Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/Stable' rating on the long-term bank facilities of Omniactive Health Technologies Limited (OHTL; part of the OHTL group).

 

The rating continues to reflect the established market position of the OHTL group in the nutraceutical segment. Continued focus on introducing new products, combined with cost optimisation measures, helped the group sustain its healthy operating performance in fiscal 2023. Revenue grew 6% on-year to Rs 716 crore while operating margin remained healthy at around 30%.

 

The financial risk profile remains comfortable, backed by healthy gearing of 0.16 time and ratio of debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) estimated at 0.44 time as on March 31, 2023. The group plans modest capital expenditure (capex) of Rs 30-40 crore annually, besides actively evaluating inorganic growth opportunities. While the capex will be funded through internal accrual, any acquisition is expected to be partly funded through debt, which could weigh on the capital structure and debt protection metrics over the medium term. Nonetheless, peak gearing is expected to remain below 1 time and peak debt to EBITDA ratio below 2 times. Larger-than-expected, debt-funded capex or acquisition, which could impact the financial risk profile, will remain a key monitorable.

 

The strengths are partially offset by working capital-intensive operations, high geographic, customer and product concentration in revenue, and susceptibility to fluctuations in raw material availability and prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of OHTL and its subsidiaries, given their common business and integrated operations. All the entities are collectively referred to as the OHTL group

 

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 in the nutraceuticals segment

The OHTL group benefits from its established market position in the nutraceuticals segment, supported by its promoters' extensive experience, strong research, and development (R&D) capability, and established product lines. The key promoter, Mr Sanjay Mariwala, has experience of more than three decades in the natural foods and supplement ingredients industry. This, along with strong in-house R&D capability, has led to a portfolio of branded, innovative natural products with clinically proven health benefits. The OHTL group has complementing products in the specialty and botanical segments, which account for about 80% and 20%, respectively, of the revenue. It has specialty products such as Lutemax 2020, Ocusorb, Omnixan, Capsimax, Gingever, enXtra, in the therapeutic segments of vision, cognition and mental health, metabolic health and weight management, active wellness, and natural energy. Some of these products are market leaders in their respective segment. Longstanding relationships with customers through co-development and co-branding of products give the group an edge in the market.

 

Revenue is expected to grow 10-12% over the medium term, supported by healthy demand for nutraceuticals to prevent lifestyle-related health conditions, specifically post the pandemic, new product launches and geographic expansion plans.

 

• Healthy operating profitability

The OHTL group has vertically integrated operations for major products, including direct sourcing of marigold and paprika from farmers, which helps ensure quality, control cost and maintain healthy margins. The company’s operating profitability was healthy at around 30% in fiscal 2023 and is expected at a similar level in the near term, supported by vertically integrated operations, moderate R&D spend, focus on high-margin specialty products, and continued benefit of cost rationalisation.

 

• Adequate financial risk profile

The financial risk profile has improved, as reflected in comfortable gearing of 0.16 time and debt to Ebitda ratio of 0.44 time as on March 31, 2023, driven by improved profitability and accrual as well as debt reduction.

 

The company plans modest organic capex of Rs 30-40 crore annually over the medium term. It is also actively evaluating inorganic growth opportunities. Any acquisition is expected to be partly funded through debt. As a result, the capital structure and debt protection metrics may moderate over the medium term. Nonetheless, peak gearing is expected to remain below 1 time and peak debt to Ebitda ratio below 2 times. Any larger-than-expected, debt-funded capex or acquisition, which could impact the company’s financial risk profile, will remain a key monitorable.

 

TA OA Associates (TA), a global private equity firm, is a strategic investor in OHTL with majority stake of 56.35% as on July 07, 2023. This ensures operational support for the OHTL group’s global expansion plans and financial flexibility for its inorganic growth plans. CRISIL Ratings is given to understand that TA will remain invested for five years and there is no obligation on OHTL or the promoter family to provide an exit or assured return to TA.

 

Weaknesses:

• Working capital-intensive operations

The key raw materials of the OHTL group are agricultural commodities and are available seasonally. Gross current assets increased to around 260 days as on March 31, 2023, from 212 days a year earlier, on account of elevated inventory of marigold and paprika. While the working capital cycle is expected to ease, it will remain large and a key rating monitorable. The business risk profile will remain constrained by working capital-intensive operations.

 

• High geographic, customer and product concentration risk

The OHTL group derives around 71% of revenue from the US, resulting in high geographic concentration. The group also has small, but growing, presence in Europe, Asia and Africa. It is susceptible to fluctuations in foreign exchange (forex) rates, as majority of the revenue is from the US, while raw material procurement is largely domestic. The group does not hedge its forex exposure.

 

With about 50% of revenue coming from the top 10 customers, any loss of customer or lower demand from top customers could adversely impact the operating performance. However, the group benefits from established relationship with its customers and co-branded products.

 

The OHTL group has a diverse product profile of 20-25 products, with 35-40% of the revenue coming from Lutemax 2020 and Lutein family products, which are key products in the eye-care segment. Ability to launch new products and increase its value offerings in other segments will remain a key monitorable.

 

• Susceptibility to fluctuations in raw material availability and prices

The group’s products are natural and manufactured from flower extracts and botanical plants sourced from agricultural fields. Raw materials, being agricultural commodities, are subject to risks of availability owing to adverse climatic conditions and the resultant volatility in prices. The group’s vertically integrated supply chain for key products, such as marigold and paprika, ensures consistent quality of output. While operating profitability should remain healthy over the medium term, any significant volatility in raw material prices and inability to pass on such price increases to end customers immediately could put pressure on operating profitability and cash accrual.

Liquidity: Adequate

The OHTL group will likely maintain adequate liquidity backed by expected annual cash accrual of over Rs 170 crore over the medium term, which will be adequate to meet debt obligation and partly fund organic capex of Rs 30-40 crore and acquisitions, if any. The bank lines were utilised 29% on average for the 12 months through March 2023. Liquid surplus was healthy at Rs 41 crore as on March 31, 2023.

Outlook: Stable

CRISIL Ratings believes the business risk profile of the OHTL group will improve backed by its established market position in the nutraceutical segment and healthy revenue growth while sustaining its improved operating profitability. The financial risk profile should remain adequate because of steady working capital cycle and adequate debt metrics.

Rating Sensitivity factors

Upward factors:

• Sustained, healthy organic revenue growth of over 12-15% annually, along with steady operating profitability, leading to sound annual cash generation
• Improvement in the financial risk profile and sustenance of healthy debt protection metrics, supported by prudent working capital management, even amid inorganic growth opportunities

 

Downward factors:

• Revenue falling more than 10% or decline in operating profitability to below 20% impacting cash generation
• Larger-than-expected, debt-funded capex or acquisition or stretch in the working capital cycle resulting in debt to Ebitda ratio of 2.5-3.0 times on a sustained basis

About the Company

OHTL, incorporated in 2003, manufactures nutritional innovations and solutions, specialty botanical and extracts. It is engaged in natural active pharmaceutical ingredients and novel delivery systems for nutrients and active ingredients and offers a range of quality ingredients which are innovative and scientifically validated for dietary supplementation, colouring, flavour enhancement and personal care applications. In January 2021, TA acquired majority stake in OHTL. As on July 07, 2023, TA held 56.35% stake in OHTL and the Mariwala family held 39.99% while the rest is held by other shareholders.

Any other information: Not applicable