Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1+’ ratings on the bank facilities of Cheviot Co Ltd (CCL).

 

The ratings continue to reflect strong business and financial risk profiles. These strengths are partially offset by exposure to risks related to the regulated nature of the jute industry and easy availability of cheaper substitutes.

 

Operating performance in fiscal 2021 were impacted by the measures taken by the central and various state governments towards containment of Covid-19. Measures include temporary closure of non-critical establishments and inter-state transportation, along with severe restrictions on travel and visiting areas of mass gatherings. The manufacturing operations were impacted from March 23, 2020.  This led to decline in operations for around two months in fiscal 2021, ultimately leading to loss in volume by around 30%. However, with sustained demand, realisation prices had also increased in the year and compensated the loss in volume to some extent. In fiscal 2021 the company recorded revenue of around Rs 395 crore with a decline of around 13% from last year. Operating profitability was slightly better at 13.11% in fiscal 2021 in comparison to 12.82% in last year. Also, the company recorded higher non-operating income of Rs 45.85 crore in fiscal 2021 in comparison of Rs 10.01 crore in last year. Higher non-operating income was recorded from better return on investments. This led to net cash accruals of Rs 80 crore in fiscal 2021 in comparison to Rs 15.81 crore (after dividend of Rs 38.20 crore) in last year.

 

In Q1 fiscal 2022 the industry was again impacted by second wave of covid 19 pandemic. However, restriction from government were not as sever in the fiscal 2022 and therefore, did not have any large impact in the year. They recorded revenue of Rs 123.46 crore (Rs 24.7 crore in Q1 fiscal 2021) and operating profitability of 16.82% (9.96% in Q1 fiscal 2021) in Q1 fiscal 2022. Also, they have recorded non-operating income of Rs 8.44 core to reach cash accruals of Rs 23.3 crore (Rs 13.44 crore in Q1 fiscal 2021).

 

In fiscal 2022 the company has paid special dividend of Rs 175 per share on around 62.67 lakh ordinary shares, amounting to Rs 109.67 crore. The payments were made in Q2 of fiscal 2022 by diluting liquid funds. Going forward company will continue to declare dividends but any large dividend declaration diluting the liquid funds will remain a key sensitivity factor.

Key Rating Drivers & Detailed Description

Strengths

Strong financial risk profile

The networth was robust at Rs 528.25 crore as on March 31, 2021. It has increased from Rs 470.95 crore as on March 31, 2021, supported by healthy accretion to reserves due to sizeable revenue and healthy operating profitability margin. The margin increased to 13.11% in fiscal 2021 from 12.82% in fiscal 2020. The peak gearing over the past five fiscals was low, at 0.04 time as on March 31, 2021, due to healthy cash accrual, limited working capital requirement, and low debt-funded capital expenditure (capex). Capex for technology upgrade and replacement of old machinery is generally through internal funding. Moreover, modernisation of facilities enhances productivity and increases cash generating ability.

 

Robust business risk profile

The business risk profile is supported by a diversified product profile, wide reach, healthy operating efficiency, and the experience of the promoters. Since the current promoter-family took over the company in 1976, it started manufacturing various speciality jute products such as yarn and superior-quality hessian and fabrics. This diversifies revenue and limits the risk of any one product becoming obsolete. Besides processing jute, the company produces high-yielding, value-added products such as yarn, hessian, and superior hessian cloth. Its yarn and superior hessian have wide acceptance in the international market, and generate high profitability. The business risk profile should remain healthy over the medium term, driven by a strong market position, an increasing awareness for eco-friendly products, a diversified product profile, and a wide distribution network.

 

Efficient working capital management: Gross current assets were moderate at 135 days as on March 31, 2021 (117 days a year earlier), owing to receivables and inventory of 39 days and 87 days, respectively, with negligible credit of 6 days from suppliers.

 

Weakness

Exposure to risks related to the regulated nature of the jute industry and easy availability of cheaper substitutes

The domestic jute industry is highly regulated by the Government of India, especially in key areas such as pricing and trading. Minimum support price (MSP) for raw jute has been announced by the Cabinet Committee on Economic Affairs to prop up jute prices and ensure security for farmers. The MSP, which varies from state to state and with jute variety, influences the end-price of products. Also, the government, under the Jute Packaging Material (compulsory use in packaging commodities) Act, 1987 (JPMA), has made it mandatory to use 90% of jute bags for packaging food grains for consignments of 10-100 kilogram (kg), and 20% of jute bags for packaging sugar for a consignment of 25-100 kg. This regulation is the key growth driver for the jute industry. Consumer packs of 25 kg and below for sugar, 10 kg and below for food grains, and packaging for export of commodities are exempted from this act. Regulated nature of the industry makes the company susceptible to any change in policies.

Liquidity: Strong

Liquidity will continue to be supported by investments in debt and equity marketable investments, and an unencumbered cash balance.  As on July 31, 2021, the unencumbered cash balance was around Rs 20 crore, and investments around Rs 311 crore in debt and equity mutual funds, government securities and equities of listed companies. However, in Q2 of fiscal 2021 around 109 crore were diluted from these investments to pay of special dividend and around Rs 20 crore were added from the cash accruals of till date in the fiscal 2022. Therefore, liquid investment is estimated at around Rs 240 crore in August 2021. Total investments are expected to grow over the medium term as management is not expected to declare any such large dividend going forward. Capex plans entail an outgo of around Rs 5-7 crore per annum, to be funded through current cash accrual without hurting liquidity. Cash accrual is expected to be negative in fiscal 2022 (Rs 56.92 crore) due to large dividend of Rs 109 crore. Thereafter accruals are expected to be in the range of Rs 34-35 crore annually. Repayment hover are modest at around Rs 15 lakh per annum. Bank limits of Rs 10 crore are used at an average of 17% in last 12 months through July 2021. The current ratio was healthy, at 9.24 times at the end of fiscals 2021.

Outlook: Stable

CRISIL Ratings believes CCL will continue to benefit from the experience of the promoters, diversified product profile, and wide distribution network, and maintain a strong financial risk profile

Rating Sensitivity factors

Upward factors

• Sustained improvement in revenue by around 10% per fiscal while sustaining profitability
• Further build-up of liquid funds along with an increase in safe investments

 

Downward factors

• A decline in revenue to below Rs 300 crore per fiscal and in the operating profitability margin to below 10%
• A stretch in the working capital cycle, leading to weakening of liquidity
• Any increase in long-term investment in risky avenues
• Any large substantial dividend / buy back of shares leads to decline in liquid funds to below Rs 200 crore

About the Company

Incorporated in 1897, CCL is the flagship company of the Cheviot group, which has interests in the jute, tea, and leather businesses. The company got its current name in 1976, when Mr B D Kanoria took it over. Currently, his son Mr H V Kanoria is the chairman and managing director. CCL manufactures and exports high-value, non-traditional, diversified jute yarn and fabric, such as precision fine jute yarn, sacking cloth, hessian cloth and bags, sacking bags (for packing food grain and other allied purposes), 4-36 pound jute yarn and superior hessian cloth. It has two manufacturing units in West Bengal: at Budge-Budge and Falta Special Economic Zone (an export-oriented unit). The company generates 30-35% of revenue from exports. It also has a captive power plant with an installed capacity of 3.14 megawatt; power requirement is, however, sourced from CESC Ltd, and the captive plant is used as a stand-by arrangement.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	395.73	458.19
Profit after tax (PAT)	Rs crore	75.50	49.71
PAT margin	%	19.08	10.85
Adjusted debt/adjusted networth	Times	0.02	0.01
Interest coverage	Times	118.06	80.47

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity  Levels	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	10	NA	CRISIL A+/Stable
NA	Letter of Credit	NA	NA	NA	15	NA	CRISIL A1+
NA	Short Term Loan	NA	NA	NA	7	NA	CRISIL A1+
NA	Long Term Loan	NA	NA	Apr-2023	1	NA	CRISIL A+/Stable
NA	Proposed Term Loan	NA	NA	NA	1	NA	CRISIL A+/Stable