Rating Rationale
February 25, 2020 | Mumbai
CavinKare Private Limited
Long-term rating reaffirmed; short-term rating withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.718 Crore (Reduced from Rs.760 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the long-term bank facilities of CavinKare Private Limited (CKPL) at 'CRISIL A/Stable'. CRISIL has also withdrawn its rating on the short-term bank facilities of CKPL based on the company's request. The same is in line with CRISIL's policy on withdrawal of ratings.
 
CRISIL believes that CKPL's business risk profile will remain stable over the medium term supported by steady performance of its personal care (PC) segment (~60% of revenues in fiscal 2019) and dairy business (~20% of revenues in fiscal 2019) and growing presence in salon business (~10% revenues in fiscal 2019). While increase in input costs and challenging market condition is likely to have moderate impact on margins in fiscal 2020, over the medium term CKPL's operating profitability to remain stable at around 10-11%, owing to steady contribution from the PC segment, while profitability in the dairy and other segments remain muted.
 
The ratio of debt to earnings-before interest, tax, depreciation and amortization (EBITDA) is expected to improve to around 1.5 times over the medium term, from 2.7 times as on March 31, 2019. Higher cash accruals resulting from better profitability, moderate capital spending and prudent working capital management has enabled the company reduce debt to about Rs 400 crore as of September 30, 2019. Earlier in fiscal 2017, debt levels increased to Rs. 632 crore, due to the merger of Trends in Vogue Pvt. Ltd. (TVPL) with CKPL, and there upon the addition of TVPL's debt to CKPL's books.
 
The ratings continue to reflect CKPL's established product portfolio in the PC segment, with strong brands, improving product diversity and its adequate financial risk profile. The rating strengths are partially offset by CKPL's susceptibility to intensifying competition (across all its business segments) and volatility in input costs and moderate geographical concentration in its revenue profile.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of CKPL and its subsidiaries. CRISIL has adjusted CKPL's net worth for the goodwill and intangible assets (amounting to around Rs.290 crore) arising due to the merger of CKPL and TVPL. Further, in fiscal 2013, CKPL has transferred certain real estate assets aggregating about Rs.48 crore to a promoter-held company and revalued existing assets by a similar amount. CRISIL has adjusted CavinKare's net worth to the extent of revalued assets.

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 product portfolio in the PC segment, with strong brands:
CavinKare's flagship PC business contributes over half of its revenues and a majority of its profits. The PC division has a strong product portfolio, which augments its strengths in the hair care and hair colour segment and follows a new product development strategy driven by packaging and pricing. Established brands such as Chik, Meera, Nyle, Karthika and Indica, a strong product pipeline and increased penetration into existing and newer markets are expected to lead to steady growth of over 10% for the PC division over the medium term. However, the company also competes with established players like Hindustan Unilever Limited (HUL, rated 'CRISIL AAA/Stable'), Proctor and Gamble (P&G) amongst others which limits CKPL's ability to achieve faster growth rates.  Operating profitability is also expected to remain at 10-11%, albeit slight moderation in fiscal 2020. The PC division's profitability was impacted in fiscal 2018 due to issues pertaining to GST; however, resolution of GST related issues and commissioning of new plant in Assam has benefitted cash generation from the PC business subsequently.
 
* Improving product diversity
CKPL's foray in the fast-moving consumer gods (FMCG) business started with the innovative packaging of sachet based shampoos. CKPL expanded its product profile in the PC segment by entering into hair colour, skin care, fragrances and professional care segment. Subsequently, the company has also diversified into dairy and beverages business. The acquisition of 'Garden Namkeen' has enhanced CKPL's presence in the food and snacks segment. Continuous diversification initiatives undertaken by the company has reduced its dependence on its flagship PC business. Consequently, the revenue contribution from the PC segment has reduced gradually to less than 60% in recent years from 75% in fiscal 2010. CKPL has also continued to launch new brands within the existing segments, thereby reducing the dependence on its flagship 'Chik' brand. Further, with merger of TVPL, the company has also diversified into the salon business, which enjoys better operating margins than most other businesses of CKPL. CRISIL believes CKPL's business risk profile benefits from its improving product diversity.
 
* Adequate financial risk profile
CKPL's debt levels had increased in fiscal 2017 due to its merger with TVPL, leading to moderation of its earlier comfortable debt protection metrics. However, CKPL's healthy cash generating ability, has helped reduce the debt levels. Debt/EBITDA consequently improved from 4.8 times in fiscal 2017 to 2.7 times in fiscal 2019. Further, CRISIL also believes CKPL will not undertake any sizeable capital spending over the medium term, which along with prudent working capital management will enable a gradual correction in key credit metrics.
 
Weaknesses:
* Susceptibility to intensifying competition (across all its business segments):
The Indian FMCG industry is marked by the presence of both organized and unorganized players across various segments and product categories. CKPL, in its key PC business, faces intense competition from both home-grown players as well as Indian subsidiaries of International players. In the food division too, CKPL faces severe competition from regional brands, and other unorganized 'home-made' brands in the highly-commoditized pickle and masala category.
 
* Moderate geographical concentration in its revenue profile
CKPL derives around half its revenues from the South Indian states of Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. Though, over the years, some of its brands like Nyle, Indica, Spinz and Chik have gained national acceptance, they continue to be dominant in South India. Dairy business is also restricted to Tamil Nadu, Kerala and Karnataka. CKPL's food products are also predominantly sold in the southern regions of the country, while Garden is currently concentrated in the Gujarat and Maharashtra markets. Also, as compared to other large home-grown FMCG players in India, contribution from CKPL's export and international business remains low at around 5% of revenues. The management's ability to replicate the success at a pan India level will be a key determinant for a significant improvement in its business risk profile.
Liquidity Strong

CKPL's liquidity is strong supported by improving cash generation, expected at over Rs 100 crore annually, which will suffice to service long term debt obligations (Rs.65 crore each in fiscal 2020 and fiscal 2021), incremental working capital requirements, and capex (Rs 50 crore annually). The company also has headroom in its fund based working capital limits, which have been utilized at about 35% as of September 2019. 

Outlook: Stable

CRISIL believes that CKPL's  credit risk profile will benefit from its diversified product portfolio, with improving operating performance across divisions.

Rating Sensitivity factors
Upward factors:
* Improvement in capital structure marked by networth of over Rs 100 crore and reduction in debt/EBITDA to below 2 times on a sustained basis.
* Significant improvement in cash generation, most likely due to steady revenue growth sustained profitability of over 10%
 
Downward factors:
* Higher than expected capex or decline in cash generation resulting in debt/EBITDA increasing to over 4 times.
* Decline in revenues and moderation in operating profitability to less than 8% on a sustained basis
About the Company

Incorporated in 1990, CKPL was promoted by Mr. C K Ranganathan, and is an established player in the domestic FMCG sector. The company started out in the PC segment and over the years has diversified into other segments, such as foods, beverages, and dairy, through the organic as well as inorganic routes.
 
CKPL's PC segment has a product portfolio that includes shampoos (key brands being Chik, Meera, and Nyle), hair-wash products (Meera, Karthika), coconut oil (Meera), fairness creams (Fairever), deodorants and talcs (Spinz), and hair-colour products (Indica, Raaga). Under the dairy segment, CKPL sells milk and milk-based products under the Cavin brand. The company's food and beverage segments comprise primarily pickles (key brands being Ruchi and Chinni's), salted snacks (Garden), and fruit-based juices (Maa). In fiscal 2017, TVPL merged with CKPL, thereby acquiring a chain of over 200 unisex beauty salons under the 'Green Trends' and 'Lime Lite' labels catering to middle and upper income segment customers.

Key Financial Indicators - (Consolidated)
As on / for the period ended March 31 Unit 2019 2018
Revenue Rs. Cr. 1628 1521
Adjusted Profit After Tax Rs. Cr. 79 55
Adjusted PAT margins % 4.9 3.6
Adjusted Debt/ Adjusted Net worth Times NM NM
Interest coverage Times 3.9 2.8
Debt/EBITDA Times 2.7 3.0
NM: Not meaningful due to adjustment of goodwill and intangibles against net worth

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. Crs.)		 Rating Assigned
with Outlook
NA Long Term Loan 01-Jan-17 NA Oct-24 400 CRISIL A/Stable
NA Long Term Loan 02-Aug-19 NA Oct-24 25 CRISIL A/Stable
NA Proposed Non-fund
based limit		 NA NA NA 42 Withdrawn
NA Bill Discounting& NA NA NA 88 CRISIL A/Stable
NA Bill Discounting@ NA NA NA 30 CRISIL A/Stable
NA Cash Credit NA NA NA 16 CRISIL A/Stable
NA Working Capital
Demand Loan		 NA NA NA 114 CRISIL A/Stable
NA Working Capital
Demand Loan$		 NA NA NA 45 CRISIL A/Stable
& Interchangeable with working capital demand loan upto Rs 32 Cr, cash credit upto Rs 27 Cr and letter of credit upto Rs 3 Cr
@ Interchangeable with cash credit of Rs 12 Cr, ST loan of INR 20 Cr and letter of credit upto Rs 5 Cr
$ Interchangeable with cash credit upto Rs 40 Cr and letter of credit upto Rs 5 Cr
 
Annexure - List of entities consolidated
Fully Consolidated Entities Extent of Consolidation Rationale for Consolidation
Cavinkare (Bangladesh) Private Limited 100% Fully owned subsidiary on the basis of business linkages
Cavinkare Lanka (Private) Limited 100% Fully owned subsidiary on the basis of business linkages
Cavinkare Middle East (FZE) 100% Fully owned subsidiary on the basis of business linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  718.00  CRISIL A/Stable  06-02-20  CRISIL A/Stable  24-09-19  CRISIL A/Stable  07-02-18  CRISIL A/Stable  04-05-17  CRISIL A/Stable  CRISIL A/Stable 
            27-02-19  CRISIL A/Stable           
Non Fund-based Bank Facilities  LT/ST  42.00  Withdrawn  06-02-20  CRISIL A1  24-09-19  CRISIL A1  07-02-18  CRISIL A1  04-05-17  CRISIL A1  CRISIL A1 
            27-02-19  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
Bill Discounting& 88 CRISIL A/Stable Bill Discounting& 88 CRISIL A/Stable
Bill Discounting@ 30 CRISIL A/Stable Bill Discounting@ 30 CRISIL A/Stable
Cash Credit 16 CRISIL A/Stable Cash Credit 16 CRISIL A/Stable
Long Term Loan 425 CRISIL A/Stable Long Term Loan 425 CRISIL A/Stable
Proposed Non Fund based limits 42 Withdrawn Proposed Non Fund based limits 42 CRISIL A1
Working Capital Demand Loan 114 CRISIL A/Stable Working Capital Demand Loan 114 CRISIL A/Stable
Working Capital Demand Loan$ 45 CRISIL A/Stable Working Capital Demand Loan$ 45 CRISIL A/Stable
Total 760 -- Total 760 --
& Interchangeable with working capital demand loan upto Rs 32 Cr, cash credit upto Rs 27 Cr and letter of credit upto Rs 3 Cr
@ Interchangeable with cash credit of Rs 12 Cr, ST loan of INR 20 Cr and letter of credit upto Rs 5 Cr
$ Interchangeable with cash credit upto Rs 40 Cr and letter of credit upto Rs 5 Cr
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 Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation

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