Rating Rationale
June 06, 2024 | Mumbai
Le Merite Exports Limited
Rating outlook revised to 'Negative'; Rating Reaffirmed; Rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.60 Crore (Enhanced from Rs.50 Crore)
Long Term RatingCRISIL BBB-/Negative (Outlook revised from 'Stable'; Rating Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Le Merite Exports Limited (LMEL; part of Le Merite group) to ‘Negative’ from ‘Stable’ while reaffirmed its rating at ‘CRISIL BBB-’.

 

The revision in the outlook reflects the moderation in the business risk profile of the company primarily due to subdued profitability driven by sharp commodity price fluctuations. Operating margins of the company declined in the current fiscal year 2024 to around 1.4% from 2.8% in fiscal 2023, due to losses in the manufacturing segment which accounts for 35% of total sales. The moderation was primarily driven by the sharp fluctuation in cotton yarn prices resulting in lower realizations and hence resulting in lower-than-expected cash accruals. With 80%-90% of higher priced inventory now out of the company’s operations and the expected stability in cotton yarn prices, revival of operating margins and cash accruals in fiscal 2025 remains a key monitorable.

 

The financial risk profile remains comfortable with limited dependence on external borrowings and adequate liquidity with no repayment obligations and healthy unencumbered cash and cash equivalents of Rs 20 crores as on March 31, 2024.

 

The rating continues to reflect the extensive experience of the promoter in the yarn manufacturing and trading business, and comfortable capital structure. These strengths are partially offset by exposure to intense competition, and moderate working capital cycle and subdued debt protection metrics led by the moderation in operating margins.

Analytical Approach

Unsecured loans of Rs. 0.6 lakhs as on March 31, 2024 extended by the promoters have been treated as debt

 

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of Le Merite Exports Limited with its subsidiary Le Merite Laxmi Spinning Private Limited, together known as Le Merite group. CRISIL considers that the subsidiary is strategically important to, and have a significant degree of operational integration with Le Merite Exports Limited.

 

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:

  • Extensive experience of the promoter: The promoters of the company has more than a decade of experience in the textile industry which has helped them understand the business and industry dynamics and has helped them overcome business cycles. It has also helped them develop healthy relationships with customers and suppliers.  The company has achieved revenues of Rs. 486 crores in fiscal 2024 backed by the steady order flow from the customers. The business profile of the company will continue to be supported from the extensive experience of the promoters.

 

  • Comfortable capital Structure: The financial risk profile is marked with estimated net worth of Rs 40 to Rs 42 crores as on March 31, 2024, led by the steady accretion to the reserves and equity infusion (in fiscal 2023 and 2022). The improvement in the net worth has led to the improvement in the capital structure leading to the estimated gearing and total outside liability to adjusted net worth ratio of 0.9 times and 1.06 times as on March 31, 2024 (0.86 times and 1.11 times a year ago). The capital structure is expected to improve over the medium term backed by the accretion to the reserves amidst the growing scale of operations.

 

Weaknesses:

  • Subdued debt protection metrics led by the moderation in the operating margins: The operating margins of the company have moderated in the current fiscal year 2024 to around 1.4% from 2.8% in the last fiscal year 2023. The moderation was on account of the moderation in the cotton yarn prices leading to the fall in realizations. This has further impacted the debt protection metrics with interest cover moderating to around less than 1.5 times in current fiscal year 2024 from 3.2 times a year ago. With the expected stability in cotton yarn prices in the current fiscal year 2025, the improvement in the operating margins and subsequently on the debt protection metrics remains a key monitorable.

 

  • Moderate working capital requirement: The working capital cycle of the company is moderately in working capital intensive as reflected in the gross current assets of 110 to 120 days as on March 31, 2024. This is driven by moderate debtors and low inventory of around 70-80 days and 15-20 days respectively as on March 31, 2024 (as compared to 98 and 17 days, a year ago). Although, receivables is large due to high credit period extended to customers, inventory is low and generally order backed. Receivables may remain high due to the elongated credit period provided to customers. The working capital cycle is expected to remain stable over the medium term.

 

  • Exposure to intense competition and volatility in raw material prices: The cotton trading industry is marked by huge fragmentation, given the low entry barriers. Furthermore, the yarn trading industry is fragmented because of the presence of several players at different points in the value chain. Presence of several small players catering to price-sensitive customers, intensifies competition and restricts bargaining power with customers and supplier, and hence, profitability. This can be reflected in decline operating margins to around 1.4% in fiscal 2024 from 2.8% in fiscal 2023. Operating margins are further susceptible to volatility in yarn prices. Limited ability to pass on increase in prices to customers due to intense competition could further affect the business profile of the company and remains a key monitorable over the medium term. 

Liquidity: Adequate

Cash accrual of Rs 6 to 8 crore per fiscal in 2025 and 2026, would be sufficient against the minimal yearly term debt of Rs 0.25 crore. Bank limit utilisation averaged 85% during the 6 months through March 2024. Strong cash and bank balance of around Rs. 42 crores as on March 31, 2024, out of which Rs 20 crores is unencumbered. Moderate cash accruals, cushion in bank lines and strong cash balance will continue to support working capital management over the medium term.

Outlook: Negative

CRISIL Ratings believes credit risk profile of Le Merite Exports Limited may weaken in the medium term due to expected moderation in operating performance, though financial risk profile is expected to sustain.

Rating Sensitivity factors

Upward factors:

  • Significant growth in revenue and steady operating margins, leading to cash accrual of more than Rs. 4 crores
  • Improvement in the financial risk profile, specifically in the interest coverage.

 

Downward factors:

  • Decline in revenue or sustained weakness in operating margin below 2%, leading to lower net cash accrual.
  • Stretch in the working capital cycle or large debt-funded capital expenditure, weakening the financial risk profile.
  • Moderation in financial risk profile with the interest cover to below 1.3 times.

About the Group

Incorporated in 2003 by the promoter, Mr Abhishek Lath, LMEL trades in cotton yarn and fabric. The Mumbai-based company derives bulk of its revenue from exports. Since June 2020, the company started manufacturing cotton yarn in its leased unit. Manufacturing facilities are located in Nagpur, Dhamangaon and Nanded (all in Maharashtra)

 

Le Merite Laxmi Spinning Private Limited is a 51% owned subsidiary of Le Merite Exports Limited engaged in the manufacturing of cotton yarn in its leased unit.

Key Financial Indicators

As on/for the period ended March 31

 Unit

2023

2022

Operating income

Rs.Crore

360.7

519.03

Reported profit after tax (PAT)

Rs.Crore

2.9

21.06

PAT margin

%

1.2

4.1

Adjusted debt/adjusted networth

Times

0.8

2.20

Interest coverage

Times

3.2

8.95

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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) Complexity levels Rating  assigned with outlook
NA Export Packing Credit NA NA NA 57.9 NA CRISIL BBB-/Negative
NA Proposed Fund Based bank Limits NA NA NA 2.1 NA CRISIL BBB-/Negative

Annexure - List of Entities Consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Le Merite Exports Limited

Full

Parent

Le Merite Laxmi Spinning Private Limited

Full

51% Owned Subsidiary.
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 60.0 CRISIL BBB-/Negative   -- 22-06-23 CRISIL BBB-/Stable 25-08-22 CRISIL BBB-/Stable 22-06-21 CRISIL BB+/Positive CRISIL BB/Stable
      --   -- 07-06-23 CRISIL BBB-/Stable   --   -- --
Non-Fund Based Facilities ST   --   --   --   -- 22-06-21 CRISIL A4+ CRISIL A4+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Export Packing Credit 13.4 Shinhan Bank CRISIL BBB-/Negative
Export Packing Credit 6 UCO Bank CRISIL BBB-/Negative
Export Packing Credit 3.5 ICICI Bank Limited CRISIL BBB-/Negative
Export Packing Credit 12.1 HDFC Bank Limited CRISIL BBB-/Negative
Export Packing Credit 6 ICICI Bank Limited CRISIL BBB-/Negative
Export Packing Credit 9 UCO Bank CRISIL BBB-/Negative
Export Packing Credit 5 ICICI Bank Limited CRISIL BBB-/Negative
Export Packing Credit 2.9 HDFC Bank Limited CRISIL BBB-/Negative
Proposed Fund-Based Bank Limits 2.1 Not Applicable CRISIL BBB-/Negative
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Bank Loan Ratings
Criteria for rating trading companies
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for Consolidation

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