Rating Rationale
May 06, 2019 | Mumbai
Eternis Fine Chemicals Limited
Long-term rating upgraded to 'CRISIL A/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.531.4 Crore (Enhanced from Rs.345.84 Crore)
Long Term Rating CRISIL A/Stable (Upgraded from 'CRISIL A-/Positive')
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facilities of Eternis Fine Chemicals Limited (Eternis) to 'CRISIL A/Stable' from 'CRISIL A-/Positive' and reaffirmed the 'CRISIL A1' rating on the short-term facilities.
 
The upgrade reflects improvement in the company's business risk profile driven by substantial increase in revenue across the product portfolio. Eternis registered robust revenue growth estimated at around 65% in fiscal 2019, driven by volume and value growth. Operating margin improved to an estimated 12.5% in fiscal 2019 from 12.1% in fiscal 2018, due to a better product mix and increased absorption of overheads. Over the medium term, revenue is expected to grow 10% annually, driven by capacity expansion and ramp-up in sale of new products. Operating margin is expected at 12.5-13.0% backed by ramp-up of high-value new products.
 
The financial risk profile remains adequate despite increase in gearing to an estimated 1.2 times as of March 31, 2019, from 0.9 time a year earlier. The gearing increased on account of larger-than-expected, debt-funded capital expenditure (capex) in fiscals 2019 and 2020 for capacity expansion, and higher working capital debt. Nevertheless, debt protection metrics should remain comfortable over the medium term. Liquid reserves estimated at Rs 115 crore as on March 31, 2019, support the financial risk profile. Acquisitions, if any, are likely to be funded in a prudent mix of debt and equity, and will remain a monitorable.
 
The ratings continue to reflect Eternis' established position in the aroma chemicals industry, strong clientele, robust manufacturing infrastructure, demonstrated research and development (R&D) capability, and adequate financial risk profile. These strengths are partially offset by volatility in raw material prices, exposure to competition in the aroma chemicals industry, and significant product concentration in revenue.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Eternis and its wholly owned subsidiary, AIMS Impex Pvt Ltd, due to significant operational and financial linkages. CRISIL has amortised goodwill of Rs 25 crore from the acquisition of AIMS Impex over a period of five years, in line with its 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:
* Established market position and strong clientele: Presence of two decades in the aroma chemicals business has helped the company gain significant expertise in manufacturing ingredients used in aroma chemicals, and achieve notable share in the global market. The company exports to more than 20 countries, including all major markets, and is the preferred supplier to the top four flavour and fragrance houses of the world-Givaudan SA (Switzerland), International Flavour and Fragrances Inc (USA, rated 'BBB/Stable/A-2' by S&P Global Ratings), Firmenich SA (Switzerland), and Symrise AG (Germany).
 
* Strong manufacturing set-up and demonstrated R&D capability: Two dedicated plants for aroma chemicals with separate production lines enable the company to increase production for a particular product depending on market conditions, without disturbing overall output. The dedicated R&D team undertakes product and process development that help minimise waste and optimise use of energy.
 
* Adequate financial risk profile: The financial risk profile is supported by comfortable gearing, estimated at 1.2 time as on March 31, 2019. Gearing should remain stable over the medium term. Networth increased steadily to an estimated Rs 297 crore as on March 31, 2019, from Rs 135 crore as on March 31, 2014.
 
Weaknesses:
* Susceptibility of profitability to volatility in raw material prices and exposure to competition: Eternis is susceptible to volatility in the prices of key raw materials, which are crude oil derivatives and are affected by changes in crude prices. The company imports a significant proportion of its raw material from China and is susceptible to change in supply or prices due to government regulations. Intense competition in the aroma chemicals ingredients industry, which has several global players, has led to pricing pressure on suppliers such as Eternis. As a result, the company's operating margin has been volatile, ranging from 8.8% to 13.5% in the past four fiscals.
 
* Significant product concentration in revenue: Eternis' top four products form a sizeable proportion of turnover, with hydrogenated and salicylates accounting for around half of revenue. However, Eternis has been successful in ramping up revenue from some of its other products, which has reduced product concentration. The risk is also mitigated by presence in the relatively stable functional fragrances segment which largely caters to players in the soaps and detergents industry.
Liquidity

Eternis has adequate liquidity, with annual cash accrual expected at Rs 90-100 crore over the medium term against debt obligation of Rs 25 crore and Rs 50 crore in fiscals 2020 and 2021, respectively. Bank lines of Rs 299 crore were utilised moderately at an average of 81% over the 12 months through January 2019. Cash and marketable securities, estimated at Rs 115 crore as on March 31, 2019, provide additional cushion. Capex of Rs 120 crore is expected in fiscal 2020. Acquisitions, which are likely to be partly or wholly funded through liquid reserves, remain a monitorable. Working capital requirement is moderate with receivables and inventory estimated at 62 and 70 days, respectively as on March 31, 2019.

Outlook: Stable

CRISIL believes Eternis will sustain its business risk profile over the medium term, backed by steady growth in revenue on account of healthy growth in sales volume of existing products and launch of new products, and sustained operating profitability. The company will continue to benefit from its established market position in the aroma chemicals industry and adequate financial risk profile.
 
Upside scenario:
* Substantial and sustained increase in revenue
* Improvement in operating profitability driven by change in product mix and improved operating efficiency
* Steady financial risk profile
 
Downside scenario:
* Steep decline in revenue or profitability
* Significant weakening of debt protection metrics
* Substantial increase in gearing on account of larger-than-expected, debt-funded capex or acquisition

About the Company

Set up in 1965 by the Mariwala group, Eternis is a closely held public limited company that manufactures aroma chemicals. The company exports to over 20 countries (78% of total turnover in fiscal 2018). The company has two manufacturing facilities in Pune and a captive hydrogen plant. It has an R&D centre in Navi Mumbai that is approved by the Ministry of Science and Technology. 

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs cr. 602 475
Profit after tax Rs cr. 35 34
PAT margin % 5.8 7.1
Adjusted debt/adjusted networth Times 0.90 0.58
Interest coverage Times 6.03 13.27

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 Crore)		 Rating Assigned
with Outlook
NA Cash Credit@ NA NA NA 28.00 CRISIL A/Stable
NA Export-bill purchase discounting# NA NA NA 90.00 CRISIL A1
NA Export-bill purchase discounting^ NA NA NA 30.00 CRISIL A1
NA Export packing credit# NA NA NA 102.50 CRISIL A1
NA Export finance limit** NA NA NA 61.00 CRISIL A1
NA External commercial borrowings NA NA 22-Jan-23 54.00 CRISIL A/Stable
NA Rupee term loan NA NA 31-Mar-24 66.00 CRISIL A/Stable
NA Term loan NA NA Feb-23 32.95 CRISIL A/Stable
NA Foreign currency term loan NA NA Nov-22 26.00 CRISIL A/Stable
NA FCNR loan NA LIBOR +2.7% 28-Aug-20 15.95 CRISIL A/Stable
NA Letter of credit$ NA NA NA 25.00 CRISIL A1
@Fully interchangeable with export finance limit, letter of credit, and buyer's credit
#Fully interchangeable with letter of credit
**Fully interchangeable with letter of credit and buyer's credit
^Fully interchangeable with import documentary credit and buyer's credit
$Fully interchangeable with export packing credit and export bill discounting
 
Annexure - List of entities consolidated
Name of company Extent of consolidation Rationale for consolidation
Eternis Fine Chemicals Ltd Full Parent company
AIMS Impex Pvt Ltd Full Wholly owned subsidiary-significant operational and financial linkages
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  506.40  CRISIL A/Stable/ CRISIL A1      07-06-18  CRISIL A-/Positive/ CRISIL A1  19-05-17  CRISIL A-/Positive/ CRISIL A1  18-11-16  CRISIL A-/Stable/ CRISIL A2+  CRISIL A-/Stable/ CRISIL A2+ 
Non Fund-based Bank Facilities  LT/ST  25.00  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
Cash Credit@ 28 CRISIL A/Stable Cash Credit* 36 CRISIL A-/Positive
Export Bill Purchase -Discounting# 90 CRISIL A1 FCNR Loan 23.34 CRISIL A-/Positive
Export Bill Purchase -Discounting^ 30 CRISIL A1 Working Capital Facility* 175.5 CRISIL A1
Export Finance Limit** 61 CRISIL A1 Foreign Currency Term Loan 26 CRISIL A-/Positive
Export Packing Credit# 102.5 CRISIL A1 Proposed Working Capital Facility* 50 CRISIL A1
External Commercial Borrowings 54 CRISIL A/Stable Term Loan 35 CRISIL A-/Positive
FCNR Loan 15.95 CRISIL A/Stable -- 0 --
Letter of Credit$ 25 CRISIL A1 -- 0 --
Term Loan 32.95 CRISIL A/Stable -- 0 --
Foreign Currency Term Loan 26 CRISIL A/Stable -- 0 --
Rupee Term Loan 66 CRISIL A/Stable -- 0 --
Total 531.4 -- Total 345.84 --
*Fully interchangeable with export bill purchase-discounting, letter of credit, buyer's credit, and packing credit
@Fully interchangeable with export finance limit, letter of credit, and buyer's credit
#Fully interchangeable with letter of credit
**Fully interchangeable with letter of credit and buyer's credit
^Fully interchangeable with import documentary credit and buyer's credit
$Fully interchangeable with export packing credit and export bill discounting
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 Chemical Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation

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