Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position and extensive experience of the promoters.: The two-decade-long experience of the promoters and the comfortable market position of BHEL in the cotton yarn and grey and denim fabric segments should continue to support the business. Revenue remained stable at Rs 283.23 crore in fiscal 2023 and has earned sales of Rs 54.11 crore in the first quarter of fiscal 2024, and revenue is expected to grow by 5-10% in fiscal 2024.

Above-average financial risk profile: The financial risk profile of BHEL has remained above average, as reflected in networth of Rs 94.6 crore and gearing of 1.02 times as on March 31, 2023. Gearing has remained at 1.0-1.3 times over the five fiscals through 2023. Networth is expected to increase further to Rs 100 crore as on March 31, 2023, with modest gearing of 1 time on account of healthy accretion to reserve. Debt protection metrics were moderate, indicated by interest coverage and net cash accrual to total debt ratios of 2.2 times and 0.12 time, respectively, in fiscal 2023. The company is under capex phase and is installing machineries for printed fabrics in fiscal 2024. Extent of debt undertaken for this project and its timely operationalization shall remain closely monitored.

Weaknesses:

Large working capital requirement: Operations are working capital intensive, as reflected in gross current assets of 180-210 days over the three fiscals through 2023 (210 days as on 31st March 23), driven by inventory of 100-135 days and receivables of 75-90 days. The company maintains large inventory of yarn, fabric and dyes on account of its diverse product profile. Large working capital requirement has led to high bank limit utilisation. Any further stretch in the working capital requirement weakening the financial risk profile and liquidity will remain a key monitorable.

Exposure to volatility in cotton prices: The cost of the key raw material, cotton, accounts for 80-85% of net sales. Any fluctuation in its price because of the vagaries of monsoon could impact profitability. Operating margin was 7-8% over the five fiscals through 2023 as the company is able to pass on increase in raw material prices to its customers with a lag of a quarter on account of its established market position and longstanding relationships with clients. Operating margins remained around 8.2% in fiscal 2023 which was lower than expectation on account of lower margins in Q4 as the sales of winter wear is higher which is a low margin product. However, the margins remained in line with past performance.