Detailed Rationale

Crisil Ratings has upgraded its rating on the short-term bank facilities of Advanced Enzyme Technologies Ltd (Advanced Enzyme) to ‘Crisil A1+’ from 'Crisil A1’ and has reaffirmed its ‘Crisil A+/Stable’ rating on the long-term company’s bank facilities

 

The rating action takes into account strong liquidity position of the company as indicated by the sustained buildup of liquid surplus, which is expected to increase gradually in the absence of any debt repayment obligations or any major organic/inorganic expansion in pipeline. The ratings continue to reflect healthy operating efficiency of the company, driven by capabilities across the value chain, healthy relationships with customers, extensive experience of the promoters and a strong financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to changes in food and drug safety regulations.

 

For fiscal 2024, operating income rose by 14% over fiscal 23 to Rs 633 crores driven by growth in the human healthcare and bioprocessing segment. Revenue was flattish on y-o-y basis at Rs 301 crores in H1FY25 compared to Rs 305 crores in H1 FY24 as human nutrition (67% of consolidated sales) saw a dip in revenue due to lower demand and in Q2FY25, the company had a higher revenue reversal from normal by Rs. 8 crores which are deferred to Q3FY25. Revenue growth is expected to remain modest over the medium term, supported by rise in application for enzymes, probiotics and bio-catalases across human nutrition and other end user industries. Operating margin increased to 34% in fiscal 2024 as compared to 32% in fiscal 2023 due to lower material and freight costs, coupled with operating leverage benefits. Operating margins are expected to remain stable around 33-35% in the medium term on account of slower recovery in higher margined global markets and limited pricing flexibility to pass on the price increases.

 

Financial risk profile remains strong on account of healthy cash accruals and no major debt-funded capex plan with interest coverage of over 50 times and TOL/TNW of around 0.14 times as on March 31, 2024. Although operations remain working capital intensive, they have not led to elevation in debt levels, with the working capital requirement funded primarily through internal accruals and liquid surplus. No major capital expenditure (capex) is envisaged over the medium term. Setting up of a research and development (R&D) facility at an estimated cost of Rs 70-80 crore is expected to be funded entirely through internal accruals and liquid surplus over the next two fiscals. Hence, the company is expected to sustain its net debt-free balance sheet and healthy credit metrics over the medium term. Liquidity remains abundant with healthy cash generation of more than Rs. 130 crore per annum and liquid surplus of over Rs. 520 crores as on September 30, 2024, majority of which is parked overseas in safe investments. The bank limits which remain unutilized for 12 months ended October’2024, provide further cushioning. Liquid surplus is expected sustain as the inorganic expansion, if any, are not expected to be sizeable impacting liquidity.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of Advanced Enzyme and its subsidiaries, Advanced Enzymes USA, Advanced Bio-Agro Tech Ltd, Advanced Enzymes Europe BV, Advanced Enzytech Solutions Ltd, JC Biotech Pvt Ltd, SciTech Specialities Pvt Ltd and Saiganesh Enzytech Solutions Private Limited. This is because all these entities, together referred to herein as Advanced Enzyme, are in the same business operate under a common management and have financial linkages.

 

Crisil Ratings has amortised the goodwill on consolidation over five years, in line with its criteria. Other intangibles have been amortised over 10 years, in line with the relevant 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:

• Strong market position: Extensive technical know-how and a large product basket led to the company’s leadership position in the domestic healthcare and nutrition segments. International sales account for around 48% of the revenue, with the US being a major contributor. The company has more than 700 clients spread across more than 45 countries and a comprehensive product basket of more than 68 enzymes and probiotics and over 400 proprietary products.

 

• Healthy operating efficiency, driven by capabilities across the value chain: The healthy operating margin and return on capital employed of 34% and 21%, respectively, in fiscal 2024 reflect healthy operating efficiency, backed by superior capabilities in R&D, manufacturing and distribution. The company has seven R&D centres and nine manufacturing facilities across India and the US, with total fermentation capacity of 500 cubic metre.

 

• Healthy financial risk profile: The financial risk profile is expected to remain strong over the medium term despite acquisitions on account of growing networth which stood at Rs 987 crore as on March 31, 2024, healthy accretion to reserves and low debt leading to comfortable gearing of 0.03 time. Debt protection metrics were robust, indicated by net cash accrual to total debt and interest coverage ratios of 4.63 times and over 57 times, respectively, in fiscal 2024.

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs) were high at 189 days as on March 31, 2024, driven by large inventory and receivables of 130 and 58 days, respectively. The GCAs were high because of diverse manufacturing locations and distribution channels, large portfolios of enzymes, wide variety of customer industries, timely customer service, high export contribution and considerable new product development. The company also undertakes formulation activities   at its US facilities as per customer requirement, which entails higher inventory. Nevertheless, the company largely funds the requirement through internal accrual, and reliance on debt is minimal.

 

• Susceptibility to regulatory and compliance-related issues: The company remains susceptible to regulatory changes related to food and drug safety norms. Any noncompliance could lead to product recall, discontinuation of business by the customers and litigation, which may adversely affect the business and financial performance. However, the company has actively taken steps to mitigate such eventualities and has displayed healthy recovery in the past.

 

• Exposure to fluctuations in foreign exchange (forex) rates: Exports, mainly to the US, account for most of the revenue (48% in fiscal 2024). A natural hedge to the extent of imports and the use of pre-shipment and post-shipment credit facilities mitigates the impact of forex rate fluctuations.

Liquidity: Strong

The company has healthy liquidity with Rs. 546 crores in liquid surplus as on March 31, 2024. Most of it is maintained in the US-based subsidiary as a significant proportion of profits are generated therein. Healthy expected cash accruals coupled with a large liquid surplus is expected to comfortably meet moderate capex and increase in working capital requirements. Further, the company also has access to fund-based limits of Rs 35 crore where utilization remains nil.

 

ESG Profile

Crisil Ratings believes that Advanced Enzyme Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The pharmaceutical sector can have a significant impact on the environment owing to greenhouse gas emissions, water use and waste generation. Social impact is characterized by the impact on the health and wellbeing of consumers on account of its products and on employees and local community due to its operations.

 

Key ESG highlights

• The Company is actively working towards enhancing its reliance on renewable energy sources and has just introduced environmental monitoring and stack emission monitoring from respective State Pollution Control Board approved external agency
• Advanced Enzyme energy intensity per rupee of turnover has increased by approximately 9% in fiscal 2024 compared to fiscal 2023.
• The water consumption per turnover has also witnessed a slight increase of 3% in fiscal 2024 as compared to fiscal 2023
• Employee gender diversity has increased from 18.6% in 2023 to 23.4% in 2024, which is higher than the peers.
• Advanced Enzyme governance profile is marked by 60% of its board comprising independent directors, split in chairman and CEO position and presence of robust internal control systems and processes. It also has extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of Advanced Enzyme to ESG principles will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

Advanced Enzyme should continue to benefit from its robust market position and healthy operating efficiency, while the financial risk profile should remain strong on account of adequate cash accrual and moderate capex.

Rating sensitivity factors

Upward factors:

• Significant and sustained increase in revenue, while maintaining operating margins at over 35%.
• Sustained healthy financial risk profile owing to prudent capex plans and working capital management.
• Sustained build-up of cash surplus.

 

Downward factors:

• Considerable increase in leverage, with gearing over 1 time, due to larger-than-expected, debt-funded capex or acquisitions.
• Decline in operating profitability to less than 30% on a sustained basis.
• Reduction in liquid surplus to below Rs. 300 crores on a sustained basis.

About the Group

Advanced Enzyme was incorporated in 1989 by Mr V L Rathi and Mr C L Rathi as Advanced Biochemicals Pvt Ltd; it was renamed in 2005. The company was listed on the Bombay Stock Exchange and National Stock Exchange in August 2016. It is one of the largest enzyme companies in India, with competencies across the value chain: R&D, manufacturing and marketing/distribution of enzymes. It has multiple operating subsidiaries.

 

Advanced Bio-Agro Tech Ltd markets animal nutrition enzymes, Advanced EnzyTech Solutions Ltd markets non-food bioprocessing enzymes and Advanced Enzymes USA (Advanced US) is a holding company for the operating and marketing subsidiaries in the US that cater primarily to the human healthcare and nutrition segment. Evoxx Technologies GmBH has presence in Germany and carries out R&D of industrial enzymes and carbohydrate for food processing. JC Biotech Pvt Ltd mainly manufactures anti-inflammatory enzyme. SciTech Specialities Pvt Ltd provides platform for effervescent technology-based manufacturing of tablets and sachets on P2P basis.

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs.Crore	633	555
Profit after tax (PAT)*	Rs.Crore	137	104
PAT margin	%	21.6	18.7
Adjusted debt/adjusted networth*	Times	0.03	0.01
Interest coverage	Times	57.55	53.51

*adjusted for amortisation of goodwill

Any other information: Not Applicable