession planning with a clear thought process that the business should survive beyond the promoter’s life. This assumes much greater importance in SMEs in terms of the process itself, because unlike the bigger corporate, the promoters do not have the luxury of hand picking from a vast talent pool of employees so that the best with maximum strengths can be selected and groomed to be the next chief executive officer.

So, the promoter has to start planning much earlier at the time of recruiting the few people that he does, typically in finance and administration. The recruitment should be ideally young professionals with an entrepreneurial bent of mind supported by relatively experienced people, ideally retired bank managers /retired PSU technocrats , who can provide the experience and direction to the young managers. The recruitment


20

should ideally happen with the long-term perspective in mind as against the thought process of “he is there only to help me, after all I am available and will control and direct everything”.

This long-term perspective is critical. Such recruitment and availability of a capable second rung also enables the promoter to take a more detached view of the business which could be favorable as well.

But, this long range planning comes at a cost-cost of recruiting good talent who will just not execute instructions but start thinking strategically. Also, having a pool of talent to pick a successor comes at a cost, which also needs to be supported by the existing revenues. Insurance of the life of the promoter is also an option, but that again comes at a cost. Further, more important is finding a suitable strong replacement to run the operations. Normally it takes a few years of sustained involvement in business to take up the reigns of the company in full effect. But it would ideally take at least a year to train somebody to make them suitable to aspire for running an existing business, this- provided the overall guidance from the promoter is available.

Impact on Credit RatingDespite the criticality associated with sound succession planning, it appears that the growing SMEs have not prioritized this requirement. Well laid out succession plan provides visibility about continuity of business, therefore the predictability and consistency of revenues, profitability and cash flows. The predictability of the cash flows is the most critical element in credit rating. Therefore, where succession is planned, business continuity may not be under question, and then the credit issues are around demand, pricing, market share, cost control and efficiency, future capex plans, funding for the same, ability of the firm to generate revenues from new capex to cover its debt obligations and therefore the firm’s ability to make enough accruals to cover its fixed costs.

However, where there is no visible succession planning, the fundamental question of whether the business will survive after the death of the promoter is raised. Credit rating being applicable to the medium/long term, this risk of disruption of the business would impact the credit rating, especially where the promoters are already aged over 60 and the second in command has not been identified. This is so because with continuity of business itself in question after the promoter’s life span, the ability of the company to meet its debt commitments will be severely impacted.

Also, where the business relies purely on the personal skills of the promoter, such as being a technocrat, artisan, painter, etc this risk is further amplified.

Plan early for business continuityHence SMEs which have a vision to grow bigger over a period of time, should start succession planning early, ideally at recruitment stage itself getting on board a mix of young professionals and experienced hands so that by long and continued interaction with the promoters, the youngsters are also trained to handle business situations. Also, while proprietorships and partnerships are normally the constitution structures of SMEs, these growing units should start exploring option of moving into a private limited company form of organization, which limits liability of the promoter while bringing in a measure of professionalization of the board, since a minimum number of members are required on board. But these could be long-term options. The key critical and immediate requirement is to groom the successor with a view to ensure business continuity for posterity.

Contributed by: TA Seethalakshmi, Manager


21

Trend of PE Investments in SME Segment

Trend of PE Investments in SME SegmentWith relatively strong economic growth (when compared with developed world), surging middle-class populations, ever-growing demand for infrastructure facilities and capital; the emerging markets are poised as perfect destination for Private Equity investment. The SME sector has emerged as a dynamic and vibrant sector of the Indian economy. The sector has performed well and has enabled the country to achieve a wide measure of industrial growth. George Soros has mentioned that markets and fundamentals function on “Theory of Reflexivity” wherein prices of various asset classes determine the fundamentals in the longer run- in essence quite opposite of basic understanding that fundamentals of a company/country determine the prices of various asset classes. India has witnessed both the cycles in the 2013 - first falling rupee led to further deterioration of the valuation of companies and then weaker fundamentals supporting its cause.

Macro indicators and trend of PE investment in India PE firms currently are weighing in hurdles like slowing growth rates, unfamiliar business cycles, political uncertainty and tighter lending situations before investing capital. A quick look at the macros will give us a good idea why there were low investments in the first quarter of CY 2013 viz lower expected GDP growth rates, fed’s reversal of QE policy, higher inflation and interest rates, depreciation of Indian currency etc. However, second quarter of CY 2013 witnessed both increase in exits as well investments in SMEs.

Six out of the seven Strategic Sales were of VC-backed IT companies including strategic sale of Bangalore-based online bus ticketing service firm ‘RedBus Limited’ to South Africa-based Naspwers for US$100 million and New Delhi-based online marketing services firm ‘WebChutney Studios Private Limited’ (sale by Capital18 to ad agency Japanese ad agency Dentsu). The only non-IT exit through strategic acquisition was Turkey’s Trakya Cam Sanayii acquisition of IFC’s stake in Kolkata-based glass maker ‘HNG Float Glass’ for US$12 million. PE firms are facing difficulties in exiting from captive sectors, few of the variants of manufacturing etc as a result there was less churning in those sectors.

The investment pattern has been skewed towards IT/ITES, Healthcare and FMCG. Healthcare contributed highest in terms of volume and IT/ITES had highest number of transactions. There is growing demand for sophisticated healthcare services in the country as a result investors have invested heavily into the sector since past few years. The sector has seen a rise in investment from US$0.46 billion investment in 2011 to around US$1.3 billion in 2012. The inherent need-driven nature has led to strong growth in the healthcare sector. The opportunities are lying in various segments of the sector- traditional healthcare centers, pharmaceutical, labs, drug development and biotechnology etc. Moreover, hospital units like eye care, oncology, orthopedic centers, fertility clinics and daycare surgeries, cardiac and cancer clinics are new emerging segments.

Few of the highlights on the Investments side in H1, CY2013

Private Equity Investor CompanyInvestment Amount (In

million USD)Sector Sub Sector Region

Asian Healthcare fund Wellspring Healthcare Pvt Ltd 3.70 Healthcare Maharashtra

Avenue Venture Casa Grande 9.50 Real Estate Tamil Nadu

Norwest Venture Partners Snowman 10.40 Logistics Cold Chain Karnataka

BanyanTree Growth Capital II Atria 8.60 Power Renewable Karnataka

Oaktree capital Cogent glass NA Packaging Pharma packaging Andhra Pradesh


22

Capvent Morf India NA Waterpurification Tamil Nadu

Nalanda Capital NRB Bearings NA Auto ancillary Maharashtra

Goldman Sachs BPL Medical Technologies NA Pharma Equipments

Medical Technologies Karnataka

Future Venture KFC Shoemaker NA Retail Footwear Maharashtra

SEAF India Agribusiness Fund Khyati Foods Pvt. Ltd. 2.75 FMCG Agri-business Maharashtra

ChrysCapital NBFC Magma Fincorp NA BFSI NBFC Maharashtra

Everstone Capital Transpole Logistics 41.00 Shipping & Logistics New Delhi

Tata Capital Star Health and Allied Insurance Company 23.00 BFSI Insurance Tamil Nadu

Norwest Venture Perfint Healthcare 11.00 Healthcare Chennai

SAIF partners Zovi 10.00 IT&ITES E-Commerce Tamil NaduSource: DealCurry.com; NA-Not Available; SMEs have been classified as companies having turnover less than US$50 million

Higher traction but lesser attractionDuring the period of 2007-12, there were quite a few funds that had not made returns on investments as envisaged; PE players are being selective when it comes to investment into renewable energy, real estate, infrastructure and captive manufacturing. Funds prima facie focused on SMEs are facing difficulties in raising money for subsequent rounds. Only those enterprises that can demonstrate proper positing and differentiation will be in position to attract PE funds. On an average less than quarter of the total funds that had invested in deals of up to US$30 million four or five years ago had made money.

The way forward - looking for returns but in different wayPE players are deploying different methods of selection and investments in order to reduce the risk on their investments. Traditionally they have made plain vanilla equity investments, slowly the assured return clauses were brought into picture on the failure of which they can increase their stakes in the company, sub-ordinate debt-based investments, Mezzanine debt-based investments etc. Now they are working more on co-investment model which is used by our banks for syndication of large-scale debt transactions.

In the first half of 2013 more than 50% of the total size of transactions was resulted because of co-investment. We might see evolution of new methods like use of contingent clauses for overall valuation in future.

Overall the first half of 2013 has seen increase in both number and size of the transactions when compared to 2012. PE players are constantly looking for good bargain in the overall negative environment across emerging markets; however they are sticking to value investing in these times of reflexivity.

Contributed by:Ravi Kataria, AnalystAkhil Goyal, Manager

New avenue of funds for PEsRelaxing norms, regulator IRDA had allowed insurance companies to invest in private equity and debt funds in circular in August 2013 - “Insurers are permitted to invest in Category I & II AIFs (Alternative Investment Funds) under the extant SEBI regulations,”. IRDA said in Category II, at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities.


23

Rupee Depreciation– impact on SMEsThe SMEs have played a critical role in the economic growth of India. It may be noted that there is an increasing trend of SME contribution in GDP of the country and hence, the ‘economic inclusive growth’ of the country depends on the sustainable growth of SMEs. In recent times, SMEs are in¬creasingly being exposed to ex¬change rate risks, given the heightened volatility in the forex market. So it is criti¬cal for SMEs to know the impact of exchange rate fluctuations on their businesses and possible measures to manage this risk.

The movement of the exchange rate of the Indian Rupee currently has been a matter of concern. The Rupee has depreciated sharply against the dollar since the last week of May 2013 inspite of efforts made by both the Reserve Bank of India (RBI) and Ministry of Finance in controlling the slide. What triggered the sharp and sudden depreciation was the markets’ reaction to certain unexpected external developments. On May 22, 2013, the US Federal Reserve Bank indicated that it would soon ‘taper’ its quantitative easing as the US economy was recovering. This led to a reversal of capital flows to emerging economies which are now sharply pulling down not just the Rupee, but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah, the South African Rand and many other currencies. While global factors such as tensions over Syria and the prospect of U.S. Federal Reserve tapering its policy of quantitative easing have caused general weaknesses in emerging market currencies, the rupee has been especially hit because of our large current account deficit in addition to policy paralysis of the government leading to overall slowdown in the economy. Accordingly, there are concerns, and justifiably so, of the impact this would have on the economy more particularly on the SMEs.

Since the beginning of 2013 more particularly since May 2013, the rupee has depreciated against all major currencies of the world. The movement of the rupee vis-a-vis major currencies of the world (Source: RBI) from January 2013 to August 2013 can be viewed through the graphs given below. What is less obvious is that in percentage terms the rupee has depreciated less against the Yen/GBP as compared to the USD/Euro. The rupee has depreciated most against the Euro. The change in rupee against the major currencies of the world during the aforesaid period can be seen from the table.

Change in Rupee v/s January 1, 2013 to August 31, 2013 (%)

USD 21.41

YEN 7.31

GBP 15.82

Euro 21.63


24

Based on the aforesaid facts, it can be concluded that an entity should consider the impact of fluctuations in the currencies to which it is exposed. Secondly, diversification of risk across currencies is beneficial as different currencies move differently.

Factors affecting the demand and supply of currency


25

Impact on SMEsFluctuations in exchange rates affect different stakeholders differently. In general when the rupee depreciates, exporters benefit and importers are adversely impacted and vise-versa. However, due to contraction in global demand and slowdown in most major economies, the rupee depreciation has not benefited Indian exporters in direct proportion and buyers are asking for discounts or reduced prices. The impact of exchange depreciation varies from sector to sector. Furthermore, the ability of different sectors to withstand adverse effects is different. Impact of the depreciation of the rupee on various SME sectors is illustrated in the table below.

Industry Impact of depreciation

Gems & Jewellery The G&J industry is heavily dependent on imports as the primary raw material is scarce in India, consequently, affecting the industry on account of increased input prices. Imports of raw material for the G&J sector have declined by 23% to US$2.49 bn on y-o-y basis during July 2013 (Source: CARE Research)

Textile The textile industry has also been affected resulting in decline in imports of silk yarn & fabrics in 9MFY13 by about 12% to Rs.355.03 crore (Source: Ministry of Textiles).

Leather The composition of import content in the leather industry is low and the export content is high. Accordingly, the leather industry players having a global presence as against having presence only in Europe are most likely to benefit on account of a depreciating rupee.

Auto Components The Auto Components industry is likely to be affected severely on account of the rupee depreciation as India continues to be net importer of the auto components with around 25% of the domestic consumption being imported.

Plastic Products The plastic products industry is likely to be affected since the plastic granule (major raw material) for plastic products is a crude oil derivative. Accordingly, as crude is mainly imported leading to increase in input cost for the players on account of a depreciating rupee.

Engineering The Engineering industry is also likely to be impacted on account of higher composition of import content as against export. The import-export gap in the engineering items is overly negative at USD 17 billion (2012-13) despite the fact that engineering items are amongst the largest contributors to India’s total export basket (Source: Engineering Export Promotion Council).

IT The small players in the IT industry having a global presence are likely to get benefitted on account of the depreciating rupee.

Mitigating Exchange Rate RiskSince SMEs work on tighter budgets than larger firms, and have weaker capital base, losses through exposure to exchange risks can result in more severe impact on profits and operating efficiencies for SMEs than for large firms. Accordingly SMEs should determine their risk exposure to various currencies, as well as adopt risk mitigation strategies and methods.Determining Risk Exposures Involves Identifying:

• The currencies to which the firm is exposed to.• The extent of sales / purchases /receivables / payables denominated in foreign currencies.• The extent to which price fluctuations can be passed on to customers (by increasing price or by entering

price-variance clauses).• Cash flow position of the firm and ability to withstand currency fluctuations.• Impact of currency fluctuation on overall profitability of the firm.

Determining risk mitigation strategies involves assessing whether the firm should hedge foreign exchange risk at all, and if it should, to what extent. Selective hedging could be undertaken when the firm has limited exposure to foreign currency, and /or the currency movement may move favourably so that the firm wants to take advantage of the situation and hence not hedge its position completely. Systematic hedging could be undertaken to hedge any foreign currency position that the firm enters in.

Risk mitigation tools and methods involve diversification of currency base, as well as hedging currency exposure by entering into forward contracts, swaps, purchasing call and put options, and using currency futures. Diversification of risk across currencies is beneficial as different currencies move differently, as loss


26

due to exposure in one currency could occur simultaneously with gain due to exposure in another currency. Also, various hedging instruments traded on the counter and at the exchange houses are available for hedging currency risk, which are as follows:

• Foreign exchange forward contracts, which allow locking in of a pre-agreed exchange rate for a pre-agreed date.

• Foreign currency option contracts, which provide the buyer of the contract the right, but not the obligation to execute foreign exchange transactions at a future date.

• Currency futures which are exchange-traded products, and provide more transparency and flexibility, but no customization to hedge foreign currency exposure.

ConclusionExchange rate fluctuations can adversely affect SMEs. Each SME should diligently determine how much exposure it has to foreign currency risk. If the risk is significant then it should hedge to the extent required, rather than view it as an external macro-economic factor which cannot be prepared for. The recent decision of the US Federal Reserve Bank in September 2013, against the much anticipated market expectations, of not ‘tapering’ its quantitative easing has also helped in putting brakes to the slide in the rupee. Last but not the least, it must be remembered, that while it is very difficult to predict exchange rate movements, it is comparatively easier to prepare for adverse fluctuations.

Contributed by: Avinava Adhikary, Manager

Rating Guide


28

Rating Approach for SME / MSE Ratings

BackgroundSME (Small and Medium Enterprises) segment plays a very vital role in the economic development of our nation. On the other hand, credit risk assessment in this segment requires a specific approach, as the factors affecting the creditworthiness are somewhat different compared to large corporate entities. Hence, to further support the growth for this sector and help the investors to determine the relative creditworthiness of entities belonging to this segment a need for separate rating product was felt. Accordingly, CARE introduced SME ratings in 2006, which are intended solely for Small and Medium Scale Enterprises. Furthermore, CARE has signed a Memorandum of Understanding with National Small Industries Corporation Limited (NSIC) to introduce the NSIC – CARE Performance and Credit Rating for MSEs. This is a special rating product for units registered as MSEs.

SME RatingSME Rating indicates the relative level of creditworthiness of an SME entity, adjudged in relation to other SMEs. It is an issuer-specific rating reflecting overall general creditworthiness. It is a one-time assessment of credit risk of the rated entity in comparison with the other SMEs.

NSIC-CARE Performance and Credit Rating for MSE entityThis rating indicates the relative level of financial strength and performance capability of an MSE entity compared to other MSEs. It is an issuer-specific rating and not a loan / bank facility-specific rating. It is a one-time assessment of the rated entity. This rating helps MSEs to obtain quicker and cheaper credit, facilitate capability assessment of MSEs by their clients and help MSEs obtain leverage from the parties in the supply chain. The Indian Bank Association (IBA) has been involved in formulating this Scheme. The government has subsidized the rating fees for this rating up to 75 per cent, enabling MSEs to get the rating at a lower cost.

Rating MethodologyThe rating exercise would take into account the industry dynamics, operational performance, financial risk characteristics, management capability and the future prospects of the entity for arriving at the overall risk profile of the SME unit. A brief discussion about key criteria is given below:

Industry DynamicsNo SME unit can isolate itself from the impact of industry dynamics. The industry parameters that affect an SME unit would include overall demand-supply scenario, level of entry barrier, competition level, availability of substitutes and technological trends, and government support to the sector, cyclicality and seasonality of the industry. Therefore, CARE believes that promoters’ ability to manage the business on industry impact is very crucial.

Operational PerformanceAgainst the backdrop of the industry, CARE assesses the entity’s operating strengths and weaknesses vis-a-vis its competitors. Many SMEs have inherent strength and relatively strong positioning (including market share) in their business segment, which is considered as credit positive.

For assessing the business risk, long-term sustainability of the business model is very important. Many SME units are part of some large groups. In that case, the entity’s importance and positioning within the group, its inter-linkages of operations and transaction transparency are also evaluated.


29

In order to assess the smoothness of functioning of day-to-day operations, timely availability and sufficiency of raw materials, manpower, utilities are analyzed with the major focus on locational and technological edge over others. The entity’s initiatives for clean and green environment are also evaluated, during the site visit.

Business strength is derived by assessing customer profile, product profile, revenue mix and bargaining power with the stakeholders. An interaction with key customers and suppliers also provides input for strength of relations with the rated SME unit. Depending on the category of the product, a wide distribution network would be essential to gain competitive advantage.

Financial Risk analysisCARE believes that the quality of accounts is of prime importance as significant part of financial risk analysis is based on the reported financial statements, disclosures and information submission. Audited financial results give more comfort than the unaudited / provisional results. CARE believes that among the SME units, limited companies have better accounting & disclosure systems as they need to follow regulatory and specific ICAI guidelines. CARE also believes that in specific legal entities, viz partnership and proprietorship firms, risk of withdrawal of capital exists.

CARE evaluates financial flexibility (through gearing ratios, debt protection ratios and hybrid ratios), liquidity (measured by current & quick ratio, proportion of liquid assets, operating cycle, working capital management, cash flow from operating activities, etc), business efficiency & profitability (indicated by turnover ratios, profitability ratios, return ratios, growth ratios, etc). While evaluating gearing ratios for SME units, CARE also sees the proportion of bank funds (excluding unsecured loans by the promoters, friends and relatives) as dependency on external funds may be lesser in certain SME entities, which is considered as credit positive.

In order to evaluate the track record and relations with the banks, CARE team interacts with the bankers / lenders to know the overall conduct of account. Cash flow analysis is the most important parameter for assessing the creditworthiness.

Management CapabilityCARE critically evaluates quality of management as one of the most important parameters that supports the credit strength of an SME unit. CARE team interacts with the SME promoters / key management personnel for understanding their business insight, vision, future growth strategy and approach towards the perceived risk factors. Most SMEs are family-managed entities and highly dependent on single person. To assess the depth of the management, CARE analyses the quality of the second line management, succession planning, organization structure and internal control systems.

The promoter’s experience in business (including within the relevant industry sector) and track record of operations of the rated entity would act as key criteria for assessing management competence. CARE believes that the management having experience of several business cycles and familiarity for project implementation would have an edge. Management’s skill to expand clientele, new trade initiatives and level of priority to the finance function are equally vital.

Project Risk AnalysisHigh level of project risk can also affect the financial strength of an SME unit, which can be assessed by project feasibility, size, and project gearing and stabilization issues, post implementation. CARE believes that the promoter’s track record in project implementation and project status including financial closure is equally vital.


30

The rating outcome is ultimately an assessment of the above factors and their linkages to arrive at the overall assessment of credit strengths and weaknesses by taking into account the industry’s cyclicality. While the methodology encompasses comprehensive technical, financial, commercial, economic, and management analysis, credit rating is an overall assessment of all aspects of the issuer.

DisclaimerCARE’s MSE rating is an independent opinion on performance capability and financial strength. The rating is a one-time exercise and it will not be kept under surveillance. The validity of the rating is one year from the date of provisional communication of rating, subject to no significant changes / events occur during this period that can materially impact the operational and financial parameters of the entity. The rating is not an audit and also not a recommendation for entering into any transaction with the entity. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.


31

NSIC-CARE MSE Rating Scale & Definitions

Rating MatrixFinancial Strength

High Moderate Low

Performance Capability

Highest SE 1A SE 1B SE 1C

High SE 2A SE 2B SE 2C

Moderate SE 3A SE 3B SE 3C

Weak SE 4A SE 4B SE 4C

Poor SE 5A SE 5B SE 5C

Definitions:SE 1A Highest Performance capability: High Financial strength. Prospects of performance are the highest and the entity has

high capacity to meet its financial obligations.

SE 1B Highest Performance capability: Moderate Financial strength. Prospects of performance are the highest. However, the entity has moderate capacity to meet its financial obligations.

SE 1C Highest Performance capability: Low Financial Strength. Prospects of performance are the highest. However, the entity has low capacity to meet its financial obligations.

SE 2A High Performance capability: High Financial strength. Prospects of performance are high and the entity has high capacity to meet its financial obligations.

SE 2B High Performance capability: Moderate Financial strength. Prospects of performance are high. However, the entity has moderate capacity to meet its financial obligations.

SE 2C High Performance capability: Low Financial Strength. Prospects of performance are high. However, the entity has low capacity to meet its financial obligations.

SE 3A Moderate Performance capability: High Financial strength. Prospects of performance are moderate. However, the entity has high capacity to meet its financial obligations.

SE 3B Moderate Performance capability: Moderate Financial Strength. Prospects of performance are moderate and the entity has moderate capacity to meet its financial obligations.

SE 3C Moderate Performance capability: Low Financial strength. Prospects of performance are moderate. However, the entity has low capacity to meet its financial obligations.

SE 4A Weak Performance capability: High Financial strength. Prospects of performance are weak. However, the entity has high capacity to meet its financial obligations.

SE 4B Weak Performance capability: Moderate Financial Strength. Prospects of performance are weak. However, the entity has moderate capacity to meet its financial obligations.

SE 4C Weak Performance capability: Low Financial Strength. Prospects of performance are weak and the entity has low capacity to meet its financial obligations.

SE 5A Poor Performance capability: High Financial strength. Prospects of performance are poor. However, the entity has high capacity to meet its financial obligations.

SE 5B Poor Performance capability: Moderate Financial Strength. Prospects of performance are poor. However, the entity has moderate capacity to meet its financial obligations.

SE 5C Poor Performance capability: Low Financial Strength. Prospects of performance are poor and the entity has low capacity to meet its financial obligations.


32

SME Rating Scale & DefinitionsCARE SME RATING SYMBOLS& DEFINITIONS

CARE SME Rating Definition

CARE SME 1 The level of creditworthiness of an SME, adjudged in relation to other SMEs is the Highest

CARE SME 2 The level of creditworthiness of an SME, adjudged in relation to other SMEs is High

CARE SME 3 The level of creditworthiness of an SME, adjudged in relation to other SMEs is Above Average

CARE SME 4 The level of creditworthiness of an SME, adjudged in relation to other SMEs is Average

CARE SME 5 The level of creditworthiness of an SME, adjudged in relation to other SMEs is Below Average

CARE SME 6 The level of creditworthiness of an SME, adjudged in relation to other SMEs is Inadequate

CARE SME 7 The level of creditworthiness of an SME, adjudged in relation to other SMEs is Poor

CARE SME 8 The level of creditworthiness of an SME, adjudged in relation to other SMEs is the Lowest. Such entities may also be in default.

Leading SMEs


34

Analysis of higher rated Small Scale entities

The NSIC-CARE MSE ratings grade the businesses registered as MSEs on two distinct parameters viz Performance Capability and Financial Strength. The rated units are compared with other MSE units operating in the same industry. If a unit is operating in a niche product segment, then comparison is made with MSEs having similar exposure to business and industry risk factors. The entities covered in this report are highly rated, having ratings SE 1A, SE 1B and SE 2A indicating high to highest performance capability and moderate to high financial strength. The entities covered in this report belong to diverse industries like services, tyre trading, textile, food and beverages, chemicals, steel, jewellery, engineering, education, plywood, hospital and electrical industry. Furthermore, only four of the entities have proprietorship or partnership constitution while private limited and public limited entities are there along with two charitable trusts. The Limited Liability form of a business entity is viewed more favourably by CARE as it not only indicates the entity’s compliance with applicable norms but also indicates the promoters’ commitment towards its business. Moreover, such a form is also viewed favourably by banks when it comes to secured lending. In a proprietorship or partnership form of business, the ability to withdraw and infuse capital easily creates difficulties in judging the networth base and other financial parameters like leverage, thus restricting financial flexibility of an entity with lending institutions also relatively being reluctant to take exposure to them.

Parameters considered by CARE for arriving at the performance capability grade can be broadly divided into management and business risk parameters. For entities getting a high grade on the performance capability, the management profile is characterized by long operational track record of the entity (usually more than 10 years), vast experience of the promoter in the main line of business and technically qualified promoters in engineering, chemicals, and IT & ITES segments. Their business risk profiles are characterized by established relationships or strategic tie-up with reputed clients, which have strong position in their respective industry segments, established marketing and distribution setup, relatively diversified product portfolio catering to various end-user industries and proximity to key customers & raw material suppliers. Some of the entities are present in niche business segment thereby avoiding competition to an extent. A few entities have long-term supply contracts in place with their key customers which ensure fair degree of revenue stability. However, these entities are exposed to industry downturns which would impact their business profiles through adverse impact on their customers. This, though, would be applicable for majority of MSEs and hence units catering to various end-user industries are better placed than others.

The financial strength of the entities is characterized by healthy growth in turnover, comfortable leverage position, moderate profitability and good liquidity indicators (See table below). The operating cycle, as expected, is on the higher side mainly due to the entities’ position in the industry value chain resulting in relatively lower bargaining power vis-a-vis customers and high degree of competition resulting in the need to keep higher inventory and extend high credit to customers.


35

Table 1: Distribution of select financial parameters for the few selected entitiesFinancial Parameter High Low Median

Growth in turnover (2-year CAGR %) 64 8 14.07

PBIDT margin (%) 39.40 2.27 11.49

PAT margin (%) 23.42 0.42 4.54

Interest coverage 33.79 1.09 4.92

Overall gearing 1.47 0.02 0.36

Working capital turnover 109.66 -4.85 3.47

Avg. inventory period 126 0 48

Avg. collection period 116 0 52

Working capital cycle 155 0 94

Besides the above parameters, CARE also looks at the ability of the promoters to bring in funds in the form of capital and/or unsecured loans from their own sources to support the operations as and when required. Lastly, relationship with the bankers and the regularity of servicing the debt obligations in a timely manner is also a factor while arriving at the financial strength grade for an entity.


36

Summary profile of small-scale entities rated by CARE

Below is a profile of small-scale entities rated by CARE during the quarter ended June 2013 (Q1FY14).


37

IndexList of the entities covered in the report Rating Page

A.K. Power Industries Private Limited SE 1B 38

AL- Shifa Super Speciality Hospital SE 2A 39

Asian Roller Bearings SE 1A 40

Forward Precision Engineers Private Limited SE 2A 41

Globe Panel Industries India Private Limited SE 2A 42

Gopani Product Systems SE 2A 43

K.E.C. Industries Limited SE 1A 44

Maharishi Institute of Creative Intelligence SE 1A 45

Needumbra Industries Private Limited SE 2A 46

Priority Gold Private Limited SE 2A 47

Shrajas Engineers Private Limited SE 2A 48

Singh Plasticisers and Resins India Private Limited SE 2A 49

Spectra Foods and Beverages Private Limited SE 1A 50

Sri Sangeetha Mills SE 2A 51

Tyre Technocrats India Private Limited SE 2A 52

Vatva Industrial Estate Infrastructure Development Limited SE 2A 53

Profiles of top rated small-scale entities


38

Name of the entity A.K. Power Industries Private LimitedRating SE 1 A

Rating Valid Till May 27, 2014

Entity profile Operation profileYear of Incorporation

2008 Products / Services Transmission Line hardware, Structure, Sub-station Structure and Distribution Line Structure

Constitution Private Limited Company Major Brands -

SSI Registration number

190161210896(dated February 21, 2013)

Total Number of employees

68 on payroll and 40 on contractual basis

Nature of Business Manufacturing and trading of electrical equipment

Key Customers A2Z Maintenance Engineering Limited,Shyma Power India Limited, KEI Industries Limited

Industry Electrical Equipment

Controlling/Registered Office

23/2/1/1, B.C. Lane, Howrah – 711101 (West Bengal)

Key Suppliers Swastika Steel & Allied Products Private Limited, R.K.Metal Stores,Varun Vinimay Private Limited

Management Profile Bankers & AuditorsKey Promoter Mrs. Archana Mallick Name of the Auditor M/s. J. Jain & Co.

Total Experience( in years)

25 years Major Bankers State Bank of India and Allahabad Bank

Certifications / Awards

ISO 9001: 2008

Financial Profile

Key StrengthPromoters having over two decades of experience in this line of business

Long track record of operations with diversified product portfolio

Moderate financial risk profile characterised by comfortable gearing, adequate liquidity position and consistent growth in sales but with low profit margins


39

Name of the entity AL-Shifa Super Speciality HospitalRating SE 2 A



2002 Products / Services Treatment in the field of piles, fissure, fistula and other ANO rectal diseases

Constitution Proprietorship Firm Major Brands -


320082313493 (dated July 02, 2012) Total Number of employees

32

Nature of Business Hospital Key Customers NA

Industry Healthcare


Rajaji Road, Near KSRTC Bus Stand, Ernakulam-682035

Key Suppliers Delite Surgicals and Mohan Drug House

Management Profile Bankers & AuditorsKey Promoter Dr. Shajahan Yousuf Sahib Name of the Auditor Abdul Rahim & Co.


25 years Major Bankers Indian Bank


Mahatma Gandhi Sevana Puraskar for excellence in Medical Field, All India Business and Community Foundation National Achievement Award for Health Excellence, Nehru Award for Excellence in Health & Family Welfare, Mother Theresa Puraskaram for Outstanding Contribution in the Field of Piles & Associated Diseases and Recognition from the Lonestar Healthcare Group, Texas, USA for performing huge number of procedures using latest laser technology.

Financial Profile

Key StrengthExperienced and professional proprietor with a long medical track record

Consistent growth in revenue over the last three years

Healthy profitability and satisfactory leverage position

Equity infusion by promoters to support operations during FY12


40

Name of the entity Asian Roller Bearings Rating SE 1 A

Rating Valid Till June 26, 2014


2006 Products / Services Tapper bearings, deep groove ball bearings etc

Constitution Partnership Firm Major Brands ARB


020101100109 (dated April 11, 2008 Total Number of employees

58

Nature of Business Manufacturing Key Customers Usha International ,Jagdish Machinery Store,Ramesh Bearings Traders

Industry Diversified


22/14 East Punjabi Bagh,New Delhi, -110026

Key Suppliers Apple India Ltd,Ningbo Kuankia Imp & Exp Co. Ltd,Zhejiang Minxing Bearing Co. Ltd

Management Profile Bankers & AuditorsKey Promoter ARB Bearings Limited Name of the Auditor Anil Khatri & Co.


25 years Major Bankers Bank of Baroda


-

Financial Profile

Key StrengthPart of ARB group which has well established presence in manufacturing of bearings

Experienced promoters

Comfortable financial risk profile characterised by steady growth in scale of operations, healthy profitability margins, comfortable capital structure, comfortable coverage indicators and liquidity position

Diversified customer base

Likely recovery in domestic (replacement market) auto component industry

Operations in tax-free zone


41

Name of the entity Forward Precision Engineers Private LimitedRating SE 2 A



1987 Products / Services Steel Balls

Constitution Private Limited Company Major Brands Tolia


270211200549 (dated April 12, 2007) Total Number of employees

84

Nature of Business Manufacturing Key Customers Tolia Overseas,N. Gandhi & Co.,Tata Motors Limited

Industry Machinery and Equipment


Plot No.A-156, Main Road, Wagle Industrial Estate, Dist. Thane, Maharashtra-400604

Key Suppliers D.H. Exports Private Limited.Supreme Heat Treaters Private Limited,Panchmahal Steel Limited

Management Profile Bankers & AuditorsKey Promoter Mr Vilesh Tolia Name of the Auditor Gandhi & Shrimankar


33 years Major Bankers Bank of India


ISO 9001:2000 TS16949:2004

Financial Profile

Key StrengthEstablished presence in the market

Experienced promoters having more than three decades of experience

Moderate operating margins, capital structure and debt coverage indicators

Operational linkages with the group companies


42

Name of the entity Globe Panel Industries India Private LimitedRating SE 2 A



2010 Products / Services Plywood Block Board, Flush Doors, Laminated Doors, Mica, Formaldehyde

Constitution Private Limited Company Major Brands GL


060031200979 (dated December 03, 2010)

Total Number of employees

175

Nature of Business Manufacturing Key Customers Diversified

Industry Plywood, laminates and chemicals


H.No. 419, Behind HSIIDC Office, Phase-I, Industrial Estate, 135001,Yamuna Nagar,Haryana-135001

Key Suppliers Open Market Purchase

Management Profile Bankers & AuditorsKey Promoter Mr Sharwan Aggarwal Name of the Auditor Mars & Associates


40 years Major Bankers State Bank of India


NA

Financial Profile

Key StrengthExperienced Promoters

Comfortable capital structure and liquidity position

Wide distribution network and established brand in Haryana region

Moderate operating cycle


43

Name of the entity Gopani Product Systems Rating SE 2 A



1993 Products / Services Filter Elements, Filter Cartridges, Housings Filters, Industrial Filters etc

Constitution Proprietorship firm Major Brands NA


240072121230 (dated May 28, 2010) Total Number of employees

25

Nature of Business Trading in industrial filters and household water purifiers

Key Customers Porvair Technology,Doshion Veollia Water Solutions Private Limited,Integrated Envirotech Private Limited

Industry Industrial Filters & Household Water Purifiers


104 Kashiparekh Complex, Behind Bhagwati Chambers, Swastik Cross Road, Ahmedabad, Gujarat -380009

Key Suppliers Microsofilt International Co. Limited,Leistung Engineering Private Limited,Umiya Enterprises

Management Profile Bankers & AuditorsKey Promoter Mr Pathik J. Gopani Name of the Auditor Bhadresh P. Soni& Co.


20 years Major Bankers Citi Bank


ISO 9001:2008

Financial Profile

Key StrengthExperienced promoters with established track record of 20 years in trading of industrial filters and housing water purifier business

Long-term relations with customers and suppliers indicated by consistent offtake from major customers in the past five years

Geographically diversified revenue profile

Increasing level of operations

Modest profit margins, capital structure and debt coverage indicators


44

Name of the entity K.E.C. Industries LimitedRating SE 1 A



1983 Products / Services Air Pre-heater, Dampers, Trays for Column, Igniters Gun, Sugar Machinery

Constitution Limited Company Major Brands NA


060031200188 (dated February 19, 2008) Total Number of employees

140

Nature of Business Manufacturing of Specialty Heat Recovery equipment

Key Customers Chennai Petroleum Corporation Ltd,Heurtey Petrochem India Private Ltd,Toyo Engineering India Ltd

Industry Capital Goods


56, Industrial Estate, Yamuna Nagar,Haryana-135001

Key Suppliers Local Suppliers

Management Profile Bankers & AuditorsKey Promoter Mr Rajinder Mohan Gaddh Name of the Auditor M/s Moudgil & Co.


27 years Major Bankers State Bank of India, Yamuna Nagar


-

Financial Profile

Key StrengthLong standing experience of the promoters with professional qualified team

Comfortable capital structure coupled with healthy coverage indicators and strong liquidity position

Healthy profitability margins

Liquid investment to the tune of Rs.30 crore in shares, bonds & debentures and mutual funds

Reputed client base and moderate order book

Positive industry outlook in the long term albeit subdued demand in short demand


45

Name of the entity Maharishi Institute of Creative Intelligence (MICI)Rating SE 1 A



1973 Products / Services Owning and Managing Seven Schools in Tamil Nadu

Constitution Society registered under the Societies’ Registration Act of 1860

Major Brands NA


330022265388 (dated June 03, 2013) Total Number of employees

-

Nature of Business Owning and Managing Educational Institutions

Key Customers NA

Industry Education


"Maharishi Gardens", No. 28, Dr. Guruswamy Road, Chetpet, Chennai, Tamil Nadu-600031

Key Suppliers NA

Management Profile Bankers & AuditorsKey Promoter Mr Ajay Prakash Shrivastava Name of the Auditor M/s .K. K. Jha & Associates


30 years Major Bankers Indian Bank


-

Financial Profile

Key StrengthVast experience of the members of the society

Established and long operational track record

Renowned brand name and prime locations of the schools run by MICI

Experienced and well qualified teaching staff

Comfortable financial position characterised by favourable capital structure and comfortable debt protection indicators


46

Name of the entity Needumbra Industries Private LimitedRating SE 2 A



1979 Products / Services Steel Balls

Constitution Private Limited Company Major Brands Tolia


270211200547 (dated April 12, 2007) Total Number of employees

80

Nature of Business Manufacturing Key Customers Tolia Overseas,N Gandhi & Co.,Tata Motors Limited

Industry Machinery and Equipment


Plot No.A-156, Main Road, Wagle Industrial Estate, Dist. Thane, Maharashtra-400604

Key Suppliers D.H. Exports Private Limited,Panchmahal Steel Limited,Supreme Heat Treaters Private Limited

Management Profile Bankers & AuditorsKey Promoter Mr Shailesh Tolia Name of the Auditor T. M. Gosher & Associates


35 years Major Bankers NA


ISO 9001:2000 TS16949:2004

Financial Profile

Key StrengthEstablished presence in the market

Experienced promoters having more than three decades of experience

Moderate operating margins, capital structure and debt coverage indicators

Operational linkages with the group companies


47

Name of the entity Priority Gold Private LimitedRating SE 2 A



2011 Products / Services Plain Gold jewellery

Constitution Private limited company Major Brands -



70

Nature of Business Manufacturing Key Customers Kalyan Jewellers Private Limited,Alukkas Jewellers Private Limited,Joy Alukkas Private Limited

Industry Gems & Jewellery


Plot no- 121, street no15/18 MIDC, Andheri (E), Mumbai, Maharashtra-641039

Key Suppliers The Bank of Nova Scotia,DAR Jewellery,HDFC Bank Limited

Management Profile Bankers & AuditorsKey Promoter Mr Jaison Panakkal Name of the Auditor M/s BSR & Company


25 years Major Bankers Yes Bank Limited, Corporation Bank Limited, Development Credit Bank ltd, State Bank of Hyderabad, The Ratnakar Bank Limited and Union Bank of India


-

Financial Profile

Key StrengthOperational and financial support from parent company (Priority Jewels Private Limited)

Experienced promoters having more than a decade of experience in gems and jewellery industry

Moderately comfortable capital structure and debt coverage indicators


48

Name of the entity Shrajas Engineers Private LimitedRating SE 2 A



1990 Products / Services Shell Filters, hermetic compressor parts, automobile parts, submersible pump parts, Agricultural parts

Constitution Private Limited company Major Brands NA


270311200025 (dated January 04, 2007) Total Number of employees

86

Nature of Business Manufacturing Key Customers Emerson Climate Technologies(India) Private Limited,Fleetguard Filters Private Limited,Nikson Industries Private Limited

Industry Steel


Survey No. 136, Khodashi, Pune Bangalore Road, Satara, Dist. :Satara, Maharashtra - 415110

Key Suppliers Poshs Metal Industries Private Limited,Loha Ispat Limited,Bhushan Steels Limited

Management Profile Bankers & AuditorsKey Promoter Mr A.L. Gundesha Name of the Auditor R B Joshi & Associates


35 years Major Bankers State Bank of India


ISO 9001:2008

Financial Profile

Key StrengthWide experience of the promoters along with long track record of operations

Long association with suppliers and customers

Financial risk profile marked by moderate profitability margins, comfortable capital structure and coverage indicators

ISO 9001:2008 certified manufacturing facilities


49

Name of the entity Singh Plasticisers and Resins India Private LimitedRating SE 2 A



1981 Products / Services Dry Bonding Chemicals, Resorcinol Formaldehyde Resins, Dipping Resins, Alkyl Phenolic Resins, Amino Curing Resins, Phenolic Resins and Antioxidants

Constitution Private Limited company Major Brands Powerplast



37

Nature of Business Manufacturing of rubber processing chemicals

Key Customers Continental Matador Truck Tires SRO,Continental Tire De Mexico SA DE CV, Apollo Tyres Ltd

Industry Chemicals


UG-34B, Somdutt Chambers-1, Bhikaji Cama Place, New Delhi-110066

Key Suppliers East West Corporation,Atul Limited,Aki Shoki Co. Limited.

Management Profile Bankers & AuditorsKey Promoter Mrs Rekha Rani Singh Name of the Auditor Sundeep Chadha & Co. New Delhi


40 years Major Bankers Corporation Bank


Recognised Export House from Ministry of Commerce and Industries

Financial Profile

Key StrengthExperienced promoters with long track record of operations

Established client profile

Satisfactory financial risk profile


50

Name of the entity Spectra Food & Beverages Private LimitedRating SE 1 A



1981 Products / Services Various types of ice creams

Constitution Private Limited Company Major Brands Kwality Walls


280161200059 (dated January 29, 2008) Total Number of employees

231

Nature of Business Manufacturing of ice cream Key Customers Hindustan Unilever Limited

Industry Food and food products


Tadigadapa Village, Penamaluru Mandal, Krishna District, Andhra Pradesh

Key Suppliers Hindustan Unilever Limited,Lotus chocolate,Geetha sugars

Management Profile Bankers & AuditorsKey Promoter Mr A.Sudhakar Name of the Auditor Brahmayya & Company, Vijayawada


18 years Major Bankers Indian Bank, Suryaraopet branch, Vijayawada


-

Financial Profile

Key StrengthEstablished track record and experienced promoters with wide industrial presence

Long-term agreement with Hindustan Unilever Limited for more than two decades

Significant increase in revenue and PAT margin during FY13

Improved capital structure during FY13 with increased net worth of the company


51

Name of the entity M/s. Sri Sangeetha MillsRating SE 2 A



2003 Products / Services Yarn and Fabric

Constitution Partnership firm Major Brands NA



125

Nature of Business Manufacturing Key Customers Kasturi Mills,Kavitha Textiles,Ravi Textiles

Industry Textiles-Cotton/Natural fibre


S.R.S Complex, Karumathampatti Road, Somanur, Coimbatore, Dist.: Coimbatore, Tamil Nadu-641 659.

Key Suppliers Mahesh Cotton,Adivappa & Sons,Guru Raghavendra

Management Profile Bankers & AuditorsKey Promoter Mr R. Kanagaraj Name of the Auditor Mr Sethu Ramasamy


10 years Major Bankers Corporation Bank, Somnanur branch, Coimbatore District, Tamil Nadu


-

Financial Profile

Key StrengthLong experience of the partners in yarn manufacturing

Established relations with its key customers

Growing scale of operations and comfortable leverage as well as coverage indicators


52

Name of the entity Tyre Technocrats India Private LimitedRating SE 2 A

Rating Valid Till April 22, 2014


1995 Products / Services Trading of OTR Tyres, on-site Service and Maintenance of OTR Tyres, Retreading of OTR Tyres

Constitution Private Limited Company Major Brands -



110

Nature of Business Trading and service Key Customers Tata Steel Ltd,Hindustan Zinc Ltd,Dhansar Engineering Co. Private Ltd,

Industry Tyre


63/1, Sardarpura, Udaipur, Rajasthan -313001

Key Suppliers Goodyear India Limited,Shakti Tyre,Victor Corporation

Management Profile Bankers & AuditorsKey Promoter Mr Raj Talreja Name of the Auditor Kunawat & Associates, Udaipur


25 years Major Bankers Bank of Baroda, Udaipur


-

Financial Profile

Key StrengthVast experience of the promoters in off-the-road (OTR) tyre retreading industry

Established presence in the niche segment of OTR tyres

Long standing relationship with clients and reputed customer base

Exclusive distributorship of OTR tyres of ‘Good Year’ brand

Moderate profitability margins and solvency position


53

Name of the entity Vatva Industrial Estate Infrastructure Development Limited (VEL)

Rating SE 2 A



2005 Products / Services Stable cash flows from AMC of property tax collection under escrow mechanism and water collection

Constitution Company (Non-profit organization u/s 25 of Companies Act, 1956)

Major Brands -


210072125791 (dated March 10, 2011) Total Number of employees

15

Nature of Business Services Key Customers -

Industry Services


Centre of Excellence Complex, Plot No-511, Phase 4, GIDC Estate, Vatva,Ahmedabad,Dist.:Ahmedabad, Gujarat -382445

Key Suppliers NA

Management Profile Bankers & AuditorsKey Promoter Mr Kirti H. Patel, Chairman Name of the Auditor Mr Kunal B. Shah , Kunal B. Shah & Co.


30 years Major Bankers Bank of India, Vatva SIDBI, Ahmedabad


-

Key StrengthThe entity created under section 25 of Companies Act to carry out infrastructure development activities in Vatva Industrial Area in pursuant of Memorandum of Agreement signed between Ahmedabad Municipal Corporation (AMC), VEL and Vatva Industries Association

Stable cash flows from AMC of property tax collection under escrow mechanism and water collection

Reputed consultant – IL & FS for project planning

Established track record of infrastructure development in Vatva Industrial area

Moderately comfortable cash coverage indicators

Recognition


55

TestimonialsFridge House

Learning


57

CASE STUDYDeepkiran Foods Pvt LtdThe article is compiled by the leading Credit Rating Agency, Credit Analysis & REsearch Ltd (CARE). CARE is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparalleled depth of expertise. CARE’s Rating Methodologies are in line with the best international practices. CARE’s SME Rating Division continuously keeps track of better rated SMEs and disseminates case studies on selected success stories for the benefit of other SME Entrepreneurs.

Company backgroundIncorporated in the year 1998, Gandhinagar-based (Gujarat) Deepkiran Foods Private Limited (DFPL) is promoted by the US-based Amin family. Evolved out of passion for cooking of Mrs Bhagwati Amin (promoter), the family has marked a remarkable presence in the US by supplying processed and ready-to-eat food through its flagship company Deep Foods Inc. (DFI). DFI, which started as a hobby in garage in 1977, is today known to be one of the leading manufacturers and retailers of Indian food in USA.

DFPL started its commercial operations in 2002 and exports its entire production to different regional units of DFI. Currently, DFPL manufactures more than 60 different food items at its plant in Gandhinagar (Gujarat).

Key challenges facedMrs Bhagwati Amin and Mr Arvind Amin are the founder directors of the company and have more than three decades of experience in processed food industry. The urge to enter into the food industry mainly rooted from the company’s financial need and Mrs Bhagwati’s passion for cooking. The key challenges faced by them in their journey were:

Limited prior business experience The promoters came with an innovative idea of turning the passion for cooking into profession. Venturing into an entirely new segment with no past experience and business knowledge was totally a challenging situation for the Amin family.

Limited financial resourcesOne of the reasons behind starting its own food processing chain was the financial crisis faced by the family. Therefore, Mrs Bhagwati decided to support her family by using her passion for cooking in a fruitful way. Thus, the company had no huge investment and financial backup to support its operations in the budding stages.

Dealing with different economiesWhile DFPL is based in India, its entire produce in India is exported to different economies in USA, Canada and Australia. Considering the trials and tribulations that every economy goes through, DFPL has to bear the highs and lows of the impact. Hence, any movement in the demand and supply gap of its products in the respective economies, good or bad, takes a toll on DFPL.

Strategies adopted The company had charted a definite strategy to bring best quality foods at affordable prices and catering to the needs of growing Indian population in USA by providing them home-cooked food.

Capturing the trust and support of the Indian population abroadThe promoter’s main strategy was to provide a wide range of home-cooked foods to the Indian population


58

residing abroad. They introduced various food categories such as Indian breads (roti, naan, paranthas), ice-creams, confectionaries, groceries, chutneys, pickles etc. They also adopted the mass production system which constantly helped them to not being impacted much by the US economy’s ups and down.

State-of-art technology and storage arrangementsDFPL procures raw material i.e. vegetables directly from farmers located in Gujarat. It procures grains from Rajasthan and Maharashtra. The processing facilities are located in Gandhinagar. The company uses British technology to freeze and store its products at (-) 18 degrees Celsius. Currently, DFPL exports 60 containers per month weighing 15 MT each to DFI. The company has plans to increase this to 100 containers per month for which the company is currently installing machinery worth Rs.15 crore.

Continuously adding new products and upgrading technologyCurrently, DFPL manufactures more than 60 different food items at its plant in Gandhinagar (Gujarat). It is continuously striving to add more and more food products to its existing portfolio and capture more customers in USA as well as Australia.

Competition in the segmentBeing part of such a fast-paced and humungous economy where there are various other players in the food processing industry, the company is not sure of the market share it occupies. But the company chalks out the possibility of facing any potential threat from its competitors as they believe in innovation and creativity. Also they modestly consider themselves to be the market leader setting the standards wherein others follow.

Future plansAs the promoters believe in continuous innovation and growth, they have plans to soon start their operations in India and pose threat to Indian food processing companies by capitalizing on the brand name earned abroad. The promoters are quite hopeful of a welcoming response from the Indian market.

Management Vision The promoters have a vision and are quite confident about substantially increasing their business in the next five years. They also shared their wish to expand their business multiple times in a span of ten years. With a proper mix of innovation and introduction of new technology, it hopes to add new categories of food products and new products to their existing categories.

Learning for SMEsPassion should be the driving force of any kind of task you take up. Anything that moves without passion is like a ship without a propeller. There should be an undying hunger to grow and understand customer needs. Focus and efficiency should go hand in hand. Companies should aim to be efficient without compromising on quality. Employees should be motivated and creativity should be induced in every aspect. The management should be more responsible and understand every miniscule detail of financial management.

Prepared by: Radhika Chakravorty, Analyst

Mohit Agrawal, ManagerNote: This case study has been developed factoring in the feedback of DFPL’s management. CARE expresses sincere thanks for their response and consent.

DISCLAIMERThis case study is prepared by SME division of Credit Analysis &REsearch Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. The opinion expressed in this report cannot be compared to the rating assigned to the company within this industry. The opinion expressed is also not a recommendation to buy, sell or hold an instrument.CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE.

Awarness Efforts


60

Synopsis of seminars and events with CARE’s participation

Canara Bank renews MOU with CARE RatingsCANARA Bank renews Memorandum of Understanding (MOU) with CARE Ratings for rating of SME/MSE clients

YES Bank signs MoU with CARE Ratings YES Bank and CARE Ratings have signed a MoU for cooperation in the SME segment through their service / product offerings. The MoU shall entail working jointly towards creating awareness on rating and funding avenues, workshops on knowledge dissemination as well as carrying out focused studies in the SME segment.

Speaking on the development, CARE’s Head–SME, Mehul Pandya, said “While access to finance remains a key challenge for SMEs, their dependence on bank credit is high in the absence of alternate financing avenues. With ratings covering an increasingly large segment of the MSMEs, the benefits of rating in terms of easier access to bank finance are getting acknowledged. Looking at this, CARE’s association with YES BANK is a timely and positive step forward considering the commitment at both ends for growing their presence in the SME segment.”

Mr Mehul Pandya (Head-SME; extreme right) and Mr K.S. Chandramouli (GM-Canara Bank) shaking hands during MOU signing

Mr. Mehul Pandya (Head-SME; left) and Mr. Sanjay Agarwal Sr. President-Yes Bank) during MOU signing

Echoing the sentiments, Mr. Sanjay Agarwal, Senior President–Business Banking, YES BANK, said “We are pleased to partner with CARE for the benefit of our valued existing as well as prospective SME clients who would gain through the knowledge sharing initiatives and wide range of product and service offerings from YES BANK and CARE.”


61

Training at Entrepreneurship Development Institute of India, AhmedabadCARE Ratings undertook a session during the programme organized by EDI, Ahmedabad for the international participants. The theme of the programme was “SME Banking and Financial Services”

Speakers from CARE addressed international participants and shared their experience on “SME Advisory and Credit Rating for MSMEs” and various benefits of credit rating including access to faster and favourable finance to meet their growing business needs.

Training at Syndicate Bank Regional Office at AhmedabadCARE Ratings official gave presentation to the officials of Syndicate Bank branch offices spread across Gujarat at their Regional Office in Ahmedabad. The focus was towards benefits of Credit Rating for SME/MSEs.

Mr. Yogesh Shah (DGM- CARE Ratings; centre), Mr. Mohit Agrawal (Manager-CARE Ratings; 2nd from right)and Mr. Akhil Goyal (Manager-CARE Ratings; extreme right) during session on SME Banking & Financial Services.

Mr Nitin Jha (Manager) explaining benefits of Credit Rating


62

ForthcomingEvent

Zara Advisory, Mumbai plans a Fellowship Program for SMEs and also SME Business Leader-ship AwardsSME Business Leadership Awards 2013 is a unique platform for nurturing and honouring SMEs in India. It is thus, not just an awards event, but aims to become a catalyst in the growth of SMEs in India. It has three facets: (1) One Full day event with 15 knowledge sessions by distinguished speakers followed by awards event (2) One full year unique, free, Fellowship Program for continual engagement and for preparing SMEs to their next level of growth (3) Spirit of Entrepreneurial Activism Campaign, which aims to promote entrepreneurship as an alternative to placements in college campuses. Entrepreneurs can share their success stories; get resources for quality research in helping fine-tune brand & product strategies of SMEs.

SME Business Leadership Awards 2013 is being held at Mumbai, Delhi, Bangalore and Ahmedabad. There will be 600-800 SME owners from Mumbai cluster participating for this one full day event to be held in Mumbai. The participants are those with below Rs.500 crore turnovers, are SME Owners or leadership team and this huge gathering provides ample opportunity to network and for business development. The speaker One-on-One gives an opportunity to interact one-on-one with distinguished speakers for 10 minutes on pre-scheduled basis. What more, Media One-on-One gives an opportunity to SME owners to give 10 minutes media interview or offer some promotion in front of media cameras or press advertorials.

Awards categories:• Outstanding Start Up• Emerging Family Business• Best CEO: SME• Outstanding Women Entrepreneur• Outstanding contribution – Educational Service• Outstanding contribution in Wellness • Outstanding contribution – Digital Business• Plant A Wish Foundation Award for contribution in CSR • Zara Mentor Award for Business Excellence• Collaborator of the Year

Panel Discussion:“Entrepreneurial activism – creating India’s Silicon Valley and eco system. Strategies and way forward.” 30 minutes Informal discussion over cocktails with the Jury Members and participants

Register NOW! Call: (+91) 902 902 6000 / write: [email protected] visit: www.zaraadvisory.com


63

LaunchesNews

CARE Ratings launches SME Newsletter – a daily publication:The newsletter apprises about the key happenings / developments in India and across the globe in the SME segment in the concise format. The newsletter is prepared from the various media reports published in the newspapers/ journals/ magazines etc worldwide. The link from which the news item is selected for the newsletter is also shared in order to read the full story.


64

CARE Ratings launches new product – CARE Due Diligence ServicesIt provides clients with systematic and detailed evaluation of profile of the entity enabling stakeholders make well-informed decisions. It covers document verification, interactions and site visit.


65

MSME News updates1. SMEs of India, China sign MOUs worth US$338 mn to enhance trade: SMEs of India and China identified

greater business opportunities in the segment across wide range of sectors and have signed 15 MoUs in different sectors worth USD 338 million at a symposium held in New Delhi during September 2013 (Source: SME Times).

2. First UK-India business Centre opens in Gurgaon: The first UK India Business Centre opened in Gurgaon to help British companies, especially SMEs, to enter the Indian market. This is the first such centre to open in a major emerging market since Prime Minister David Cameron’s announcement in November that Britain would go ahead with an initiative designed to transform the support given to the UK business overseas (Source: Economic Times).

3. Exporters hail increase in duty drawback rates: Exporters have welcomed the duty drawback rate rationalized for the year 2013-14, which brought more items under the scheme for tax refund to exporters to give a boost to overseas shipments. The exporters’ body welcomed the increase in rates for some handicraft items, silk garments, fabrics and yarn, gold and silver jewellery and also bringing milk products under drawback as exports growth in the dairy sector has been encouraging (Source: SME Times).

4. Registered MSMEs up by 19% in FY12 as per the ministry of MSME’s annual report for 2012-13: The annual report shows that there has been a consistent rate of growth of more than 10 per cent in the number of registered MSMEs every year until 2010-11, while in 2011-12 the growth rate surged to 19 per cent, which is around twice of the growth rate recorded for previous years (Source: Business Standard).

5. Hubli-Dharwad region is emerging as SME hub with more than a lakh SMEs: The small and medium industries in the region have developed a lot compared to the last few years in the region, and a lot of potential is seen. Entrepreneurs in the region are exporting goods to all over the country and even outside (Source: Times of India).

6. India moots plant to train SME promoters of Oman: The Confederation of Indian Industry (CII) has put forward a proposal to train young Omani entrepreneurs for promoting SMEs. The proposal aims at training graduates to become entrepreneurs (Source: Times of Oman).

7. SMEs witnessing persistent fall in sales since 2008-09 says RBI: Small companies (sales up to Rs.1 billion) witnessed a persistent contraction of sales since 2008-09 and rates of contraction worsened over the years. Among major industries, machinery, motor vehicles and cement industries in the manufacturing sector witnessed significant decline in sales growth (Source: SME Times).

8. Inter-Ministerial panel proposes easier entry, exit norms for SMEs: To counter current account deficit (CAD), the manufacturing sector needs to be supported and so the Inter-Ministerial Committee (IMC) on manufacturing has proposed new easier rules for entry and exit of MSMEs (Source: SME Times).

9. India, Mauritius sign MoU to support SMEs: The MoU facilitates an assistance and provides the necessary

support to SMEs to gain market access and business opportunities and to compete successfully in the national and international markets for both the countries (Source: SME Times).


66

10. Retail FDI policy may not have clear impact on MSMEs: A parliamentary panel has warned that the Foreign Direct Investment (FDI) policy for retail may not have positive impact on MSMEs and has suggested that a regulatory authority be set up to safeguard the interest of domestic players in the sector, reports media (Source: SME Times).

11. Dragon’s threat makes Indian toy sector SMEs suffer: Nearly 2,000 SMEs have closed down in the last 4-5 years and the rest 20% on the verge of collapse as Chinese toys are flooding into the Indian market, reveals the ASSOCHAM recent study (Source: SME Times).

12. Corporation Bank to open 9 loan centres for SMEs: Mr B. K. Srivastav, Executive Director, said the bank currently has 16 SME loan centres across the country and the aim is to take the total number of such centres to 25 by March 2014 (Source: Hindu Business Line).

13. Punjab SMEs oppose e-TRIP System: SMEs in Punjab, already battling sluggish demand from large vendors amidst the slowdown, are opposed to tax collection by the state government through electronic means. The e-TRIP (Electronically Transporting Information within Punjab) system was introduced to record intra-state transactions and curb tax evasion, and was expected to generate additional revenue of Rs. 200-300 crore per annum (Source: Business Standard).

14. Cabinet okays continuing TUFS for textiles: The Cabinet Committee on Economic Affairs approved continuing the TUFS during the 12th Plan period with a major focus on power looms (Source: SME Times).

DisclaimerThis report is prepared by CARE Ratings, a division of Credit Analysis & REsearch Limited [CARE]. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. Opinion expressed is also not a recommendation to buy, sell or hold an instrument. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE Ratings.

www.careratings.com

This report is prepared by CARE Ratings, a division of Credit Analysis & REsearch Limited [CARE]. CARE Ratings has taken utmost care to ensure

accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor

completeness of information contained in this report is guaranteed. Opinion expressed is also not a recommendation to buy, sell or hold an

instrument.

CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information

contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. This

report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner

without prior written permissionof CARE Ratings.

MUMBAIAvinash Chandra4th Floor, Godrej Coliseum,Somaiya Hospital Road, Off Eastern Express Highway,Sion (East), Mumbai - 400022Tel: +91-22-6754 3456Email: [email protected]

AHMEDABADAnand Prakash Jha32, Titanium, Prahaladnagar Corporate Road,Satellite, Ahmedabad - 380015Tel: +91-79-40265656E-mail: [email protected]

BENGALURUUnit No. 8, 1st Floor, Commander's Place, No. 6,Raja Ram Mohan Roy Road, (Opp. P F Office),Richmond Circle, Bangalore - 560025Tel: +91-80-41150445

CHANDIGARH2nd Floor, S.C.O. 196-197,Sector 34-A, Chandigarh - 160022

CHENNAIM. ChandrasekarUnit No. O-509/C, Spencer Plaza, 5th Floor,No. 769, Anna Salai, Chennai - 600002Tel: +91-44-2849 7812 / 2849 0811Email: [email protected]

HYDERABADAakash Jain401, Ashoka Scintilla, 3-6-520, Himayat Nagar,Hyderabad - 500029Tel: +91-40-39935664Email: [email protected]

Disclaimer

For more information, please contact the following

Mehul Pandya - Executive Vice President & Head - SMEPhone: +91-79-40265656, +91-9824256265, E-mail: [email protected]

Credit Analysis & Research Ltd

CORPORATE OFFICE4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai 400022Tel: +91-22-6754 3456, Fax: +91-22- 6754 3457, E-mail: [email protected]

503, Kaledonia, Sahar Road, Off Western Express Highway, Andheri (E), Mumbai 400069Tel.: +91-22-6144 3456

JAIPURRahul Jain304, Pashupati Akshat Heights, Plot No D-91,Madho Singh Road, Bani Park, Jaipur - 302016Cell: +91-9314921496, Tel: +91-141-4020213 / 14E-mail: [email protected]

KOLKATAArghya Talukdar3rd Floor, Prasad Chambers, Shagun Mall Building,10 A, Shakespeare Sarani, Kolkata - 700071Tel: +91-33-40181600 / 22831803Email: [email protected]

NEW DELHIK. A. Malik3rd Floor, B-47, Inner Circle, Near Plaza Cinema,Connaught Place, New Delhi - 110 001.Tel: +91-11-45333200 / 23318701 / 23716199E-mail: [email protected]

PUNERahul Patni9th Floor, Pride Kumar Senate, Bhamburda,Senapati Bapat Road, Shivaji Nagar, Pune - 411015Tel: +91-20-40009000Email: [email protected]

SME Digest Cover - careratings.com Digest... · I am proud to present this fifth issue of CARE SME...

Documents

Transcript of SME Digest Cover - careratings.com Digest... · I am proud to present this fifth issue of CARE SME...