Arora Aromatics Pvt. Ltd.

Brickwork Ratings revises the ratings for the enhanced Bank Loan Facilities aggregating to Rs. 128.00 Crs. of Arora Aromatics Pvt. Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (23 Dec 2021)	Present
Fund Based	122.00	128.00	Long Term	BWR BBB+/Stable Reaffirmation and Removed from the INC category	BWR BBB /Stable Downgrade
Fund Based	(25.00)	(25.00)	Long Term		BWR BBB /Stable Downgrade
Non Fund Based	(2.50)	(2.50)	Short Term	BWR A2 Reaffirmation and Removed from the INC category	BWR A3 + Downgrade
Non Fund Based	(5.00)	(5.00)	Short Term	BWR A2 Reaffirmation and Removed from the INC category	BWR A3 + Downgrade
Grand Total	122.00	128.00	(Rupees One Hundred Twenty Eight Crores Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
*** Note: This rating pertains to an existing assignment received prior to 6 October 2022

RATING ACTION / OUTLOOK

The downgrade of the ratings assigned to the bank facilities of Arora Aromatics Private Limited (‘AAPL’ or ‘The Company’) is constrained by volatility in raw material prices, foreign exchange fluctuation risk, susceptibility to industry competition and threat of substitution from synthetic menthol. The ratings also take cognizance of moderation in total operating income of the company on account of subdued realizations and elongation in working capital cycle marked by increase in inventory period. The ratings however continue to derive strength from experienced promoters with established track record of operations of more than three decades in menthol industry, strategic plant location, diversified product portfolio and established relationship with reputed clients. The ratings also continue to take comfort from its moderate financial profile characterized by stable debt protection metrics and moderate capital structure.

Rating Outlook: Stable

BWR believes that AAPL’s business risk profile will be maintained over the medium term. The 'Stable' outlook indicates a low likelihood of rating change over the medium term. The rating outlook may be revised to 'Positive' in case of substantial improvement in operational and financial parameters. BWR may revise its outlook to 'Negative' in case there is a deterioration in the financial parameters over the medium term.

KEY RATING DRIVERS

Credit Strengths:

Experienced Promoters :
Experienced Promoters with an established track record of more than three decades in the menthol industry Arora Aromatics Pvt Ltd (AAPL) is promoted by Mr. Arvind Kumar Arora & Family in 1976.The promoter family has more than three decades of experience in the industry. Mr. Arvind Kumar Arora is a graduate and looks after the ‘Production and Finance’ function in the company. Further, the second line generation has also joined the family business and are ably assisted by a team of professionals having rich experience in their respective domains.
Diversified product portfolio along with strategic plant location :
AAPL is into manufacturing of menthol (along its allied products). The product profile of AAPL is well-diversified & includes organic Certified Products, Natural Mentha Oil, Essential Oils & Fine Division, Dementholised Peppermint Oil (Tri-Rectified), Menthol Crystal,Spearmint Oil, Dementholised Oil Crude, Menthol Powder, Organic Menthol Crystal, Organic Basil Oil, etc. These products find application in several industries including Pharmaceuticals, Food, Oral care, Flavor, Fragrances, Tobacco, Cosmetics, and Paint. Manufacturing Facility: AAPL’s manufacturing facility is located in Sambhal, Uttar Pradesh, which is known for mentha based industry due to the easy availability of the raw material in districts like Bareilly, Chandausi, Rampur Sambhal, etc. Proximity of manufacturing plant to major mentha oil producing region gives AAPL an advantage in terms of regular supply of raw material and lower lead time of purchase.
Established relationships with reputed customers :
The Company has been able to build and sustain strong relations spread over the past several years with many large national and international players, such as Düllberg Konzentra GmbH & Co. KG (Germany), International Flavors & Fragrances Inc. (USA), Essex Laboratories LLC ( USA), Dohler GMBH. (Germany), Sojitz Corporation (Japan), etc. The Company has a well-diversified customer base spread across various industries such as fragrances, flavours, food processing, pharmaceuticals, and paints. This also removes any customer or industry concentration risk, thus providing stable order flow and business.
Moderate financial risk profile and comfortable capital structure :
The total operating income of the company moderated by 6.18% from Rs.326.40 crore in FY21 to Rs. 306.22 crore in FY22 on account marginal decline in quantity sold as compared to previous year. However, the average realization has increased from Rs. 1354/ kg in FY21 to Rs. 1365/ kg in FY22. The operating profit margins of the company has marginally declined to 7.70% in FY22 from 9.54% in FY21 due to increase in prices of raw material such as CMO (Crude menthe oil). The overall gearing of the company moderated from 0.19x as on March 31, 2021 to 0.39x as on March 31, 2022, on account of higher utilization of working capital borrowings and increase in LC backed creditors.

Credit Risks:

Foreign exchange fluctuation risk and volatility in raw material prices :
AAPL garnered 89% of the total revenue (of which a substantial portion is from the related party) from the export market and is therefore exposed to currency fluctuation risk. Further, all the export receivables are completely hedged in form of forward contracts by the company. Crude Mentha Oil (CMO) which is the major raw material for AAPL is an actively traded commodity. Its price is, therefore, influenced by the trading activity as well as the vagaries of nature making the price vulnerable to fluctuations. Adverse movement in CMO prices can affect the AAPL’s margin adversely. However, the prices of menthol are fixed taking into consideration the prevailing raw material prices.
Elongation in operating cycle :
The operating cycle of the company elongated from 64 days in FY21 to 93 days in FY22 due to increase in inventory days from 30 days to 43 days. The increase in inventory is mainly on account of increased raw material requirement during capacity enhancement of plant. The company gets credit for 8-10 days only from its suppliers as mentha oil is a cash crop.
Susceptible to intense industry competition :
AAPL operates in the menthol industry, which is not largely capital or technology-intensive, resulting in low entry barriers. Consequently, the industry is highly fragmented which results in intense industry competition. Further, there is limited differentiation in products of different players, because of which buyers have a high bargaining power and limits the pricing power of the manufacturers resulting in low profitability. Players with vertically integrated product portfolio are able to command higher margins. Menthol is not considered an essential commodity and Government intervention in this commodity is very minimal. The Company also faces competition with synthetic mint manufacturers wherein the cost of synthetic menthol is lower and as it is available with large organized players, 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, softening the impact on natural menthol demand. Players with vertically integrated product portfolio are able to command higher margins. Any major increase in the supply of synthetic menthol or decline in prices of dihydromyrcenol might adversely impact revenues and profitability going forward.
Threat of substitution from synthetic menthol :
Synthetic menthol could become a possible substitute to natural menthol as the same is not dependent on the vagaries of nature. However, the natural version is preferred for the food and beverage industry which is the major user of menthol products.

ANALYTICAL APPROACH - Standalone

BWR has applied its rating methodology on a standalone basis, as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale).

RATING SENSITIVITIES

Positive Factors

Ability of the company to enhance its profitability margin above 12% on a sustained basis with sustenance in its total operating income at the current levels.
Ability of the company to profitably scale up its operations by 20% or more going forward compared to past trends and maintain its overall margins.
Ability of the company to efficiently manage its working capital requirements.

Negative Factors

Any sharp decline in the PBILDT margin below 8.00% on a sustained basis
Deterioration in capital structure of the company marked by increase in overall gearing beyond 1.00x
Significant volatility in the prices of synthetic menthol resulting in decline in the price of natural menthol & hence impacting the credit profile of AAPL.

LIQUIDITY INDICATORS - Adequate

Despite a consistent decline in operating income in the last three FYs, healthy cash accruals were generated by the company of Rs.22.83 Crs during FY22. Similar trend is expected in the short to medium term, with the company not having any long-term repayment obligation in FY22 nor have any plans for the debt funded capex planning in the near future. Also, all the regular capex needs for the technical upgradation and maintenance are expected to be met from the internal accruals. Further, the utilization levels for the fund-based working capital facilities have remained less than 50%, from January 2022 till October -2022 period. Also, with no repayment obligation, the company has sufficient headroom to utilize the accruals and un-utilized working capital limits for its operational requirements, reflecting an adequate liquidity profile.

ABOUT THE ENTITY

Arora Aromatics started its operation in the year 1976 and in 2014 merged with Arora Aromatics Pvt. Ltd (AAPL) having its registered office in Moradabad, UP. AAPL is an ISO certified manufacturer & exporter of natural mint ingredients & aromatic chemicals. AAPL is a GOI approved star export house, HACCP & GMP certified in food & pharma , Kosher certified and REACH ready company.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 21-22 (Audited)	FY 20-21 (Audited)
Operating Revenue	Rs.Crs.	306.22	326.40
EBITDA	Rs.Crs.	23.58	31.12
PAT	Rs.Crs.	19.78	24.47
Tangible Net Worth	Rs.Crs.	139.09	119.23
Total Debt/TNW	Times	0.39	0.19
Current Ratio	Times	1.50	2.21

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not Applicable

ANY OTHER INFORMATION

Nil

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	128.00	BWR BBB/Stable (Downgrade)	04Oct2021	BWR BBB+Stable (Reaffirmation/ISSUER NOT COOPERATING*)	09Jun2020	BWR BBB+Stable (Upgrade)	05Feb2019	BWR BBBStable (Assignment)
		0.00	NA	23Dec2021	BWR BBB+Stable (Reaffirmation and Removed from the INC category)	07Jul2020	BWR BBB+Stable (Reaffirmation)	NA	NA
FB SubLimit	LT	(25.00)	BWR BBB/Stable (Downgrade)	NA	NA	NA	NA	NA	NA
NFB SubLimit	ST	(2.50)	BWR A3+ (Downgrade)	04Oct2021	BWR A2 (Reaffirmation/ISSUER NOT COOPERATING*)	09Jun2020	BWR A2 (Upgrade)	05Feb2019	BWR A3+ (Reaffirmation)
		(5.00)	BWR A3+ (Downgrade)	23Dec2021	BWR A2 (Reaffirmation and Removed from the INC category)	07Jul2020	BWR A2 (Reaffirmation)	NA	NA
Grand Total		128.00	(Rupees One Hundred Twenty Eight Crores Only)

*** Note: This rating pertains to an existing assignment received prior to 6 October 2022 COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

Analytical Contacts
Neha Jain Senior Rating Analyst Board : +91 11 2341 2232 neha.j@brickworkratings.com	Ravi Rashmi Dhar ravi.d@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Arora Aromatics Pvt. Ltd.

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Indian Bank	Packing Credit (PC) - Sanctioned	60.00	_	60.00
	Sub-Limit (Bank Guarantee)		(5.00)
	Sub-Limit (Foreign letter of Credit) - Sanctioned		(2.50)
	Sub-Limit (PCFC) - Sanctioned	(25.00)
2	Indian Bank	Gold Card - Sanctioned	18.00	_	18.00
3	Indian Bank	Post Shipment - Sanctioned	50.00	_	50.00
4	State Bank Of India (SBI)	Packing Credit (PC) - Sanctioned	_	_	0.00
5	State Bank Of India (SBI)	Foreign Bill Purchase - Sanctioned	_	_	0.00
Total			128.00	0.00	128.00
TOTAL (Rupees One Hundred Twenty Eight Crores Only)

* Note: This rating pertains to an existing assignment received prior to 6 October 2022

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