Key Rating Drivers & Detailed Description

Strengths:

Established position in the cotton industry and strong relationships with customers

The promoter family has been operating the textiles unit since 1991, which has enabled them to understand market dynamics and establish healthy relationships with customers and suppliers. The company exports to China, Bangladesh, Portugal, Mauritius and Singapore. The company has already achieved revenue of around Rs ~630 crores till third quarter of fiscal 2023, despite the lower demand from international market due to the Russia-Ukraine war and other geopolitical factors. The company has been able to compensate the lost sales with the domestic sales as it has well established customer base in India. In the current quarter, export sales are likely to contribute 50-55% (in line with previous fiscals) to total sales. Established market position and healthy clientele would continue to aid business risk profile over the medium term as well.

Advantageous location of the unit

Manufacturing facility is in Hissar, Haryana, which is a major cotton-growing belt. DNL procures majority of its raw material requirement from local traders and ginners, reducing logistics cost and ensuring timely availability of raw materials. Proximity to the customer and suppliers, assuring regular order flow, will continue to aid the business risk profile of DNL over the medium term too.

Comfortable financial risk profile:

The financial risk profile of DNS is comfortable as indicated by low expected total outstanding liabilities to adjusted net worth of 0.9-1 time supported by a large networth of Rs 300-320 crores expected as on March 31, 2023. Debt protection metrics are also likely to be comfortable, with interest coverage ratio of 4.8-5.0 times in fiscal 2023; however, net cash accrual to adjusted debt (NCAAD) ratio is likely to be weak at 0.13 time on account of operating losses in the second and third quarters of fy23. However, the NCAAD ratio is expected to improve to 0.25-0.29 time over the medium term. Absence of sizeable debt funded capital expenditure over the medium term, and expected business revival, will further aid the financial risk profile over the medium term.

Weakness:

Vulnerability to fluctuations in raw material prices impacting operating margin

Since cotton is an agricultural commodity, its availability depends on monsoon. Furthermore, government interventions and fluctuations in global cotton output may result in sharp movement in cotton prices, thereby impacting the profitability of spinning mills. On account adverse market condition leading to moderation in cotton-yarn spread, operating profitability during April-Dec in the ongoing fiscal declined to 3.5%. Though operating profitability is expected to improve in last quarter of the fiscal and thereafter, its steady improvement, amid volatility related to cotton-yarn spread, will remain a key monitorable. Nevertheless, the operating profitability for fy23 shall half to around 5-6%, as against 11-12% estimated previously. Any further moderation in the same, leading to weakening to debt protection metrics will remain a key rating sensitivity factor.

Exposure to demand risks

Exports account for 50-60% of total sales, majority of which are to Europe, China and Bangladesh. Bangladesh is one of the largest exporters of textiles in the world, and any economic disturbance there could adversely affect the business risk profile of DNL. In the current quarter, it is expected the company will be able to record export sales contribution of around 50-55% (in line with the previous years) with the upliftment of lockdown in China and situations getting stabilized in Europe resulting revived demand. Although, the lower demand from international market due to the Russia-Ukraine war and other geopolitical factors was compensated with the domestic sales as it has well established customer base in India, this resulted in lower profitability, hence, However, the sustainability of demand from overseas market will remain a key monitorable over the medium term.

Outlook Stable

DNL will continue to benefit from its established market position in the cotton industry, strong relationships with customers and strategic location of the plant.

Key Financial Indicators

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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