Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Advanced Enzyme Technologies Limited (Advanced Enzyme).

 

The ratings continue to reflect strong operating efficiency of the company, driven by capabilities across the value chain, healthy relationships with customers, extensive experience of the promoters and a strong financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to changes in food and drug safety regulations.

 

Revenue for fiscal 2021 grew 14% year-on-year to Rs 509 crore from Rs 448 crore in fiscal 2020 on account of strong performance in the human healthcare segment. Revenue from this segment grew 18% year-on-year to Rs 378 crore in fiscal 2021 (Rs 321 crore in fiscal 2020) and formed 77% of the total revenue (73% in fiscal 2020). Operating profitability improved marginally by 70 basis points to 47.1% in fiscal 2021 from 46.4% in fiscal 2020, supported by increase in the share of high value-added products sold. Revenue growth is expected to remain healthy over the medium term, supported by rise in application for enzymes and probiotics across human nutrition and other end user industries. Besides, operating margin is expected to remain in line with earlier years owing to the company’s presence in the highly niche specialty enzyme segment.

 

Although operations remain working capital intensive, they have not led to elevation in debt levels, with the working capital requirement funded primarily through internal accrual and liquid surplus. No major capital expenditure (capex) is envisaged over the medium term, barring setting up of a research and development (R&D) facility at estimated cost of Rs 40-50 crore, expected to be funded entirely through internal accrual and liquid surplus. Liquidity remained healthy. Hence, the company is expected to sustain its net debt-free balance sheet and healthy credit metrics over the medium term.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Advanced Enzyme and its subsidiaries, Advanced Enzymes USA, Advanced Bio-Agro Tech Ltd, Advanced Enzymes Europe BV, Advanced Enzytech Solutions Ltd, JC Biotech Pvt Ltd and SciTech Specialities Pvt Ltd. This is because all these entities, together referred to herein as Advanced Enzyme, are in the same business operate under a common management and have financial linkages.

 

CRISIL Ratings has amortised the goodwill on consolidation over five years, in line with its criteria. Other intangibles have been amortised over 10 years, in line with the relevant criteria.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position

Extensive technical know-how and a large product basket led to the company’s leadership position in the domestic healthcare and nutrition segments. International sales account for around 56% of the revenue, with the US being a major contributor. The company has more than 700 clients spread across 45 countries and a comprehensive product basket of 68 enzymes and probiotics and over 400 proprietary products.

 

• Strong operating efficiency, driven by capabilities across the value chain

The healthy operating margin and return on capital employed of 47% and 30%, respectively, in fiscal 2021 reflect strong operating efficiency, backed by superior capabilities in R&D, manufacturing and distribution. The company has seven R&D centres and nine manufacturing facilities across India and the US, with total fermentation capacity of 500 cubic metre.

 

• Healthy financial risk profile

The financial risk profile is expected to remain strong over the medium term despite acquisitions on account of growing networth of Rs 696 crore as on March 31, 2021, and healthy accretion to reserve; low debt lead to comfortable gearing of 0.03 time. Debt protection metrics were robust, indicated by net cash accrual to total debt and interest coverage ratios of 9.02 times and 94.2 times, respectively, in fiscal 2021.

 

Weaknesses:

• Large working capital requirement

Gross current assets (GCAs) were high at 229 days as on March 31, 2021, drive by large inventory and receivables of 127 and 63 days, respectively. The GCAs were high because of diverse manufacturing locations and distribution channels, large portfolios of enzymes, wide variety of customer industries, timely customer service, high export contribution and considerable new product development. The company also undertakes formulation activities   at its US facilities as per customer requirement, which entails higher inventory. Nevertheless, the company largely funds the requirement through internal accrual, and reliance on debt is minimal.

 

• Susceptibility to regulatory and compliance-related issues

The company remains susceptible to regulatory changes related to food and drug safety norms. Any noncompliance could lead to product recall, discontinuation of business by the customers and litigation, which may adversely affect the business and financial performance. However, the company has actively taken steps to mitigate such eventualities and has displayed healthy recovery in the past.

 

• Exposure to fluctuations in foreign exchange (forex) rates

Exports, mainly to the US, account for most of the revenue (53% in fiscal 2021). A natural hedge to the extent of imports and the use of pre-shipment and post-shipment credit facilities mitigate the impact of forex rate fluctuations. The company hedges 25-30% of its net exposure 

Liquidity: Strong

Company has healthy liquidity with unencumbered cash and marketable securities at Rs319 crore as on March 31, 2021. Out of these around Rs 256 crore is maintained in the US-based subsidiary as a significant proportion of profits are generated therein (50% of consolidated operating income in fiscal 2021. Healthy expected cash accruals coupled with large liquid surplus is expected to comfortably meet moderate capex and increase in working capital requirements. Further, company also has access to fund based limits of Rs 32.5 crore which has been marginally utilized in the past.

Outlook: Stable

Advanced Enzyme should continue to benefit from its robust market position and healthy operating efficiency, while the financial risk profile should remain strong on account of adequate cash accrual and moderate capex.

Rating Sensitivity factors

Upward factors

• Significant and sustained increase in revenue, at a compound annual growth rate over 15% while maintaining operating margins at over 40%
• Sustained healthy financial risk profile with gearing of less than 0.5 time owing to prudent capex plans and working capital management
• Sustained build-up of cash surplus

 

Downward factors

• Considerable increase in leverage, with gearing over 1 time, due to larger-than-expected, debt-funded capex or acquisitions
• Adverse impact on the business risk profile due to any regulatory or compliance-related action
• Decline in operating profitability to less than 30% on a sustained basis

About the Company

Advanced Enzyme was incorporated in 1989 by Mr V L Rathi and Mr C L Rathi as Advanced Biochemicals Pvt Ltd; it was renamed in 2005. The company was listed on the Bombay Stock Exchange and National Stock Exchange in August 2016. It is one of the largest enzyme companies in India, with competencies across the value chain: R&D, manufacturing and marketing/distribution of enzymes. The company operates two primary business segments: healthcare and nutrition and bioprocessing. It has multiple subsidiaries operating in similar businesses.

 

Advanced Bio-Agro Tech Ltd markets animal nutrition enzymes, Advanced EnzyTech Solutions Ltd markets non-food bioprocessing enzymes and Advanced Enzymes USA (Advanced US) is a holding company for the operating and marketing subsidiaries in the US that cater primarily to the human healthcare and nutrition segment. Evoxx Technologies GmBH has presence in Germany and carries out R&D of industrial enzymes and carbohydrate for food processing. JC Biotech Pvt Ltd mainly manufactures anti-inflammatory enzyme. SciTech Specialities Pvt Ltd provides platform for effervescent technology based manufacturing of tablets and sachets on P2P basis.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	509	448
Profit after tax (PAT)*	Rs crore	140	122
PAT margin	%	27.5	27.1
Adjusted debt/adjusted networth*	Times	0.03	0.04
Interest coverage	Times	94.17	51.08

 *adjusted for amortisation of goodwill

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Pre Shipment Packing Credit*	NA	NA	NA	15.00	NA	CRISIL A+/Stable
NA	Overdraft Facility#	NA	NA	NA	12.50	NA	CRISIL A+/Stable
NA	Pre Shipment Packing Credit@	NA	NA	NA	5.00	NA	CRISIL A+/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	2.50	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	40.00	NA	CRISIL A+/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	25.00	NA	CRISIL A+/Stable

* Includes Post shipment and is Interchangeable with Rs 15 crore of cash credit and working capital demand loan and Rs 10 Crore of BG/BC/SLC/ULC/BD

#Fully interchangeable with working capital demand loan

@ Interchangable with LC, CC, FDBP, PDB, Buyer Credit, WCDL and OD sub limit of Rs 2.5 crores

Annexure – List of entities consolidated

Subsidiaries	Extent of consolidation	Reason
Advanced Enzymes USA	Full consolidation	100% subsidiary
Advanced Bio-Agro Tech Ltd	Full consolidation	60% subsidiary
Advanced Enzymes Europe BV	Full consolidation	100% subsidiary
Advanced Enzytech Solutions Ltd	Full consolidation	100% subsidiary
Advanced Enzymes (Malaysia) Sdn Bhd:*	Full consolidation	100% subsidiary
JC Biotech Pvt Ltd	Full consolidation	70% subsidiary
SciTech Specialities Pvt Ltd	Full consolidation	51% subsidiary