Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of CavinKare Private Limited (CKPL) to ‘Positive’ from ‘Stable’ and reaffirmed the ‘CRISIL A’ rating.

 

The outlook revision reflects the expectation of improvement in the business risk profile of CKPL supported by strong demand for personal care (PC) products (68% of revenue in fiscal 2021) driven by increasing consumer spend on personal hygiene and care. While revenue growth is expected in the mid-to-high single digits over the medium term, operating profitability is expected at the past level of 11-13%, with steady margins in the PC business buttressing lower, though improving, contribution from the dairy (15% of revenue), beverages, salon and foods businesses. The non-PC businesses will be impacted in the first quarter of fiscal 2022 by the second wave of COVID-19, but will perform better compared with the first quarter of fiscal 2021. Focus on lowering cash burn in these segments through stringent cost cutting, and increased sale of high-margin products will support profitability.

 

The financial risk profile should continue to improve over the medium term, due to steady cash accrual (over Rs 130 crore), modest capital expenditure (capex), and progressive debt repayment, leading to comfortable debt protection metrics.

 

Despite the impact of the pandemic in the first quarter of fiscal 2021, revenue is estimated to have declined by only 5% driven by strong performance of the PC business which is estimated to have grown 10-15%. The other segments which are seasonal (beverages) or dependent on footfall (salon business) saw a decline. Operating margin is estimated to have improved by over 300 basis points to around 12% in fiscal 2021 due to lower spends on marketing and reduced losses in some divisions. The salon business, however, continued to face challenges as restrictions on mobility hit customer visits.

 

Higher cash accrual resulting from better profitability helped the company reduce debt to around Rs 400 crore as on March 31, 2021, from over Rs 550 crore a year earlier, leading to improvement in the debt protection metrics. The company also had cash and cash equivalents of Rs 50 crore as on March 31, 2021. The ratio of debt to earnings before interest, tax, depreciation and amortisation (Ebitda) was around 2.1 times in fiscal 2021, compared to 4 times in fiscal 2020. In fiscal 2017, debt had increased to Rs 632 crore due to the merger of Trends in Vogue Pvt Ltd (TVPL) with CKPL and the addition of TVPL’s debt to the books of CKPL.

 

The ratings continue to reflect the established product portfolio of CKPL in the PC segment, with strong brands, improving product diversity and adequate and improving financial risk profile. The strengths are partially offset by susceptibility to intensifying competition in all business segments and to volatility in input costs.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CKPL and its subsidiaries and has adjusted the networth of CKPL for the goodwill and intangible assets (amounting to around Rs 290 crore) arising from the merger of CKPL and TVPL. In fiscal 2013, CKPL transferred real estate assets of about Rs 48 crore to a promoter-held company and revalued assets by a similar amount. CRISIL Ratings has adjusted the networth to the extent of the revalued assets.

 

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

* Established product portfolio in the PC segment, with strong brands:

The flagship PC business contributes almost 68% to revenue and account for a majority of profits. The PC division has a strong product portfolio, with a sound market position in the hair care and hair colour segment, and follows a product development strategy driven by packaging and pricing. Established brands such as Chik, Meera, Nyle, Karthika and Indica, a strong product pipeline and increased penetration into existing and new markets are expected to lead to steady growth of 8-10% for the PC division over the medium term. However, competition from established players such as Hindustan Unilever Ltd (HUL; ‘CRISIL AAA/Stable’) and Proctor and Gamble (P&G) which makes it a competitive industry.  The PC division’s profitability was impacted in fiscal 2018 due to issues pertaining to GST. Resolution of these issues and commissioning of the plant in Assam has improved cash generation from the PC business subsequently. Operating profitability of the PC segment is expected to remain at above 20% over the medium term.

 

* Improving product diversity

CKPL entered the fast-moving consumer goods (FMCG) business with the innovative packaging of shampoos in sachets and expanded its product profile in the PC segment by entering the hair colour, skin care, fragrances and professional care segments. The company has also entered the dairy and beverages businesses. The acquisition of Garden Namkeen has enhanced its presence in the food and snacks segment. Continuous diversification has reduced dependence on its flagship PC business. However, pandemic-driven disruptions resulted in lower revenue contribution from other segments in fiscal 2021, with the PC business contributing 68% (albeit lower than over 75% seen in fiscal 2010 and before). CKPL has continued to launch new brands, thereby reducing the dependence on its flagship Chik brand. The merger with TVPL has helped the company diversify into the salon business, which has better operating margin than most of its other businesses, except PC.

 

Profitability of the non-PC businesses was impacted in fiscal 2021 by the pandemic-led lockdown, and this continued in the first quarter of fiscal 2022 as well, though the impact is lower this fiscal. As the pandemic-related issues abate, the business risk profile will benefit from the company’s product diversity and increased profitability of the non-PC businesses.

 

* Adequate and improving financial risk profile

Debt increased in fiscal 2017 because of the merger with TVPL, leading to moderation in the debt protection metrics. However, healthy cash generation helped reduce the debt subsequently. Debt to Ebitda ratio improved from 4.8 times in fiscal 2017 to an estimated 2.1 times in fiscal 2021. CKPL is unlikely to undertake sizeable capex over the medium term, which along with steady cash generation and prudent working capital management, will enable further correction in the debt protection metrics; for instance, the debt to Ebitda ratio is expected below 1.6 times in fiscal 2022.

 

Weaknesses:

* Susceptibility to intensifying competition

The Indian FMCG industry has organised and unorganised players across segments and product categories. CKPL, in its key PC business, faces intense competition from both home-grown players as well as Indian subsidiaries of International players. In the food division, CKPL faces competition from regional brands and unorganised, ‘home-made’ brands in the highly-commoditised pickle and masala category.

 

* Geographical concentration in revenue

CKPL derives a significant portion of its revenue from the states of Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. While some brands such as Nyle, Indica, Spinz and Chik have gained national acceptance over the years, they continue to be dominant in these states. The company’s dairy business is also restricted to Tamil Nadu, Kerala and Karnataka and its food products are predominantly sold in southern India, while Garden is concentrated in Gujarat and Maharashtra. Also, compared with large home-grown FMCG players in India, revenue contribution of the company’s international business remains low around 5%. The management’s ability to replicate the success at a pan-India level will be a key determinant for a significant improvement in the business risk profile of CKPL.

Liquidity: Strong

CKPL has strong liquidity supported by improving cash generation, expected at Rs 130 crore annually, which will suffice to meet long-term debt obligation of Rs 88 crore in fiscal 2022 and Rs 67 crore in fiscal 2023, incremental working capital requirement and capex (Rs 40 crore annually). The company has headroom in its fund-based working capital limits, which were utilised 45% on average over the 12 months through March 2021.

Outlook: Positive

The business risk profile of CKPL will benefit from its established presence in the PC segment, diversified product portfolio, and good distribution network. Operating profitability will be supported by strong performance of the PC segment and increasing revenue from other segments. The financial risk profile should continue to benefit from steady cash generation, progressive debt repayment, prudent working capital management and modest capex.

Rating Sensitivity factors

Upward Factors:

• Sustained healthy revenue growth (6-8%), and improved operating profitability (over 12%), due to faster turnaround of non-PC businesses benefitting cash generation
• Progressive debt reduction through steady cash generation, prudent working capital management and capex leading to sustained improvement in the debt protection metrics (debt to Ebitda ratio below 1.6 times)

 

Downward Factors:

• Sluggish revenue growth and moderation in operating profitability to less than 8%, impacting cash generation
• Larger-than-expected capex or decline in cash generation resulting in moderation in debt protection metrics with debt to Ebitda ratio increasing to 3.0-3.2 times.

About the Company

Incorporated in 1990, CKPL was promoted by Mr C K Ranganathan, and is an established player in the domestic FMCG sector. The company started in the PC segment and has diversified into other segments, such as foods, beverages and dairy over the years, through organic as well as inorganic routes.

 

The PC product portfolio includes shampoos (key brands being Chik, Meera and Nyle), hair-wash products (Meera, Karthika), coconut oil (Meera), fairness creams (Fairever), deodorants and talcs (Spinz), and hair-colour products (Indica, Raaga). Under the dairy segment, CKPL sells milk and milk-based products under the Cavin brand. The company’s food and beverage segments comprise pickles (key brands being Ruchi and Chinni’s), salted snacks (Garden), and fruit-based juices (Maa). In fiscal 2017, CKPL merged with TVPL, thereby acquiring a chain of over 200 unisex beauty salons under the Green Trends and Lime Lite labels catering to middle and high income customers.

Key Financial Indicators

As on/for the period ended March 31	Unit	2020	2019
Revenue	Rs.Crore	1630	1628
Adjusted profit after tax (PAT)	Rs.Crore	48	79
Adjusted PAT margin	%	0.4	4.9
Adjusted debt/ adjusted networth	Times	5.52	7.10
Interest coverage	Times	2.9	3.9

 

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	Long-term loan	01-Jan-2017	NA	Oct-2024	400	NA	CRISIL A/Positive
NA	Long-term loan	2-Aug-2019	NA	Oct-2024	25	NA	CRISIL A/Positive
NA	Proposed long-term bank loan facility	NA	NA	NA	67	NA	CRISIL A/Positive
NA	Bill discounting&	NA	NA	NA	88	NA	CRISIL A/Positive
NA	Bill discounting@	NA	NA	NA	61	NA	CRISIL A/Positive
NA	Cash credit	NA	NA	NA	11	NA	CRISIL A/Positive
NA	Working capital demand loan	NA	NA	NA	158	NA	CRISIL A/Positive

&Interchangeable with working capital demand loan up to Rs 32 crore, cash credit up to Rs 27 crore and letter of credit up to Rs 3 crore

@Interchangeable with cash credit of Rs 12 crore, short-term loan of Rs 20 crore and letter of credit up to Rs 5 crore

Annexure – List of entities consolidated

Name of the entity	Extent of consolidation	Rationale for consolidation
Cavinkare (Bangladesh) Pvt Ltd	100%	Fully owned subsidiary and business linkages
Cavinkare Lanka (Pvt) Ltd	100%	Fully owned subsidiary and business linkages
Cavinkare Middle East (FZE)	100%	Fully owned subsidiary and business linkages