October 09, 2019

K V Aromatics Private Limited: Ratings downgraded to [ICRA]D

Summary of rating action

Previous Rated Amount Current Rated Amount
Instrument* Rating Action
(Rs. crore) (Rs. crore)
[ICRA]D; downgraded from
Fund based Long term 8.00 8.00
[ICRA]BBB-(Negative)
[ICRA]D; downgraded from
Term Loan-Long Term 0.38 0.38
[ICRA]BBB-(Negative)
[ICRA]D; downgraded from
Fund based short term 194.00 194.00
[ICRA]A3
[ICRA]D; downgraded from
Non-Fund based short term 11.00 11.00
[ICRA]A3
[ICRA]D; downgraded from
Unallocated-Short term 16.00 16.00
[ICRA]A3
Total 229.38 229.38
*Instrument details are provided in Annexure-1

Rationale
The ratings downgrade reflects the delays in servicing of debt obligations, based on the feedback received from the
banker. The company suffered losses due to a fire incident in the factory premises on August 26, 2019 owing to which
most of the inventory of the company was destroyed and the plant of the company remained shut for more than a
month. Though, the company had filed provisional claim with the insurance company, however, admissibility of amount
and receipt of claim from the insurance company would be key rating sensitivities. Liquidity profile of the company
remains weak characterised by large debt obligations and inadequate coverage indicators. The regularisation of debt
obligations on sustained basis and turnaround in the operational performance will be critical for improvement in overall
financial profile and would remain key sensitivities, going forward.

Key rating drivers and their description

Long and established track record of promoters in menthol industry: KVAPL promoters have been present in the
menthol industry for more than two decades and have extensive experience of manufacturing and trading of menthol
products. The promoters manage the operations of the company themselves and have been able to increase the scale of
operations of the company at 30% CAGR over last 9 years.

Healthy export demand of the processed product i.e. menthol products: India supplies nearly 90% of the global demand
for natural menthol as the key raw material i.e. mentha oil is primarily produced in India. With expected improvement in
the global economy and discretionary consumer spending, the demand for various FMCG products like oral care, hair
care, chewing gums, pharma products etc. should improve. As menthol demand is driven by demand for these products,
the same should see improvement going forward.

Duty drawbacks, mandi tax exemption and MEIS incentive aid profitability: KVAPL gets various fiscal benefits under
different schemes of Government of India which aid the company’s profitability. Some of the fiscal benefits KVAPL gets
include duty drawbacks upto 1.2% of its export values, exemption from payment of mandi tax of 1.5% on raw material
procurement and MEIS incentives.

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Locational advantage due to proximity to raw material source: KVAPL’s plant is located in Greater Noida, Uttar Pradesh,
which is close to the source of raw material i.e. the Terai region. This enables the company to save costs on procurement
and transportation of raw material.

Credit challenges
Delays in servicing of debt obligations: The company had delayed payment in debt obligations.

Threat of substitution by synthetic menthol: With cost of synthetic menthol being lower and the availability from
organised large players from where clients also procure other chemicals, synthetic menthol has found acceptance among
the erstwhile users of natural menthol. While synthetic menthol capacities are expected to increase going forward, rising
demand for menthol products is expected to absorb part of the rising capacity thus softening the impact on natural
menthol demand.

Weakened credit profile marked by elevated working capital borrowings due to high inventory levels: The credit
profile of the company has weakened over past few years owing to high inventory levels, which has resulted in elevated
working capital borrowings. Under fixed price contracts, KVAPL procures the entire raw material inventory at the outset
of the contract to overcome the volatility in the price of raw material over the course of the contract. As a result, the
working capital borrowings have remained elevated for the company leading to high interest costs. However, with price
of mentha oil being exposed to agro climatic risks, as it is derived from the crop mentha arvensis, and speculative trading
as it is an actively traded commodity, the strategy has helped the company to protect its margins when prices have
remained volatile.2

High competitive intensity due to several players in the organized sector: The competitive intensity in the industry
remains high owing to presence of many organised and unorganised players in the industry. The unorganised players
cater majorly to the domestic market wherein the demand is driven by the pan masala manufacturers and menthol of
lower purity, around 95% menthol, is used. In the export market demand for high purity menthol demand keeps the
organised players at the fore.

Significant revenue dependence on menthol products as other volume offtake of other products continues to remain
low: The product mix of the company comprises of various products like menthol crystals, peppermint oil, De-
mentholated oil (DMO) etc. However, the revenue contribution from the menthol-based products remains high and thus
exposes the company to product concentration risk.

Liquidity position: Poor

Liquidity of the company remains poor as reflected in its delays in the servicing of debt obligations owing to loss of most
of the inventory in the fire incident.

Rating sensitivities
Positive triggers – Regularisation of debt servicing on a sustained basis (more than three months)

Negative triggers – Not Applicable

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Analytical approach
Analytical Approach Comments
Applicable Rating Methodologies Corporate Credit Rating Methodology
Parent/Group Support NA
Consolidation/Standalone The rating is based on standalone financial statements

About the company

K. V. Aromatics Private Limited (KVAPL) was incorporated in 2005 and was originally registered in the name of M/s J C
Infrasoft Private Limited. The promoters effected the change of name of the company on 31.3.2008 to K. V. Aromatics
Private Limited. The company’s operations are based at Greater Noida in the state of Uttar Pradesh.

Mr. Vinod K. Agarwal, father of the promoters Mr. Sudhanshu Agarwal and Mr. Himanshu Agarwal ventured into
menthol business in 1990 with the trading of Mentha Oil. The family established its first manufacturing unit under a
company named Siddhant Chemicals in 1996 at Sambhal. In 2004 the company ventured into exports. Subsequently the
family established its second manufacturing facility under a company named Abhey Chemicals in the state of Jammu and
Kashmir to take benefit of tax concessions announced by the government in 2005. In 2007 the promoters commenced
work on setting up of another manufacturing facility at Greater Noida under the company K. V. Aromatics Private
Limited. The manufacturing facility was completed by 2008 and trial productions started in October 2008.

The product mix of the company constitutes menthol crystals, menthol powder, De-mentholised Peppermint oil, and
various essential oils and specialty chemicals such as Rectified Spearmint oil, Cis-3-Hexenol etc.

Key financial indicators (audited)

FY2018 FY2019
Operating Income (Rs. crore) 347.9 469.6
PAT (Rs. crore) 8.0 -2.9
OPBDIT/OI (%) 8.5% 6.1%
RoCE (%) 9.5% 6.3%

Total Outside Liabilities/Tangible Net Worth (times) 1.7 1.6

Total Debt/OPBDIT (times) 6.3 5.9
Interest Coverage (times) 1.7 1.6
DSCR 1.6 0.9

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years
Rating (FY2020) Rating History for the Past 3 Years
Current Earlier
FY2019 FY2018 FY2016
Instrument Amount Amount Rating Rating
Type
Rated Outstanding 9-Oct- 1-April- 9-Oct- 9-Feb- 27-April- 29-Jan-
2019 2019 2018 2018 2017 2016
[ICRA]
Fund based Long [ICRA]BBB- [ICRA]BBB- [ICRA]BBB [ICRA]BBB+
1 8.00 - [ICRA]D BBB
limits term (Negative) (Negative) (Stable) (Stable)
(Stable)
Long [ICRA]BBB- [ICRA]BBB- [ICRA]BBB
2 Term Loan 0.38 0.38 [ICRA]D - -
term (Negative) (Negative) (Stable)
Fund based Short [ICRA] [ICRA] [ICRA]BBB+
3 194.00 - [ICRA]D [ICRA]A3 [ICRA]A3
limits term A3+ A3+ (Stable)
Non-fund-based Short [ICRA] [ICRA]
4 11.00 - [ICRA]D [ICRA]A3 [ICRA]A3 [ICRA] A3+
limits term A3+ A3+
Short
5 Unallocated 16.00 - [ICRA]D [ICRA]A3 [ICRA]A3
term
Amount in Rs. Crore

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
Date of Amount
Issuance / Maturity Rated Current Rating
ISIN Instrument Name Sanction Coupon Rate Date (Rs. crore) and Outlook
- Cash Credit Nov 2016 - - 8.00 [ICRA]D
- Term loan Dec-2017 11.50% March 2022 0.38 [ICRA]D
- Fund based short term Dec 2017 - - 194.00 [ICRA]D
- Non-fund based short term Dec 2017 - - 11.00 [ICRA]D
- Un-allocated short term Dec 2017 - - 16.00 [ICRA]D
Source: KV Aromatics Private Limited

Annexure-2: List of entities considered for consolidated analysis

Company Name Ownership Consolidation Approach
NA NA NA

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ANALYST CONTACTS
K. Ravichandran Prashant Vasisht
+91 44 4596 4301 +91 124 4545 322
[email protected] [email protected]

Mohit Lohia
+91 124-4545814
[email protected]

RELATIONSHIP CONTACT
Jayanta Chatterjee
+91 80 4332 6401
[email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
[email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

[email protected]

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit
Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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