Rating Rationale
December 10, 2020 | Mumbai
Eastern Condiments Private Limited
Long-term rating continues on 'Watch Positive'; short-term rating reaffirmed 
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore
Long Term Rating CRISIL A (Continues on 'Rating Watch with Positive Implications')
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.50 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on the long-term bank facility of Eastern Condiments Private Limited (Eastern) continues to be on 'Rating Watch with Positive Implications'. The rating on the short-term facilities and commercial paper programme have been reaffirmed at 'CRISIL A1'.
 
On September 11, 2020, CRISIL had placed its rating on the long term bank facility 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 will 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. Nawaz and Mr. Feroz).
 
MTR with revenues 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 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 a strong presence in Kerala, Tamil Nadu and export markets and a moderate presence in Uttar Pradesh (UP), Telangana, Andhra Pradesh, Maharashtra and Rajasthan. On the other hand, MTR has a 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 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 expects Eastern's performance to improve in fiscal 2021 with revenue growth of 10-11% and operating margin of over 13%. Operating performance in the first half of fiscal 2021 was strong, with standalone revenue growth of 11%, led by strong growth in the export segment which grew by over 60% year-over-year; while operating margin was healthy at nearly 15% on account of lower manpower and promotional costs. 
 
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. 111 crore as on September 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 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 - Details of Consolidation, 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 a 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 believes that its market position in the RoI segment should continue to improve, aided by focus towards select well performing regions.

In the first half of fiscal 2021, exports contributed to around 35% of the total revenues. 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 half 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.

Eastern's focus on export markets, which has 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
Financial risk profile benefits from the 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 111 crore as on September 30, 2020.

Weaknesses
* 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 also 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 70 crore in fiscal 2021 against debt repayment obligations of Rs 10 crore. Bank limit utilization averaged 66% over the last twelve months through October 2020. Utilisation levels are expected to be lower in the near term with reduction in inventory.
.
Rating Sensitivity Factors
Upward factors
* Completion of the transaction with MTR Foods 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.

About the Company

Eastern was set up by the late Mr. ME Meeran, at Adimali, Kerala, in 1989. The company manufactures spices, blended spice powders, pickles, and rice-based products under the Eastern brand, and is the flagship company of the Eastern group, which is also engaged in the rubber re-treading, construction, mattress and ready-made garments businesses. The company has six facilities across Kerala, Tamil Nadu, Andhra Pradesh, and UP. Operations are managed by the founder's sons, Mr. Navas Meeran and Mr. Firoz Meeran.

Key Financial Indicators
As On /For The Period Ended March 31 Unit 2019 2018
Revenue Rs.Cr 864 828
Profit After Tax (PAT) Rs.Cr 47 44
PAT Margin % 5.4 5.3
Adjusted Debt/Adjusted Networth Times 0.7 0.4
Interest coverage Times 8.5 9.2

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Short-Term loan@ NA NA NA 55 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 Cash Credit# NA NA NA 15 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
@Interchangeable with Cash Credit
#Interchangeable with Short Term Loan
 
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 Speciality 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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A1  11-09-20  CRISIL A1  24-10-19  CRISIL A1  10-09-18  CRISIL A1  21-08-17  CRISIL A1  CRISIL A1 
            30-09-19  CRISIL A1  31-08-18  CRISIL A1       
Fund-based Bank Facilities  LT/ST  285.00  CRISIL A/Watch Positive/ CRISIL A1 11-09-20  CRISIL A/Watch Positive/ CRISIL A1  24-10-19  CRISIL A/Positive/ CRISIL A1  10-09-18  CRISIL A/Positive/ CRISIL A1  21-08-17  CRISIL A/Stable/ CRISIL A1  CRISIL A/Negative/ CRISIL A1 
            30-09-19  CRISIL A/Positive/ CRISIL A1  31-08-18  CRISIL A/Positive/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST  15.00  CRISIL A/Watch Positive  11-09-20  CRISIL A/Watch Positive  24-10-19  CRISIL A/Positive  10-09-18  CRISIL A/Positive  21-08-17  CRISIL A1  CRISIL A1 
            30-09-19  CRISIL A/Positive  31-08-18  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
Bank Guarantee* 15 CRISIL A/Watch Positive Bank Guarantee* 15 CRISIL A/Watch Positive
Cash Credit# 15 CRISIL A/Watch Positive Cash Credit# 15 CRISIL A/Watch Positive
Long Term Loan 30 CRISIL A/Watch Positive Long Term Loan 30 CRISIL A/Watch Positive
Packing Credit** 50 CRISIL A/Watch Positive Packing Credit** 50 CRISIL A/Watch Positive
Proposed Long Term Bank Loan Facility 17 CRISIL A/Watch Positive Proposed Long Term Bank Loan Facility 17 CRISIL A/Watch Positive
Short Term Loan@ 55 CRISIL A/Watch Positive Short Term Loan@ 55 CRISIL A/Watch Positive
Short Term Loan*** 93 CRISIL A1 Short Term Loan*** 93 CRISIL A1
Short Term Loan 25 CRISIL A1 Short Term Loan 25 CRISIL A1
-- 0 -- Short Term Loan 63 Withdrawn
Total 300 -- Total 363 --
***Interchangeable with Packing Currency in Foreign Currency / Indian Rupee
**Interchangeable with Short Term Loan
*Interchangeable with Short Term Loan & Cash Credit
@Interchangeable with Cash Credit
#Interchangeable with Short Term Loan
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
CRISILs Criteria for rating short term debt

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