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.

 

Revenue improved to Rs 562 crore in fiscal 2022, marked by y-o-y growth of 44%. Robust demand from both domestic and export markets and sufficient cost pass through continue to support profitability, leading to operating margins of 14.64% in fiscal 2022 against 13.11% in fiscal 2021.

In fiscal 2022, CCL declared a special dividend of Rs 175/- share on 62,66,875 ordinary shares, amounting to Rs 109.67 crore, funded by internal accruals, and retained earnings, leading to negative net cash accruals of Rs 26.2 crore as on March 31, 2022. CCL bought back 2,50,000 ordinary shares, as measure to remunerate the shareholders, for total consideration of Rs 43.125 crore and the shares were extinguished on 4th February 2022. The payments were made by diluting liquid funds. Going forward, CCL will continue to declare dividends but any large dividend declaration diluting the liquidity position will remain a key sensitivity factor.

 

In Q1 fiscal 2023 the industry was impacted by cap levied by government on procurement price of raw jute at Rs 65,000 per MT in September 2021, while actual purchase price continued to remain high. This exerted pressure on operating profitability leading to margin of 9.9% in Q1 fiscal 2022. After resistance from the local jute players and closure of multiple jute mills, the cap was revoked in May 2022. CCL is estimated to have registered revenue of Rs 146.2 crore in Q1 fiscal 2023. Furthermore, as majority of exports are to European nations, Russia-Ukraine war led to lower demand and export volumes is estimated to have shrunk in H1 fiscal 2023. Going forward, for sustenance of export market position, unhindered exports remains key monitorable. Moreover, the on-going capital expenditure (capex) to set up new weaving unit is expected to commence in Q3 fiscal 2023, yielding steady improvement in business risk profile over the medium term.

Key Rating Drivers & Detailed Description

Strengths:

• Strong financial risk profile

Robust networth of over Rs 447 crore as on March 31, 2022, healthy cash accruals and limited working capital requirement and absence of large, debt funded capex continue to support capital structure yielding gearing of less than 0.02 times during the last 5 fiscals through fiscal 2022 and total outside liabilities to total networth ratio of 0.12 times as on March 31, 2022. Debt protection metrices is supported by healthy accretion to reserves due to sizeable revenue and healthy operating profitability margin. The margin increased to 14.64% in fiscal 2022 from 13.11% in fiscal 2021. Operating efficiency through regular capex for technology upgrade and replacement of old machinery is generally through internal funding. Moreover, ability of the company to launch value-added products yielding handsome returns ensures steady profitability.

 

• 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 specialty jute products such as yarn and superior-quality hessian and fabrics. This diversifies revenue 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. Moreover, the on-going capex to set up a new weaving unit for addition of newer products to the portfolio is expected to strengthen the business risk profile over the medium term. While Russia-Ukraine war has lowered demand scenario in export markets, ability of the company to divert the export volumes to domestic markets remains critical as CCL derived more than 40% revenue from export sales in fiscal 2022.

 

• Efficient working capital management:

Gross current assets (GCA) have remained stable in range of 112-135 days during 5 fiscals through March 31, 2022. GCA days were at 112 days as on March 31, 2022 (135 days a year earlier), owing to receivables and inventory of 32 days and 66 days, respectively, with negligible credit of 7 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 is 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.  Even after distribution of special dividends of Rs 109.67 crore and buy back of shares for total consideration of Rs 43.125 crore in fiscal 2022, unencumbered cash bank balance was around Rs 30.3 crore and other investment around Rs 273.7 crore in debt and equity mutual funds, government securities, alternative investments funds and equities of listed companies. On May 26, 2022, Board of Directors have declared final dividend of Rs 60 per share amounting to Rs 36 crore. No significant dilution of liquidity position is expected over the medium term. Regular capex to be funded through current cash accrual without hurting liquidity. Cash accrual is expected to be around Rs 40-50 crore per fiscal against negligible repayment obligation. Bank limits of Rs 10 crore are used at an average of 47.1% in last 12 months through June 2022. The current ratio was healthy, at 6.47 times as on March 31, 2022.

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), 4-36pound 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 around 40% 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	2022	2021
Revenue	Rs crore	561.66	390.75
Profit after tax (PAT)	Rs crore	79.35	75.72
PAT margin	%	14.13	19.38
Adjusted gearing	Times	0.02	0.02
Interest coverage	Times	196.43	118.06

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	10.0	NA	CRISIL A+/Stable
NA	Short Term Loan	NA	NA	NA	7.0	NA	CRISIL A1+
NA	Long Term Loan	NA	NA	Apr-23	1.0	NA	CRISIL A+/Stable
NA	Proposed Term Loan	NA	NA	NA	1.0	NA	CRISIL A+/Stable
NA	Letter of Credit	NA	NA	NA	15.0	NA	CRISIL A1+