(The following statement was released by the rating agency)
Dec 22 - Fitch Ratings has affirmed Officedge India Pvt. Ltd.’s (Officedge) National Long-Term rating at ‘Fitch BB(ind)’ with a Stable Outlook. A list of additional rating actions is provided at the end of this commentary.
The affirmation reflects Officedge’s continued comfortable credit profile and strong liquidity. In FY11, the company’s financial leverage (total adjusted debt/op. EBITDAR) improved to 0.4x from 1.5x in FY10; however, interest coverage (op. EBITDA/gross interest expense), though comfortable, declined to 4.3x from 18.7x due to a rise in interest costs as working capital limits’ utilization increased to around 35% from around 10%. Working capital utilization at end-October 2011 was around 60%. Cash flow from operations (CFO) has largely been positive in the past three years except in FY10, when increased inventory led to a negative CFO.
The ratings also reflect Officedge’s standing as a supplier of speciality chemicals to HUL’s personal care products division for over five-years. HUL has a strong credit quality and demonstrated record of timely payments. The ratings also benefit from limited inventory risk as purchasing is undertaken on HUL’s defined production schedules at negotiated product prices.
The ratings, however, remain constrained by the high customer concentration risk, with Hindustan Unilever Limited (HUL, ‘Fitch AAA(ind)'/Stable) being Officedge’s only customer, and the absence of any formal agreement between Officedge and HUL. The ratings are further constrained by the low entry barriers in the domestic chemical industry and Officedge’s low operating EBITDA margins, which remained flat at around 2% over FY10-FY11 (year-end: March).
Negative rating guidelines include any significant reduction in business from HUL, Officedge’s leverage exceeding 4x and interest coverage falling below 2x. Positive rating guidelines include a diversification in Officedge’s customer base - which would reduce its dependence on HUL - while maintaining the current level of profitability and leverage.
Established in 2003, Officedge supplies speciality chemicals to 57 HUL plants across India including the second- and third-party manufacturers of HUL’s products. In FY11, the company’s revenues grew by 10% yoy to INR565m and earned a net income of INR10.1m (INR9.7m).
Fitch has also affirmed Officedge’s bank loan ratings as follows:
- INR40m fund-based facility: affirmed at ‘Fitch BB(ind)’
- INR10m non-fund based facility: affirmed at ‘Fitch A4+(ind)'