Rating Rationale
July 30, 2019 | Mumbai
Himatsingka Seide Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2468.17 Crore
Long Term Rating CRISIL A/Negative (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Negative/CRISIL A1' ratings on the bank facilities of Himatsingka Seide Limited (HSL; part of the Himatsingka group).
 
The reaffirmation continues to reflect group's healthy and established market position in the drapery, upholstery, and bedding verticals of the home textile segment. The ratings also factor in strong operating efficiency on account of vertically integrated businesses (manufacturing and distribution) in the home textiles segment. These strengths are partially offset by modest financial risk profile, low margin in the distribution business, susceptibility of performance to economic downturns in end-user markets and to volatility in raw material prices, and large, ongoing capex.
 
The operating performance remained healthy with 18% revenue growth in fiscal 2019 while operating margin stood at 21.8% for fiscal 2019, as compared to 20.7% in corresponding period of the previous fiscal. Going forward, the company is expected to post revenue growth of ~18% per annum (p.a.). The operating margin is expected to be in the range of 21.0% - 22.0% over the medium term. Gradual ramp up of Terry towel project, which will start commercial operations before September 2019, will also drive operating performance having revenue potential of Rs 800 crore at its full capacity utilization with operating margin of over 20%.
 
The company had liquidity in the form of cash and marketable instruments amounting to Rs 368 crore as on 31st March 2019. The company has a policy of maintaining enough liquidity to cover next 1 year of debt service. 
 
Large debt-funded capital expenditure (capex) of around Rs 1800 crore over fiscal 2016 to fiscal 2019 was carried out on account of expansion of sheeting capacity to 61 million metres per annum (mmpa) from 23 MMPA, installation of a high-count spinning unit for backward integration (commissioned in February 2018), greenfield 25000 Tonne per annum (TPA) terry towel unit (trial production commissioned in February 2019) and acquisition of exclusive licensing rights for brands such as Tommy Hilfiger Home and Copper Fit in May 2018. Further, higher inventory days resulted in higher dependence on working capital debt.

The consolidated gross debt stood at Rs 2788 crore as on 31st March 2019. CRISIL expects HSL's debt levels to have peaked as on March 2019 with completion of majority capex. Going forward with annual cash accrual of Rs. 300 - 450 crore and lower capex intensity as well as normalization of working capital cycle, overall debt is expected to reduce to below Rs 2700 crore in fiscal 2020 and below Rs 2400 crore in fiscal 2021. The debt protection metrics is expected to improve over medium term, for instance, ratio of gross debt to earnings before interest, tax, depreciation and amortization (EBITDA) is expected to have peaked in fiscal 2019 at 4.8 times and to reduce to 4.1 times in fiscal 2020 and 3.2 times in fiscal 2021. Improvement in operating profitability due to benefits accruing from capex, and reduction in debt will be key sensitivity factors with substantial reduction in Debt/EBIDTA remaining a key monitorable for rating.
 
Financial risk profile of the company is expected to improve gradually with ramp up in cash generation, low capex intensity and expectation of normalization of working capital cycle in the medium term.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of HSL and its subsidiaries (owned directly or indirectly): Himatsingka Wovens Pvt Ltd, Himatsingka Holdings North America, Inc., Himatsingka Europe Ltd, Twill & Oxford LLC, , Himatsingka America, Inc. ((Merged entity of DWI Holdings, Inc. and Divatex Home Fashions, Inc.) and The companies collectively referred to as the Himatsingka group, have a common management team, and strong operational and financial linkages and past instances of support.

CRISIL has amortised goodwill of around Rs 680 crore on the acquisitions of Bellora, DWI, and Divatex over a period of 10 years, commencing 2008. CRISIL has also restated the increase in valuation of plant, property, and equipment by about Rs 240 crore owing to Ind-AS, to earlier historical levels. The acquisition cost of Tommy Hilfiger Home, Copper Fit and other brands acquired in May 2018 has also been capitalized and to be amortized over next 5 years from fiscal 2019.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Healthy market position in the drapery, upholstery, and bedding verticals:
The group is among the top five home textile players in India, with a presence in manufacturing as well as distribution. It has a high-end bed sheeting manufacturing capacity of 61 million metres per annum (mmpa), and drapery and upholstery fabrics manufacturing capacity of 1.8 mmpa. The group holds licenses to brands such as Tommy Hilfiger Home, Calvin Klein Home and Barbara Barry, and caters to private label programmes of major retailers. Branded sales contributed 80% (around Rs 2255 crore) to revenue in the fiscal 2019, and have witnessed strong growth in the recent past.
 
HSL has also tied up with Applied DNA Sciences (ADNAS), a leading authentication and supply chain security company to ensure tagging of all kinds of cotton including PIMA cotton which is grown in The United States of America (USA). This will ensure that purity of the product can be verified at each point along the supply chain. The group has registered three brands, PimaCott, HomeGrown and Organiccott in this platform. Such initiatives will help increase drive customer preference for its products, and augur well for business performance over the medium term.
 
* Strong operating efficiency:      
Manufacturing capability is complemented by vertical integration into distribution and retail. The distribution business provides a significant market reach in the Americas, efficient warehousing infrastructure, a global sourcing base, and access to large customers such as Bed, Bath and Beyond, Costco, TJ Maxx and Home Depot in the home textiles space. The manufacturing business has operating margin of 25-30%, while the distribution business has lower operating margin of 3-4%. The share of manufacturing is increasing with over 75% of bedsheet requirement now being procured internally (up from 50% in fiscal 2017). Increasing share of manufacturing coupled with backward integration into spinning has resulted into improvement in operating margin from 10.4% in 2015 to 21.8% in 2019. Company is revising its product mix in favour of lower realising products to enhance capacity utilizations as well as to cater to lower pricing points which was reflected in operating margin at 20.7% in 4th quarter of fiscal 2019, however the increase in export incentives by Government in December 2018 and March 2019, are expected to keep the operating margin in the range of 21.0-22.0% over medium term. Lower-than-expected operating margins could delay the envisaged improvement in debt protection measures, and hence, will remain a key rating sensitivity factor.
 
Weaknesses 
* Modest financial risk profile
The group's balance sheet is leveraged due to sizeable ongoing capex, and increase in working capital requirement. Interest coverage and debt to EBIDTA ratio stood at, 3.6 times and 4.8 times respectively for fiscal 2019 compared to 3.9 times and 4.8 times in fiscal 2018 respectively. The financial risk profile is likely to improve gradually over medium term with debt to EBIDTA expected to improve to 4.1 times for fiscal 2020 and 3.2 times for fiscal 2021. The interest cover is expected to be in the range of 3.4 - 4.3 times over medium term.  
 
Despite the high leverage, liquidity is comfortable given the management's policy of maintaining enough liquidity to cover next 1 year of debt service. The company had liquidity in the form of cash and marketable instruments amounting to Rs 368 crore as on 31st March 2019. Also, longer tenure and back-ended repayment of long-term project loans reduces debt obligation during the implementation of capex.
 
* Susceptibility to economic downturns in end-user markets: 
USA account for over 80% of the group's turnover, and hence, performance will be susceptible to any major slowdown and increase in competition in that market. Also, as top five leading customers account for bulk of textile revenue, the group's fortunes are susceptible to their sourcing policies. HSL is trying to enhance presence in Europe and expects significant increase from the same from fiscal 2020. Nevertheless, while prospects for home textile export are healthy, competition is on the rise with higher trade incentives being provided by competing countries. Operating profitability remains partially vulnerable to adverse movements in foreign exchange rates, with HSL being a net exporter.
 
* Capital intensive nature of business
The company has carried out sizeable debt-funded capex of around Rs 1800 crore between fiscals 2016 and 2019, involving expansion of sheeting capacity, and installation of a high-count spinning unit and a terry towel unit. The capex has been funded partly through debt, leading to modest debt protection metrics in the project implementation phase.
 
Doubling of sheeting capacity to 46 mmpa was completed in October 2016. Addionally the sheeting capacity was increased to 61 MMPA in 3rd quarter of fiscal 2019 though de-bottlenecking. This capacity expansion has helped enhance contribution of the high-margin domestic manufacturing business. The spinning unit was commissioned in February 2018 for improving backward integration and to reduce dependence on external yarn sourcing.
 
Capex for the terry towel facility has been majorly complete and the facility will start commercial operations before September 2019. Given the significantly large capex in a relatively new field, the group will face risks relating to implementation, and stabilisation and scaling up of operations, in the terry towels segment. Over the medium term, capex intensity is expected to be low and focus will be on to ramp up the capacity utilizations.  
 
Any delay in realisation of benefits from this capex in the form of growth in revenue as well as operating profitability will remain key rating sensitivity factors.
 
Additionally the operations are highly working capital incentive owing to high inventory days due to requirement to maintain large cotton and finished products inventories as well as requirement of high credit period to global retailers. Also delay in receipt of subsidies and incentives also leads to increase in working capital requirement.
Liquidity

HSL has adequate liquidity driven by expected cash and equivalents of Rs 368 crore in March 2019 (at consolidated level, Rs.351 crore at standalone level). The company is expected to have cash accruals of more than Rs 330-450 crore per annum from fiscal 2019 to fiscal 2021. HSL also has access to fund based limits of Rs 728 crore, utilized to the tune of 90% on an average over the last 12 months ended May 2019. The higher utilization is mainly due to access to low cost export credit at ~6% per annum. The company has long term repayment obligations around Rs 125 - 240 crore per annum over fiscal 2019 to fiscal 2021. The company maintains enough liquidity to cover next 1 year of debt service. The capex intensity is expected to be low in fiscal 2020 and fiscal 2021 aggregating to Rs 250 crore. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations, as well as incremental capex requirements.

Outlook: Negative

CRISIL believes better utilization of the enhanced sheeting capacity, benefits of backward integration post stabilization of the spinning unit, contribution from recent brand acquisitions including Tommy Hilfiger home product portfolio and ramp up of terry towel capacity will help HSL materially improve its business performance over the medium term. CRISIL also expects HSL's debt levels to have peaked in fiscal 2019, and gradually reduce due to better cash flows from operations; debt repayment and moderate capex spend, leading to better credit metrics.

Downside scenario
* Weak revenue growth and operating margins declining to below 18%, impacting cash generation or
* Weakening of credit metrics over the medium term (sustained high gross debt to EBIDTA of over 4.4 times in 2020 and 3.7 times in 2021 due to lower cash generation, elongation of working capital cycle, further debt funded acquisitions, or increase in capex, including due to cost overruns)

Upside scenario
* Significant improvement in business performance, and working capital management, leading to healthy cash generation
* Completion of capex without any major time and cost overrun, and successful scaling up of operations
* Improvement in credit metrics; for instance gross debt to EBIDTA ratio to below 3-3.2 times over the medium term.

About the Group

The Himatsingka Group is a vertically integrated textile major with a global footprint. The Group focuses on the manufacture, retail and distribution of Home Textile products.  On the manufacturing front, the Group operates amongst the largest capacities in the world for producing Bedding products, Bath products, Drapery & Upholstery fabrics and Fine count Cotton Yarn. Spread across North America, Europe and Asia, the Group's retail and wholesale distribution divisions own and or license among the largest brand portfolios in the home textile space. With a team of over 8,000 people, the Group continues to build capacities and enhance reach in the global textile space.

The group reported a profit after tax (PAT) of Rs.197 crore (unadjusted for goodwill) on operating income of Rs 2654 crore in fiscal 2019, against Rs. 202 crore (unadjusted for goodwill) and Rs 2261 crore, respectively, in fiscal 2018.

Key Financial Indicators (Consolidated; CRISIL Adjusted Financials)
Particulars Unit 2018 2017
Revenue Rs Crore 2261 2,138
Profit After Tax (PAT) Rs Crore 160 95
PAT Margins % 7.1 4.5
Adjusted debt/adjusted networth Times 3.27 2.41
Interest coverage Times 3.89 3.97

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned
with outlook
NA Term Loan NA NA Jul-2028 177.3 CRISIL A/Negative
NA Term Loan NA NA Jun-2029 1236.37 CRISIL A/Negative
NA Term Loan NA NA Feb-2026 100 CRISIL A/Negative
NA Bank Guarantee NA NA NA 5.5 CRISIL A1
NA Letter of Credit NA NA NA 239 CRISIL A1
NA Packing Credit# NA NA NA 685 CRISIL A1
NA Post Shipment Credit# NA NA NA 25 CRISIL A1
#Interchangeable with bills discounting

Annexure - List of Entities Consolidated
1 Himatsingka Wovens Pvt Ltd, Subsidiary
2 Himatsingka Holdings North America, Inc. Subsidiary
3 Himatsingka Europe Ltd Step Subsidiary
4 Twill & Oxford LLC Subsidiary
5 Himatsingka America, Inc. Step Subsidiary
6 Himatsingka Energy Private Limited Associate
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT    --    --  13-04-18  Withdrawal  30-06-17  CRISIL A/Stable  29-12-16  CRISIL A-/Stable  CRISIL A-/Negative 
                23-03-17  CRISIL A-/Stable  01-07-16  CRISIL A-/Negative   
                11-01-17  CRISIL A-/Stable  30-06-16  CRISIL A-/Negative   
Fund-based Bank Facilities  LT/ST  2223.67  CRISIL A/Negative/ CRISIL A1  26-06-19  CRISIL A/Negative/ CRISIL A1  07-05-18  CRISIL A/Negative/ CRISIL A1  30-06-17  CRISIL A/Stable/ CRISIL A1  29-12-16  CRISIL A-/Stable/ CRISIL A2+  CRISIL A-/Negative/ CRISIL A2+ 
        28-03-19  CRISIL A/Negative/ CRISIL A1  13-04-18  CRISIL A/Negative/ CRISIL A1  23-03-17  CRISIL A-/Stable/ CRISIL A2+  01-07-16  CRISIL A-/Negative/ CRISIL A2+   
        15-01-19  CRISIL A/Negative/ CRISIL A1      11-01-17  CRISIL A-/Stable/ CRISIL A2+  30-06-16  CRISIL A-/Negative/ CRISIL A2+   
Non Fund-based Bank Facilities  LT/ST  244.50  CRISIL A1  26-06-19  CRISIL A1  07-05-18  CRISIL A1  30-06-17  CRISIL A1  29-12-16  CRISIL A2+  CRISIL A2+ 
        28-03-19  CRISIL A1  13-04-18  CRISIL A1  23-03-17  CRISIL A2+  01-07-16  CRISIL A2+   
        15-01-19  CRISIL A1      11-01-17  CRISIL A2+  30-06-16  CRISIL A2+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 5.5 CRISIL A1 Bank Guarantee 5.5 CRISIL A1
Letter of Credit 239 CRISIL A1 Letter of Credit 239 CRISIL A1
Packing Credit# 685 CRISIL A1 Packing Credit# 685 CRISIL A1
Post Shipment Credit# 25 CRISIL A1 Post Shipment Credit# 25 CRISIL A1
Term Loan 1513.67 CRISIL A/Negative Term Loan 1513.67 CRISIL A/Negative
Total 2468.17 -- Total 2468.17 --
#Interchangeable with bills discounting
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for Consolidation

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