Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facilities of Synthite Industries Ltd (Synthite) at ‘CRISIL AA/Stable/CRISIL A1+’.

 

Revenue increased at a healthy rate of around 14% in fiscal 2021 over the previous fiscal driven by growth in revenues in India and key markets like US, Europe, and Brazil. Covid-19 pandemic did not have much impact on operations both in terms of sourcing of inputs as well as supply, given that the products fall under the essential commodities. On a consolidate level, operating margins grew by 400bps to 17.3% in fiscal 2021 driven by benign raw material prices and sourcing efficiency measures.

 

Over the medium term, revenue is expected to grow by around 9-12% per fiscal, driven by sustained demand from existing customers and growth in India and China markets where the company is looking to expand its product portfolio. In line with correction in input prices, operating margin will moderate by 200-250 bps and are expected to sustain at 14-15% over the medium term. Operating margin will be aided by cost advantages emanating from efficient procurement of inputs and streamlining of production units. The company also faces minimal risk on account fluctuation in input price and foreign exchange (forex) rates, as inventory is backed by orders and receivables are completely hedged. Though operations will remain working capital intensive, improving cash accrual should ensure lower reliance on bank debt.

 

The financial risk profile remains healthy supported by healthy cash accruals of Rs.270 crore in fiscal 2021 and gearing 0.3 time as of March 31,2021. The company has moderate capex plans to be completed over a period of 18 months. The capex is expected to be predominantly funded by internal accruals and liquid investments. Financial profile is further expected to improve with expected minimal addition of debt, healthy cash accruals and subsequent improvement in debt protection metrics. Liquidity is comfortable, aided by cash and cash equivalents of around Rs 85 crore and current investments of Rs.300 crore as on March 31, 2021 and other liquid investments.

 

The ratings continue to reflect an established brand, leading market position in the spice oils and oleoresins market in India, and a healthy financial risk profile. These rating strengths are partially offset by susceptibility to volatility in raw material prices and forex rates and working capital-intensive operations.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Synthite and its subsidiaries and joint-venture, due to operational and financial linkages. All the entities are together herein referred to as Synthite.

 

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

Leading exporter of spice oils and oleoresins with an established brand: Synthite is India’s largest producer and exporter of spice oils and oleoresins. The company, which accounts for almost 50% of Indian exports of these commodities, derives 70-75% of revenue from the overseas market. It exports to more than 75 countries around the globe, lending considerable geographical diversity.

 

The company has longstanding relationships with leading food processing companies globally and a diverse client base as well. The top client contributes less than 10% of revenue, thereby mitigating client concentration risk. It has around 500 products and continues to invest in research and development to meet global quality standards and customise products as per client requirements.

 

Healthy financial risk profile and liquidity: The gearing and debt protection metrics are comfortable. Reducing debt, and rising cash accrual improved the net cash accrual to total debt ratio to about 0.61 time in fiscal 2021, from 0.46 time in the previous fiscal. No substantial addition of long term debt is expected over the medium term. The capital structure is likely to remain comfortable, despite the working capital-intensive nature of operations. The networth was around Rs 1,443 crore as on March 31, 2021, and is expected to improve further, aided by steady cash generation.

 

Liquidity is supported by 32% utilised bank lines of around Rs 745 crore in the 12 months through July 2021 and cash and liquid funds of Rs.383 crore as on March 31, 2021. The company also holds around 6.5% of shares in Cochin International Airport Authority.

 

Weaknesses

Susceptibility to volatility in raw material prices and forex rates: Key raw materials are spices, such as pepper, chilli and turmeric, the prices of which have been volatile depending on supply level. While multiple procurement sources and the ability to pass on major increases in costs to customers mitigate this risk, any significant volatility in prices can impact margins. Also, despite the natural hedge available through input imports and product exports, and hedging undertaken on net exposure, any significant fluctuation in forex rates could impact the operating margin.

 

Working capital-intensive operations: Due to seasonal procurement of raw materials, large inventory of 4-5 months is maintained; this is expected to continue with slight reduction due to better inventory management. Average gross current assets were around 270 days in the five fiscals ended March 31, 2021 and are expected to remain at a similar level over the medium term. 

Liquidity: Strong

Cash accrual of over Rs 250 crore per fiscal over the medium term, and cash and cash equivalents of Rs 85crore as on March 31, 2021, should comfortably cover capex, minimal maturing debt obligation and part of the incremental working capital requirement. Average utilisation of the fund-based bank lines of Rs 745 crore was 32% during the 12 months through June 2021. With a gearing of about 0.3 time as on March 31, 2021, there is sufficient headroom to raise additional debt to fund capex, if required. 

Outlook Stable

CRISIL Ratings believes the business risk profile will remain stable over the medium term, backed by a healthy market position, pick-up in end-market demand and improving operating efficiency. The financial risk profile should remain healthy driven by healthy cash accrual, moderate capex plans and reducing reliance on bank borrowing for working capital funding.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth of 20% per fiscal while maintaining a healthy operating margin of over 17%, resulting in significantly higher-than-expected cash accrual
• Sustenance of healthy credit metrics, with the gearing below 0.2 time and an increase in liquid surplus

Downward factors

• Significant decline in revenue by over 15% per fiscal and in the operating margin to below 10%, affecting cash accrual
• Large, debt-funded capex or acquisition, or a significant stretch in the working capital cycle, leading to weakening of key credit metrics

About the Company

Synthite, which was set up by Mr CV Jacob as Synthite Industrial Chemicals Ltd in 1972, commenced operations by manufacturing oleoresins from chosen Indian spices, such as pepper, turmeric and cardamom. It got its present name in September 2008. The company has subsidiaries in the US, Brazil, China, Vietnam and Sri Lanka. Subsidiaries in the US and Brazil act as marketing hubs, while the ones in Sri Lanka and Vietnam serve as procurement arms. The subsidiary at Dezhou, China, has a manufacturing setup and will be used both as a procurement arm and export unit.

Synthite offers over 500 products, including spice oleoresins, essential oils, floral concretes/absolutes, seasonings, resinoids (for the perfume industry), health and functional ingredients, and application-oriented, value-added products. The company has also diversified into other businesses, including realty and hospitality; however, these remain small relative to the large spice and spice-derivative business.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	1822	1610
Profit after tax (PAT)	Rs crore	220	120
PAT margin	%	12.1	7.5
Adjusted debt/adjusted networth	Times	0.30	0.28
Interest coverage	Times	31.0	5.13

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

^100% interchangeability between letter of credit
##100% interchangeability between packing credit in foreign currency, foreign documentary bill purchase, and foreign usance discount bill purchase
*100% interchangeability between packing credit in foreign currency, foreign bill purchase, foreign bill discounting, foreign bill negotiation, bill purchase, bill discounting, working capital demand loan, and short-term loan
@@100% interchangeability between packing credit in foreign currency, import letter of credit, standby letter of credit, short-term loan, and overdraft export invoice financing.

Annexure – List of entities consolidated

Names of entities	Extent of consolidation	Rationale for consolidation
Synthite (Xinjiang) Bio Tech Co Ltd	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite (Beijing) Bio Tech Co Ltd	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite (Dezhou) Bio Tech Co Ltd	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite Brazil Importcao Exportcao Ltda	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite USA Inc	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite Lanka Private Limited	Full	Common management, similar line of business, business and financial linkages, and common promoters
Synthite Vietnam LLC	Full	Common management, similar line of business, business and financial linkages, and common promoters
Sijmak Exports Private Limited	Full	Common management, similar line of business, business and financial linkages, and common promoters
Algavista Greentech Private Limited	Proportionate (50%)	Common management, similar line of business, business and financial linkages, and common promoters