Lagos, 08 April 2021 – GCR Ratings (“GCR”) has assigned national scale long and short-term issuer ratings of BBB(NG) and A3(NG) respectively, to Daraju Industries Limited, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Daraju Industries Limited||Long Term issuer||National||BBB(NG)||Stable Outlook|
|Short Term issuer||National||A3(NG)|
The ratings of Daraju Industries Limited (“Daraju”) are underpinned by its established market niche and diversified product portfolio, which have facilitated stable earnings and cash flows, as well as the expected margin enhancements through ongoing backward integration initiatives. This is counterbalanced by the currently high earnings-based gearing metrics and a weak liquidity assessment.
Daraju is a Nigerian focused FMCG manufacturer, producing a wide variety of hygiene and household cleaning products for the lower income market. The ratings are supported by the competitive advantages derived from its relatively strong market share within its niche, well accepted brand and competitive pricing within its segment. The company has also developed strong distributive footprint across the country. Although, there are plans to diversify geographically over the longer term, the Nigerian market will remain the key contributor to earnings.
Daraju has sustained a strong earnings progression, with 16.6% CAGR reported over the 5-year period to December 2020, underpinned by higher traded volumes through product advancement and capacity expansion. Driven by expansion projects, GCR expects sound volume and revenue growth over the next 12 to 24 months. Margin enhancement should also emanate from greater control over some key aspects of the supply chain, as Daraju increasingly produces more of its own input requirements. Accordingly, EBITDA margins are projected to trend above the historical average of 11.6% over the next two years.
Constraining the rating, debt has risen sharply in recent years due to ongoing expansion and the high working capital required to meet volume growth. Consequently, net debt to EBITDA climbed to around 540% during FY19 but had materially moderated to 409% at FY20 (on the back of stronger earnings). GCR expects further moderations to around 250%-300% in FY21 due to expected stronger earnings and reduction in debt as scheduled redemption materialises. Both EBITDA coverage of net interests and operating cash flow coverage of debt remain relatively low and will likely remain so as long as large working capital investments are made to scale up production. GCR has, however, taken cognisance of the strong relationships with lenders as evidenced in the well diversified funding source, including local banks, government concessional facilities and shareholders loans, which provide some funding flexibility.
The weak liquidity assessment also negatively impacts the rating. This is primarily owing to the large proportion of short-term revolving facilities that Daraju utilises. This debt significantly exceeds cash resources and unutilised facilities. GCR has, however, factored in the likelihood that the proposed N10bn bond issue will be at least partially successful, and the proceeds used to extend the debt over the medium term. Positively, there is ample covenant headroom, with revenue performing well ahead of loan covenants.
The Stable Outlook reflects GCR’s expectations that Daraju will continue to generate robust cash flows and operate profitably over the outlook period. Along with the proposed bond issue, this will help to reduce the high and short dated debt profile.
Positive rating action could emanate from successful bond issue which leads to a meaningful improvement in the debt maturity profile. Attaining or exceeding earnings targets should also ensure improved cash flows and a reduction in the overall quantum of debt. The rating could come under pressure if the company is unable to refinance its short-term debt. Further, persistent liquidity pressure would likely mean that gearing remains high and debt service coverage relatively weak.
|Primary analyst||Samuel Popoola||Analyst|
|Lagos, Nigeria||Samuel@GCRratings.com||+234 1 904 9462|
|Secondary analyst||Eyal Shevel||Sector Head: Corporate and Public Sector Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, February 2021|
|GCR Nigeria Corporate Sector Risk Scores, February 2021|
Daraju Industries Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term issuer||Initial/Last||National||BBB(NG)||Stable Outlook||March 2021|
|Short Term issuer||Initial/Last||National||A3(NG)|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|Leverage and Cash flow||(1.50)|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Daraju Industries Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Daraju Industries Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Daraju Industries Limited and other reliable third parties to accord the credit ratings included:
- 2019 audited annual financial statement, and prior four years annual financial statements;
- 2020 full year management accounts;
- Internal and/or external management reports;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;