Rating Rationale
September 24, 2019 | Mumbai
CavinKare Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.730 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank loan facilities of CavinKare Private Limited (CKPL) at 'CRISIL A/Stable/CRISIL A1'.
 
CRISIL believes that CKPL's business risk profile will remain stable over the medium term supported by steady performance of its personal care (PC) segment (~60% of revenues in fiscal 2019) and dairy business (~20% of revenues in fiscal 2019) and growing presence in salon business (~10% revenues in fiscal 2019). CKPL's operating profitability to remain stable at around 10-11% over the medium term, owing to steady contribution from the PC segment, while profitability in the dairy and other segments remain muted.
 
The ratio of debt to earnings-before interest, tax, depreciation and amortization (EBITDA) is expected to improve to around 1.5 times over the medium term, from an estimated 2.5 times as on March 31, 2019. Higher cash accruals resulting from better profitability, moderate capital spending and prudent working capital management has enabled the company reduce debt to about Rs 445 crore estimated as of March 31, 2019. Earlier in fiscal 2017, debt levels increased to Rs. 632 crore, due to the merger of Trends in Vogue Pvt. Ltd. (TVPL) with CKPL, and there upon the addition of TVPL's debt to CKPL's books.
 
The ratings continue to reflect CKPL's established product portfolio in the PC segment, with strong brands, improving product diversity and its adequate financial risk profile. The rating strengths are partially offset by CKPL's susceptibility to intensifying competition (across all its business segments) and volatility in input costs and moderate geographical concentration in its revenue profile.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of CKPL and its subsidiaries. CRISIL has adjusted CKPL's net worth for the goodwill and intangible assets (amounting to around Rs.290 crore) arising due to the merger of CKPL and TVPL. Further, in fiscal 2013, CKPL has transferred certain real estate assets aggregating about Rs.48 crore to a promoter-held company and revalued existing assets by a similar amount. CRISIL has adjusted CavinKare's net worth to the extent of 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:
CavinKare's flagship PC business contributes over half of its revenues and a majority of its profits. The PC division has a strong product portfolio, which augments its strengths in the hair care and hair colour segment and follows a new 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 newer markets are expected to lead to steady growth of over 10% for the PC division over the medium term. However, the company also competes with established players like Hindustan Unilever Limited (HUL, rated 'CRISIL AAA/Stable'), Proctor and Gamble (P&G) amongst others which limits CKPL's ability to achieve faster growth rates.  Operating profitability is also expected to remain at 10-11%. The PC division's profitability was impacted in fiscal 2018 due to issues pertaining to GST; however, resolution of GST related issues and commissioning of new plant in Assam has benefitted cash generation from the PC business subsequently.
 
* Improving product diversity
CKPL's foray in the fast-moving consumer gods (FMCG) business started with the innovative packaging of sachet based shampoos. CKPL expanded its product profile in the PC segment by entering into hair colour, skin care, fragrances and professional care segment. Subsequently, the company has also diversified into dairy and beverages business. The acquisition of 'Garden Namkeen' has enhanced CKPL's presence in the food and snacks segment. Continuous diversification initiatives undertaken by the company has reduced its dependence on its flagship PC business. Consequently, the revenue contribution from the PC segment has reduced gradually to less than 60% in recent years from 75% in fiscal 2010. CKPL has also continued to launch new brands within the existing segments, thereby reducing the dependence on its flagship 'Chik' brand. Further, with merger of TVPL, the company has also diversified into the salon business, which enjoys better operating margins than most other businesses of CKPL. CRISIL believes CKPL's business risk profile benefits from its improving product diversity.
 
* Adequate financial risk profile
CKPL's debt levels had increased in fiscal 2017 due to its merger with TVPL, leading to moderation of its earlier comfortable debt protection metrics. However, CKPL's healthy cash generating ability, has helped reduce the debt levels. Debt/EBITDA consequently improved from 4.8 times in fiscal 2017 to about 2.5 times in fiscal 2019. Further, CRISIL also believes CKPL will not undertake any sizeable capital spending over the medium term, which along with prudent working capital management will enable a gradual correction in key credit metrics.
 
Weaknesses:
* Susceptibility to intensifying competition (across all its business segments):
The Indian FMCG industry is marked by the presence of both organized and unorganized players across various 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 too, CKPL faces severe competition from regional brands, and other unorganized 'home-made' brands in the highly-commoditized pickle and masala category.
 
* Moderate geographical concentration in its revenue profile
CKPL derives around half its revenues from the South Indian states of Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. Though, over the years, some of its brands like Nyle, Indica, Spinz and Chik have gained national acceptance, they continue to be dominant in South India. Dairy business is also restricted to Tamil Nadu, Kerala and Karnataka. CKPL's food products are also predominantly sold in the southern regions of the country, while Garden is currently concentrated in the Gujarat and Maharashtra markets. Also, as compared to other large home-grown FMCG players in India, contribution from CKPL's export and international business remains low at around 5% of revenues. The management's ability to replicate the success at a pan India level will be a key determinant for a significant improvement in its business risk profile.
 
Liquidity: Strong
CKPL's liquidity is strong supported by improving cash generation, expected at over Rs 100 crore annually, which will suffice to service long term debt obligations (Rs.65 crore in fiscal 2020), incremental working capital requirements, and capex (Rs 50 crore annually). The company also has headroom in its fund based working capital limits, which have been utilized on average at about 16% over the past 9 months ended December 2018.
Outlook: Stable

CRISIL believes that CKPL's credit risk profile will benefit from its diversified product portfolio, with improving operating performance across divisions.
 
Rating sensitivity factor
Upward factor
* Improved in capital structure marked by networth of over Rs 100 crore and reduction in debt/EBITDA to below 2 times on a sustained basis.
* Significant improvement in cash generation, most likely due to steady revenue growth sustained profitability of over 10%
 
Downward factor
* Higher than expected capex or decline in cash generation resulting in debt/EBITDA increasing to over 4 times.
* Decline in revenues and moderation in operating profitability to less than 8%

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 out in the PC segment and over the years has diversified into other segments, such as foods, beverages, and dairy, through the organic as well as inorganic routes.
 
CKPL's PC segment has a product portfolio that 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 primarily pickles (key brands being Ruchi and Chinni's), salted snacks (Garden), and fruit-based juices (Maa). In fiscal 2017, TVPL merged with CKPL, thereby acquiring a chain of over 200 unisex beauty salons under the 'Green Trends' and 'Lime Lite' labels catering to middle and upper income segment customers.

Key Financial Indicators
As on / for the period ended March 31 Unit 2018 2017
Revenue Rs. Cr. 1521 1455
Profit After Tax (PAT) Rs. Cr. 55 61
PAT margins % 3.6 4.2
Adjusted Debt/Adjusted Net worth Times N.M. N.M.
Interest coverage Times 2.8 11.2
Debt/EBITDA Times 3.0 4.8
N.M: Not meaningful due to adjustment of goodwill and intangibles against net worth

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name Of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Crs.) Rating Assigned with Outlook
NA Long Term Loan 1-Jan-2017 NA Oct-2024 400 CRISIL A/Stable
NA Long Term Loan 1-Jan-2017 NA July-2023 15 CRISIL A/Stable
NA Long Term Loan 02-Aug-2019 NA Jan-2025 25 CRISIL A/Stable
NA Proposed Non-Fund Based Limit NA NA NA 1.25 CRISIL A1
NA Bill Discounting& NA NA NA 95 CRISIL A/Stable
NA Cash Credit NA NA NA 15 CRISIL A/Stable
NA Working Capital Demand Loan NA NA NA 115 CRISIL A/Stable
NA Working Capital Demand Loan$ NA NA NA 55 CRISIL A/Stable
NA Working Capital Demand Loan# NA NA NA 5 CRISIL A/Stable
NA Working Capital Demand Loan@ NA NA NA 3.75 CRISIL A/Stable
&Interchangeable with working capital demand loan upto Rs 32 Cr, cash credit upto Rs 27 Cr and letter of credit upto Rs 3 Cr
$Interchangeable with cash credit upto Rs 40 Cr and letter of credit upto Rs 15 Cr
#Fully interchangeable with cash credit
@Fully interchangeable with cash credit and letter of credit

Annexure - List of entities consolidated
Fully Consolidated Entities
Cavinkare (Bangladesh) Private Limited
Cavinkare Lanka (Private) Limited
Cavinkare Middle East (FZE)
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  728.75  CRISIL A/Stable  27-02-19  CRISIL A/Stable  07-02-18  CRISIL A/Stable  04-05-17  CRISIL A/Stable  28-12-16  CRISIL A/Stable  CRISIL A/Stable 
                    08-02-16  CRISIL A/Stable   
Non Fund-based Bank Facilities  LT/ST  1.25  CRISIL A1  27-02-19  CRISIL A1  07-02-18  CRISIL A1  04-05-17  CRISIL A1  28-12-16  CRISIL A1  CRISIL A1 
                    08-02-16  CRISIL A1   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current Facilities Previous Facilities
Facility Amount
(Rs. Crore)		 Rating Facility Amount
(Rs. Crore)		 Rating
Long Term Loan 440 CRISIL A/Stable Long Term Loan 415 CRISIL A/Stable
Proposed Non-fund based limit 1.25 CRISIL A1 Proposed Long Term Loan 25 CRISIL A/Stable
Bill Discounting& 95 CRISIL A/Stable Proposed Non-fund based limit 51.25 CRISIL A1
Cash Credit 15 CRISIL A/Stable Bill Discounting& 95 CRISIL A/Stable
Working Capital Demand Loan 115 CRISIL A/Stable Cash Credit 15 CRISIL A/Stable
Working Capital Demand Loan$ 55 CRISIL A/Stable Working Capital Demand Loan 65 CRISIL A/Stable
Working Capital Demand Loan# 5 CRISIL A/Stable Working Capital Demand Loan$ 55 CRISIL A/Stable
Working Capital Demand Loan@ 3.75 CRISIL A/Stable Working Capital Demand Loan# 5 CRISIL A/Stable
- - - Working Capital Demand Loan@ 3.75 CRISIL A/Stable
Total 730 -- Total 730 --
&Interchangeable with working capital demand loan upto Rs 32 Cr, cash credit upto Rs 27 Cr and letter of credit upto Rs 3 Cr
$Interchangeable with cash credit upto Rs 40 Cr and letter of credit upto Rs 15 Cr
#Fully interchangeable with cash credit
@Fully interchangeable with cash credit and letter of credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation

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