Rating Rationale
March 27, 2020 | Mumbai
Himatsingka Seide Limited
Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.2784.17 Crore
Long Term Rating CRISIL A-/Negative (Downgraded from 'CRISIL A/Negative')
Short Term Rating CRISIL A2+ (Downgraded from 'CRISIL A1')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on bank facilities of Himatsingka Seide Limited (HSL; part of the Himatsingka group) to 'CRISIL A-/Negative/CRISIL A2+' from 'CRISIL A/Negative/CRISIL A1'.

The rating action reflects slower than expected improvement in credit metrics, owing to sluggish operating performance in fiscal 2020, and the likelihood that the challenging business conditions may have impact on the company's performance in the near term.
 
In fiscal 2020, the company is expected to post flat growth in overall revenues, due to softened demand in US bed linen market, and slower than expected ramp up in terry towel capacity, which commenced operations in October 2019, and operated at lower utilisation level of 20%. Further, withdrawal of MEIS incentives by the government of India in January 2020, with retrospective effect from March 2019, and initial teething issues at the terry towel capacity are expected to lead to operating profitability of 18-19% in fiscal 2020, from ~22% in fiscal 2019. Consequently, cash generation is expected to be impacted, leading to the company's ratio of gross debt to earnings before interest depreciation, tax and amortization (EBIDTA) expected at around 5 times in fiscal 2020 as against earlier expectation at 4.4 times.

The rating action also takes into account possible impact of the global COVID-19 outbreak, on operations of HSL's customers i.e. brick-and-mortar home furnishing retailers mainly in the US. Disruption in business of these customers may result in delayed shipments, thereby impacting HSL's operations, as over 70% of revenue comes from exports to US-based retailers. While a faster reversal to normalcy may contain the impact, a longer period of low shipments will lead to continued high leverage for fiscal 2021.That said, the ability of the business to revert back to operational stability and any relief measures given by the government will be key monitorables. 

Consolidated gross debt stood at Rs 2,774 crore (excluding lease liabilities) as on December 31, 2019 (as against Rs 2,788 crore as on March 31, 2019), and is expected to be in the range of Rs 2,600-2,700 crore as on March 31, 2020.

The company had cash and marketable instruments worth around Rs 206 crore as on December 31, 2019 (lower than Rs 368 crore as on March 31, 2019). Liquidity may improve to Rs 340 crore in the near term, owing to release of export incentives of about Rs 90 crore by the Government of India, and incentives by the state government of Karnataka, worth Rs 70 crore. As a policy, HSL maintains enough liquidity to cover the next 12 months of debt service. The company has maturing debt of Rs 34 crore in March 2020, and 56 crore in June 2020, and around Rs 250 crore in fiscal 2021. It is in the process of refinancing a portion of term debt, which if done, can reduce the repayment to Rs 34 crore in June 2020, and Rs 160 crore in fiscal 2021. 
Improvement in operating margin, driven by benefits accruing from capital expenditure (capex), and reduction in debt will be key sensitivity factors, with substantial reduction in debt/EBIDTA ratio being a key rating monitorable.  Gradual ramp up of the terry towel project over the next 2-3 fiscals will also drive operating performance. The unit has revenue potential of Rs 800 crore at full capacity with operating margin of over 20%.

The rating continues to reflect the group's established market position in the drapery, upholstery, and bedding verticals of the home textile segment. The ratings also factor in strong operating efficiency, aided by the vertically integrated businesses (manufacturing and distribution) in the home textiles segment. These strengths are partially offset by modest financial risk profile, susceptibility of performance to economic downturns in end-user markets and to volatility in raw material prices, and capital-intensive nature of business.

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.). The companies, collectively referred to as the Himatsingka group, have a common management, and strong operational and financial linkages, with past instances of support.

CRISIL has amortised goodwill of around Rs 680 crore on 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 capitalised, and is to be amortised over next five  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 sheet manufacturing capacity of 61 million meters per annum (mmpa), terry towel manufacturing capacity of 25 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 2,255 crore) to revenue in 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 that is grown in US. 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 drive customer preferences 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 yields an operating margin of 25-30%, while the distribution business fetches a lower margin of 3-4%. Share of manufacturing is increasing, with over 75% of bedsheet requirement now being procured internally (up from 50% in fiscal 2017). This, coupled with backward integration into spinning, has helped the margin increase to 21.8% in fiscal 2019, from 10.4% in fiscal 2015. In fiscal 2020, the operating margin may drop to 19% owing to retrospective withdrawal of MEIS incentives by Government of India in January 2020, and revision in product mix, in favour of products with lower realisations, to enhance capacity utilisation and cater to lower pricing points. Lower-than-expected operating margins could delay the envisaged improvement in debt protection metrics, and hence, remain a key rating sensitivity factor.
 
Weaknesses:
* Modest financial risk profile
The group's balance sheet is leveraged due to sizeable ongoing capex, and higher working capital requirement. Interest coverage and debt to EBIDTA ratios stood at 3.6 times and 4.8 times, respectively, for fiscal 2019, and are expected at ~2.8 times and 5.1 times in fiscal 20120, respectively. If the impact of Covid ' 19 gets contained in the near term, the financial risk profile may gradually improve, also aided by ramping up of terry towel capacity and improvement in debt to EBIDTA (to 4.3 times and 3.5 times for fiscals 2021 and 2022, respectively). Interest cover ratio is expected to be in the range of 2.8-3.7 times over the medium term. The 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:
The US accounts for over 70% of the Himatsingka 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 enhancing its presence in Europe, and expects a significant increase in revenue from the region in fiscal 2020. Nevertheless, while prospects for home textile exports are healthy, competition is on the rise, with higher trade incentives offered 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 undertaken sizeable debt-funded capex of around Rs 1,950 crore between fiscal 2016 and first half of fiscal 2020, and this involved expansion of the sheeting capacity, and installation of a high-count spinning unit and a terry towel unit. 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. Additionally the sheeting capacity was increased to 61 MMPA in third 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, to improve backward integration and reduce dependence on external yarn sourcing.

The terry towel facility started commercial operations in October 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 ramping up capacity utilisation.

Any delay in realisation of benefits from this capex, in the form of growth in revenue and operating profitability, will remain key rating sensitivity factors.

Additionally, operations are highly working capital intensive, owing to large inventory comprising cotton and finished products and high credit extended to global retailers. Delay in receipt of subsidies and incentives also leads to a stretch in the working capital cycle.
Liquidity Adequate

Liquidity remains adequate, driven by cash and equivalents of Rs 206 crore as of December 2019 (expected at Rs 340 crore in near term). In case the impact of Covid-19 is contained in near term, the company is likely to report cash accrual of Rs 290-370 crore per fiscal over  2021 and 2022, against maturing debt of Rs 230-250 crore per annum. Fund based limit of Rs 861 crore was utilised at over 90% on an average, mainly due to access to low-cost export credit at around 6% per annum. The company maintains enough liquidity to cover debt servicing for the next one year. Capex intensity is expected to be low in fiscals 2020 and 2021, aggregating to Rs 250 crore cumulatively. CRISIL expects internal accrual, cash & cash equivalents, and unutilised bank limit to comfortably cover the repayment obligation, as well as incremental capex.

Outlook: Negative

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

Rating Sensitivity Factors
Upward factors
* 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 3.5-3.75 times over the medium term
 
Downward factors
* Steeper-than-anticipated weakening of operating performance due to Covid-19 outbreak
* Interest cover remaining below 2.5 times in fiscal 2021.

About the Group

The Himatsingka group is a vertically integrated textile major with a global footprint. The group focuses on manufacture, retail and distribution of home textile products.  On the manufacturing front, the group operates one of the largest capacities in the world, for bedding and bath products, drapery and 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 licenses 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 82 crore (unadjusted for goodwill) on operating income of Rs 1,949 crore in the first nine months of fiscal 2020, against Rs 148 crore (unadjusted for goodwill) and Rs 1,927 crore, respectively, in the corresponding period of previous fiscal.

Key Financial Indicators - (Consolidated; CRISIL adjusted financials)
Particulars Unit 2019 2018
Revenue Rs Crore 2654 2261
Profit After Tax (PAT) Rs Crore 155 160
PAT Margins % 5.9 7.1
Adjusted debt/adjusted networth Times 3.50 3.27
Interest coverage Times 3.56 3.89

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.Cr) Rating assigned
with outlook
NA Term Loan NA NA Jul-28 177.3 CRISIL A-/Negative
NA Term Loan NA NA Jun-29 1236.37 CRISIL A-/Negative
NA Term Loan NA NA Feb-26 100 CRISIL A-/Negative
NA Bank Guarantee NA NA NA 5.5 CRISIL A2+
NA Letter of Credit NA NA NA 239 CRISIL A2+
NA Packing Credit# NA NA NA 916 CRISIL A2+
NA Post Shipment Credit# NA NA NA 25 CRISIL A2+
NA Proposed Working
Capital Facility		 NA NA NA 85 CRISIL A-/Negative
#Interchangeable with bills discounting

Annexure - List of entities consolidated
 Sr.No Name of the Company Type of consolidation Rationale for consolidation
1 Himatsingka Wovens Pvt Ltd, Full consolidation Subsidiary
2 Himatsingka Holdings North America, Inc. Full consolidation Subsidiary
3 Himatsingka Europe Ltd Full consolidation Step Subsidiary
4 Twill & Oxford LLC Full consolidation Subsidiary
5 Himatsingka America, Inc. Full consolidation Step Subsidiary
6 Himatsingka Energy Private Limited Full consolidation Associate
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
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  CRISIL A-/Stable 
                    23-03-17  CRISIL A-/Stable   
                    11-01-17  CRISIL A-/Stable   
Fund-based Bank Facilities  LT/ST  2539.67  CRISIL A-/Negative/ CRISIL A2+      31-10-19  CRISIL A/Negative/ CRISIL A1  07-05-18  CRISIL A/Negative/ CRISIL A1  30-06-17  CRISIL A/Stable/ CRISIL A1  CRISIL A-/Stable/ CRISIL A2+ 
            30-07-19  CRISIL A/Negative/ CRISIL A1  13-04-18  CRISIL A/Negative/ CRISIL A1  23-03-17  CRISIL A-/Stable/ CRISIL A2+   
            26-06-19  CRISIL A/Negative/ CRISIL A1      11-01-17  CRISIL A-/Stable/ CRISIL A2+   
            28-03-19  CRISIL A/Negative/ CRISIL A1           
            15-01-19  CRISIL A/Negative/ CRISIL A1           
Non Fund-based Bank Facilities  LT/ST  244.50  CRISIL A2+      31-10-19  CRISIL A1  07-05-18  CRISIL A1  30-06-17  CRISIL A1  CRISIL A2+ 
            30-07-19  CRISIL A1  13-04-18  CRISIL A1  23-03-17  CRISIL A2+   
            26-06-19  CRISIL A1      11-01-17  CRISIL A2+   
            28-03-19  CRISIL A1           
            15-01-19  CRISIL A1           
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 A2+ Bank Guarantee 5.5 CRISIL A1
Letter of Credit 239 CRISIL A2+ Letter of Credit 239 CRISIL A1
Packing Credit# 916 CRISIL A2+ Packing Credit# 916 CRISIL A1
Post Shipment Credit# 25 CRISIL A2+ Post Shipment Credit# 25 CRISIL A1
Proposed Working Capital Facility 85 CRISIL A-/Negative Proposed Working Capital Facility 85 CRISIL A/Negative
Term Loan 1513.67 CRISIL A-/Negative Term Loan 1513.67 CRISIL A/Negative
Total 2784.17 -- Total 2784.17 --
#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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