Detailed Rationale

CRISIL Ratings on the long-term bank facilities of Eastern Condiments Private Limited (Eastern) continues on 'Rating Watch with Positive Implications'. Also, CRISIL Ratings has reaffirmed its 'CRISIL A1' rating on the short-term bank facilities and commercial paper programme.

 

On September 11, 2020, CRISIL Ratings had placed its rating on the long-term bank facilities of Eastern on watch owing to an agreement between Orkla ASA (Orkla), through its wholly owned subsidiary, MTR Foods Pvt Ltd (MTR) and members of the Meeran family (the promotors of Eastern). The two had signed an agreement, whereby MTR would purchase 41.8% stake in Eastern from the members of the Meeran family and further acquire the entire 26% stake held by McCormick Ingredients SE Asia Pte Ltd. Post completion of the transaction, MTR would own 67.8% stake in Eastern. The transaction took place at a purchase price that values the company at Rs.2,000 crore, on a debt and cash free basis.

 

Following the completion of the transaction, an application would be filed to merge Eastern into MTR. The merged company would be jointly owned by Orkla (90.01%) and the Meeran family (9.99% represented by brothers, Mr. Navas and Mr. Feroz).

 

MTR with revenue of almost Rs.900 crore in fiscal 2020 (almost similar to Eastern), makes and sells spices, condiments, ready-to-cook breakfast mixes and ready-to-eat meals, beverages and sweets.

 

CRISIL Ratings expects the merged entity to benefit from improved scale of operations, due to synergies emerging out of complementary businesses, and a more solid market position, especially in south India. Eastern has strong presence in Kerala, Tamil Nadu and export markets and moderate presence in Uttar Pradesh (UP), Telangana, Andhra Pradesh, Maharashtra and Rajasthan. On the other hand, MTR has strong presence in Karnataka and Andhra Pradesh, and is present in almost all other states across India. MTR is expected to benefit from Eastern’s direct distribution network in Kerala, while MTR’s pan-India outlets are expected to help penetrate in regions outside Kerala.

 

The financial risk profile of the merged entity is expected to be significantly bolstered due to low debt at Eastern, while MTR is debt free.

 

This transaction is subject to approval from Competition Commission of India and lenders. The said approvals are yet to be received. The rating will be removed from watch post receipt of necessary approvals for the transaction, and is expected to move up by at least a notch, post successful completion of the transaction.

 

CRISIL Ratings expects Eastern’s topline to grow by 3-5% in fiscal 2021 with operating margin at 11-12%. Operating performance in the first nine months of fiscal 2021 was healthy, with standalone revenue growth of 6%, led by strong growth in the export segment which grew by over 43% year-over-year; while operating margin was healthy at nearly 13% on account of lower manpower and promotional costs. Growth in the export market has moderated since the third quarter of fiscal 2021, as its competitors are catching up, as the situation is gradually becoming normal.

 

For fiscal 2020, Eastern's consolidated operating revenue is estimated to have been flat, at over Rs 880 crore with operating margins contracting by 380 basis points to 7.3%. This is attributed to provisions made by the company on account of a fire incident, in one of their cold storage units in Theni, Tamil Nadu, in October 2019, followed by higher promotional costs related to exports and due to disruptions caused by the Covid-19 pandemic. Consolidated debt is estimated at Rs 162 crore in fiscal 2020, and has reduced to around Rs. 76 crore as on December 31, 2020. Improved profitability and cash generation will benefit the credit metrics, which are already healthy.

 

The ratings reflect Eastern’s established market position in the Kerala spice market, improving operating efficiencies driven by focus on high margin export markets and reducing operating losses in the rest of India (RoI) markets, and healthy financial risk profile. These strengths are partially offset by susceptibility to volatile raw material prices and intense competition.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of Eastern, and its wholly owned subsidiaries and joint venture (JV) to the extent of its shareholding. That’s because all these entities, collectively referred to herein as Eastern, have common businesses and financial fungiblity. 

 

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 market position

Backed by the longstanding presence of over 30 years, the company manufactures plain powders (unblended spices), masala powders (blended spices), pickles and rice powders, under the ‘Eastern’ brand. The company has nearly 70% market share in the organised spice segment in Kerala and has diversified into pickles and ready-to-cook items. The established market position of Eastern is supported by its strong direct distribution network and cash and carry model which enables it to maintain its dominance in the region.

 

Over the years, the company has ventured into territories beyond Kerala, leveraging its established brand presence across India in UP, Maharashtra, Karnataka, Andhra Pradesh, Telangana and Tamil Nadu. CRISIL Ratings believes that its market position in the RoI segment should continue to improve, aided by focus towards select well performing regions.

 

In the first nine months of fiscal 2021, exports contributed to around 33% of the total revenue. Eastern has strong presence in the Middle East, especially Dubai, Doha and Jeddah and these markets also provide higher realisations, translating into better profitability compared to the domestic markets. While reliance on Kerala will remain high (nearly 50% of the revenue in the first nine months of fiscal 2021), geographic diversity in revenues should continue to improve.

 

• Improving operating efficiencies

Eastern’s market position is backed by an effective distribution system, which includes direct distribution and cash and carry model. Proximity of grinding/powdering units to sourcing hubs reduces logistics cost by 7-8% annually.

 

The company’s focus on export markets, which have higher margins coupled with reducing operating losses in the RoI markets is expected to improve overall profitability. Over the years, the company has also been focusing on increasing sales of higher value products such as masala powders, which have better operating margins. The cash-and-carry approach adopted by the company has kept receivables low at 30-40 days in the four fiscals through 2020.

 

• Healthy financial risk profile

The financial risk profile benefits from sizeable net worth (Rs.257 crore as on March 31, 2020) and healthy debt protection metrics. Debt was Rs.162 crore as on March 31, 2020, leading to gearing of 0.63 time. Total debt is expected to be lower in fiscal 2021, leading to an interest coverage ratio of over 9 times, and gearing of under 0.5 time. Total debt stood at Rs 76 crore as on December 31, 2020.

 

Weakness:

• Susceptibility to volatility in raw material prices

Key raw materials, including chilli, coriander and turmeric, constitute majority of the total requirement. Given the agro-based nature of raw materials and different crop patterns, availability is seasonal and prices tend to fluctuate. Eastern typically procures 50% of its raw material requirement upfront during the crop season, and the balance as required. Inventory holding also depends on the management’s anticipation of prices.

 

Operating margin has fluctuated over the five fiscals through 2020, because of volatility in raw material prices and the high inventory holding period. Limited scope to pass on the increase in raw material cost to end-consumers partly constrains profitability.

 

• Exposure to risks related to competition

The spice market is intensely competitive, and dominated by small scale units because of low capital intensity and entry barriers. Processing spices is a commodity-based business, with low value addition and limited product differentiation. Eastern competes with local brands such as Nirapara and Kitchen Treasures in Kerala, and prominent brands such as Everest Masala and MDH Masala, which have a pan-India presence. Besides, ITC Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and Tata Consumer Products Ltd have recently enhanced their focus on the spices segment, and are also strengthening their pan-India presence.

Liquidity: Adequate

Eastern has adequate liquidity, marked by expected cash accruals of over Rs 80 crore in fiscal 2021 against debt repayment obligations of Rs 10 crore. Bank limit utilisation averaged 57% over the last twelve months through January 2021. Company has surplus liquidity in the form of bank fixed deposits amounting to Rs 35 crore. Though utilisation levels are lower at present, they are expected to peak in the months of March and April 2021 at the onset of harvest season as the company starts procuring inventory.

Rating Sensitivity factors

Upward factors

• Completion of the transaction with MTR resulting in stronger business and financial risk profiles
• Sustained improvement in operating profitability, along with achievement of operating breakeven in the RoI segment.
• Strengthening of debt metrics (gearing less than 0.5 time on sustained basis), and liquidity position.

 

Downward factors

• Sustained decline in operating profitability to 6-8%, on account of increased competition or promotions
• Debt (to fund the acquisition of 67.8% stake in Eastern,), if any, transferred to the merged entity, or large capital expenditure leading to moderation in credit metrics – for instance gearing sustaining at above 1-1.25 times.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of allotment	Coupon rate %	Maturity date	Issue size (Rs.Cr)	Complexity level	Rating assigned with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	17	NA	CRISIL A/Watch Positive
NA	Short-Term Loan***	NA	NA	NA	93	NA	CRISIL A1
NA	Cash Credit**	NA	NA	NA	70	NA	CRISIL A/Watch Positive
NA	Short-Term Loan	NA	NA	NA	25	NA	CRISIL A1
NA	Packing Credit**	NA	NA	NA	50	NA	CRISIL A/Watch Positive
NA	Long-Term Loan	NA	NA	Nov-22	30	NA	CRISIL A/Watch Positive
NA	Bank Guarantee*	NA	NA	NA	15	NA	CRISIL A/Watch Positive
NA	Commercial Paper	NA	NA	7-365 days	50	Simple	CRISIL A1

***Interchangeable with Packing Currency in Foreign Currency / Indian Rupee

**Interchangeable with Short Term Loan

*Interchangeable with Short Term Loan & Cash Credit

Annexure – List of entities consolidated

Name of entities	Extent of consolidation	Rationale for consolidation
BAMS Condiments Impex Private Limited	100%	Strong managerial, operational, and financial linkages
Eastern Food Specialty Formulation Private Limited	100%	Strong managerial, operational, and financial linkages
Eastern Condiments Middle East & North Africa FZC, UAE	100%	Strong managerial, operational, and financial linkages