Press Release Shree Shubham Logistics Limited

1 1 CARE Ratings Limited Press Release Shree Shubham Logistics Limited March 15, 2018 Ratings Facilities Amount (Rs. crore) Ratings1 Rating Action Long Term Bank Facilities (reduced from ) CARE BBB; Stable (Triple B; Outlook : Stable) Reaffirmed Short Term Bank Facilities ( ) CARE A3 (A Three) Reaffirmed Long Term / Short Term Bank Facilities (reduced from ) CARE BBB; Stable / CARE A3 (Triple B; Outlook : Stable / A Three) Reaffirmed Total Bank Facilities (Rupees Four Hundred Seventy Eight crore and Nine Lakh Only) Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Shree Shubham Logistics Limited (SSLL) continue to derive strength from its strong parentage and SSLL s tie-ups with government and private organizations for its warehousing services.

2 SSLL is a majority owned subsidiary of Kalpataru Power Transmission Ltd. (KPTL; rated CARE AA; Stable / CARE A1+) and KPTL has demonstrated financial support for ensuring uninterrupted operations of SSLL. The ratings also factor growth in total operating income of SSLL s warehousing operations during 9 MFY18 (refers to the period April 1 to December 31) with improved capacity utilisation alongwith discontinuation of the high risk agro commodity trading business. The ratings are, however, constrained on account of continued cash losses incurred by the company due to its high operating leverage and high interest costs on debt availed for its asset heavy infrastructure business, its high leverage, significant debt repayment liabilities in the medium term, high amount of debtors and susceptibility of business volumes to vagaries of monsoon and crop-sowing patterns.

3 The ratings also take cognizance of the envisaged monetization of some of the idle assets of the infrastructure business segment of the company, in the near to medium term. SSLL s ability to significantly increase the scale of its warehousing operations, improve its profitability and capital structure and realise its debtors in a timely manner would be the key rating sensitivities. Furthermore, continued support from KPTL and performance of SSLL s acquired non-banking financial company (NBFC) subsidiary alongwith the nature and extent of support provided to the latter would also be crucial from the credit perspective.

4 Detailed description of the key rating drivers Key Rating Strengths Strong parentage of KPTL along with continuous financial support to SSLL: KPTL acquired majority stake in SSLL in March 2007 as a part of its diversification strategy in new growth areas, away from its core business in Transmission and Distribution Infrastructure (TDI) segment. The parentage of KPTL helped SSLL embark upon its capex plans from its initial owned capacity of around 16,400 metric tonnes (MTs) in FY09 to 462,716 MTs as on November 30, 2017. KPTL has also demonstrated continued financial support for ensuring uninterrupted operations of SSLL.

5 In FY17, KPTL infused equity of crore in SSLL, primarily towards meeting SSLL s various funding requirements including debt servicing. Growth in warehousing income in 9 MFY18 and discontinuation of agro commodity trading business: SSLL s income from its warehousing services, after exhibiting sharp decline over two years ended FY17 to crore in FY17, witnessed some increase to crore in 9 MFY18 with addition of new clientele and expansion in newer states. With growth in 1 Complete definitions of the ratings assigned are available at and in other CARE publications.

6 2 CARE Ratings Limited Press Release income from warehousing services and cost rationalization measures adopted by the company, it registered operating profit (PBILDT) during 9 MFY18, albeit with cash losses. SSLL scaled down its trading business in FY17 in line with the management s shift towards the company s core infrastructure business of providing warehousing and value added services. During FY17, it registered a meager trading income of crore through liquidation of existing inventory as against a trading income of crore registered in FY16. During 9 MFY18, it did not register any trading sales.

7 In the near term, SSLL plans to start providing trade facilitation services whereby it would purchase agri-commodities, backed by onward sales contracts. Key Rating Weaknesses Cash losses resulting in continued financial dependence on parent: SSLL has registered continuous cash losses from FY16 till 9 MFY18 on account of reduction in capacity utilisation of its warehouses alongwith high operating and interest costs in its asset heavy warehousing business as well as due to inventory losses in its agro-commodity trading business. Although the quantum of cash loss reduced to crore in 9 MFY18 from crore in FY17 with growth in warehousing income; however, SSLL is likely to continue to be dependent on its parent for meeting its operational expenses and debt servicing in the medium term especially in light of large upcoming debt repayment.

8 The company also envisages monetization of some of its idle assets of its infrastructure business segment, in the near to medium term. High trade receivables: Receivables level of SSLL has remained high in recent years due to credit offered mainly to government clients in its warehousing business; alongwith presence in agri-commodity trading business till FY17. The outstanding receivables of the company reduced from crore as on March 31, 2016 to crore as on March 31, 2017 ( crore as on December 31, 2017); albeit remained high. Furthermore, a significant portion of these receivables pertains to the erstwhile trading business of the company.

9 Timely realization of these receivables and efficient deployment of the realised funds towards the core agri-warehousing business of the company would be crucial for SSLL s liquidity going forward. High financial leverage: SSLL s capital structure remained leveraged with a high overall gearing of as on December 31, 2017 ( as on March 31, 2017); the same has deteriorated significantly over past few years. This was on account of debt availed over the years to fund the capex for setting up new warehouses, alongwith reduction in networth base due to continued net losses.

10 In the near term, the management plans to convert the interest-bearing unsecured loans from promoter group companies, amounting to crore as on Dec. 31, 2017 to equity so as to improve its profitability. Timely conversion of these loans shall remain crucial for improvement in the capital structure and reduction in interest costs for the company. Furthermore, SSLL has invested around crore in its NBFC subsidiary viz. Punarvasu Financial Services Pvt Ltd (Punarvasu) till September 30, 2017. Financial performance of Punarvasu and any further investment by SSLL in it shall remain crucial from credit perspective.