Key Rating Drivers & Detailed Description

Strengths:

Extensive industry experience of promoters and established relationship with key customer: The promoters have experience of around 3 decades in FMCG industry. Longstanding presence in industry has given them strong understanding of dynamics of the market, and enabled them to establish relationships with one of the FMCG giant i.e. HUL. OCL has been associated with HUL since 1993 and the agreement of contract manufacturing of detergents for its brands, Active ‘Wheel’ has been renewed on a yearly basis for the last 25 years. Further, OCL has also started supplying to HUL for its brands ‘Surf Excel’ from December 2018 onwards. 

Such long association with HUL highlights OCL’s ability to timely execute its orders while maintaining the strict quality guidelines required by the client. This association with a reputed client, like HUL reduces the receivables’ risk for OCL and the terms of contract also ensure steady revenue stream.

Efficient working capital cycle: Efficient management of its inventory and timely realization of receivables has led to discipline working capital cycle. The gross current assets (GCA) days has remained in the range of 45-69 days over the last four fiscals through fiscal 2020.  The working capital cycle is expected to remain disciplined over the medium term. 

Above-average financial profile: OCL’s financial profile is above-average reflected from its total outside liabilities to tangible networth (TOL/TNW) of around 1.79 time as on March 31, 2020 (1.88 times as on March 31, 2019). Furthermore, the debt protection measures are also above-average with interest coverage ratio and net cash accruals to total debt of 5.37 times and 0.43 time for fiscal 2020. CRISIL believes OCL’s financial profile will remain above-average over medium term and any increase in debt level higher than expected will be key monitorable.

Weakness:

Presence in a highly fragmented industry with limited size: The industry is highly fragmented and competitive, with a large number of unorganized players in the market. Such high fragmentation limits the pricing flexibility and bargaining power of the players. Also, the threat from large integrated players in the form of capacity additions limits the growth. The industry is exposed to the risk low entry barriers. The small initial investment and the low complexity of operations have resulted in existence of innumerable entities, much smaller in size, leading to significant fragmentation 

Customer and geographical concentration in revenue profile: OCL faces significant customer concentration risks. HUL account to 100 per cent of its total sales. Also, the company operates with single manufacturing unit in Odisha thereby constraining its geographical diversity. The high customer and geographical concentration make the company’s revenue growth and profitability dependent on its key customers’ future growth plans.

Risk associated with implementation of warehouse: The company has entered into agreement with HUL to construct a warehouse with rentable area of 1,76,976 sq. ft. The entire project cost is around Rs 36 crores which is to be funded by debt to equity mix of around 1:1. The management do not have any prior experience of building and operating such large warehouse. Moreover, the project got delayed by almost a year due to the Covid 19 pandemic induced lockdowns.

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