Rating Rationale
July 31, 2020 | Mumbai
Madura Coats Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.250 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.20 Crore Short Term Debt CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and short-term debt programme of Madura Coats Private Limited (MCPL).
 
The reaffirmation reflects strong business risk profile driven by market leading position in the sewing threads segment in India, large distribution network and diversified customer base and marketing and operational support from parent, Coats Group PLC. It also takes into account the healthy financial risk profile driven by debt free nature of operations, adequate internal accruals and healthy liquidity. These strengths are partially offset by financial impact of the parent's repatriation policy, exposure to risks related to volatility in raw material prices and to competition from the unorganised sector.
 
Revenue and profitability are expected to be impacted in the current year, due to impact of Covid-19 pandemic and reduced demand from customers in ready-made garments (RMG) industry. Revenue for calendar year (CY) 2020 is expected to be lower by around 30-35% while the operating margin is expected to be lower by 300-400 bps. However, the financial risk profile is expected to remain healthy with nil debt and comfortable debt protection metrics.
 
For 2019, MCPL reported operating income of Rs. 1,631 crore (stagnant compared to CY 2018) and operating margin of 6.4% (8.3% in CY 18). 

Analytical Approach

CRISIL has applied its parent notch-up framework to factor in support from Coats Group PLC to MCPL.

Key Rating Drivers & Detailed Description
Strengths
* Healthy market position and well-diversified clientele
The company is the market leader in the sewing threads segment in India, with a wide product range for both domestic and industrial applications, large distribution network, and diversified customer base. It has 18 sales offices spread across 18 cities, supported by 5,000 dealers, and 11,000 direct and 200,000 indirect customers.
 
Clientele includes domestic garment manufacturers, garment exporters, retail consumers, as well as group companies across the world.
 
* Strong support from the parent
MCPL enjoys strong management, marketing, technical, and procurement support from the parent. It leverages on the strength of Coats Group's relationship with global consumer brands to secure domestic orders of the global brands. MCPL is strategically important to Coats Group, given that the latter has identified India as a key global manufacturing base for grey yarn and finished products.
 
* Healthy financial risk profile
Financial risk profile is driven by strong cash generation ability, nil debt obligations, and strong liquidity. MCPL had nil outstanding debt and liquidity of Rs. 122 crore as on December 31, 2019. Despite large dividend pay-out, net worth remained comfortable at above Rs. 235 crore over the past three years.
 
* Cost-efficient production process
The company outsources processes such as yarn spinning for lower-end grey yarn, and winding of finished products into retail packages. Its steam generator plant in Ambasamudram (Tamil Nadu) has been reducing power costs. With the installation of a reverse osmosis plant and zero discharge unit, the company has reduced its water consumption by over 75%, thus achieving cost efficiency. Operating efficiency is likely to remain healthy over the medium term driven by cost-efficient production processes.
 
Weaknesses
* High financial impact of pay-out to parent
The parent, Coats, has a policy of repatriating excess liquidity held by its operating entities, including MCPL, in the form of royalty, management fee, and dividend, applied consistently across group's operating companies. MCPL may, therefore, continue to regularly repatriate surplus profit to parent. This restricts improvement in net worth, thereby limiting financial flexibility.
 
* Volatility in raw material prices
Susceptibility to fluctuations in the prices of key raw materials - polyester fibre, synthetic filament, and cotton fibre - persists. The prices of polyester fibre and filament are closely linked to crude oil rates, which remain volatile. Cotton fibre prices, too, exhibit cyclical volatility and depend on the monsoon and international demand. For instance, operating margin in CY 18 dropped by 150 basis points due to higher raw material prices.
 
* Competition from the unorganised sector
The organised sector for manufacturing sewing threads has two large players - MCPL and Vardhman Yarns and Threads Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+') - with the former being the leader. Despite this, the company continues to face competition from the unorganised sector, which accounts for a sizeable segment of the total threads market. On account of competitive pressures, revenue growth has remained modest in the past few years.
Liquidity Strong

Liquidity is strong driven by healthy net cash accrual vis-a-vis nil debt repayments over the medium term. Liquid investments (including cash and cash equivalents) aggregated Rs 122 crore as on December 31, 2019, compared to Rs 70 crore in the previous year. Over the medium term, the company is unlikely to maintain high liquid surplus. Excess cash would be distributed in the form of dividend post meeting capital expenditure (capex) and working capital requirements. In addition, funded facilities of Rs 100 crore remains largely unutilised.

Outlook: Stable

CRISIL believes MCPL will continue to benefit from its established market position in the sewing threads segment in India. Financial risk profile should remain healthy over the medium term in the absence of any major capex and despite sizeable dividend pay-out.
'
Rating Sensitivity Factors
Upward Factors
* Significant and sustained increase in revenue and profitability
* Improvement in capital structure with total outside liabilities to tangible net worth (TOL/TNW) ratio reducing to below 2.0 times

Downward Factors
* Significant decline in revenue and profitability leading to weakening of business risk profile
* Weakening of capital structure due to debt-funded capex and higher than expected dividend pay-out to the parent resulting in TOL/TNW ratio to increase beyond 5 times.

About the Company

MCPL is a wholly owned subsidiary of Coats, the world's leading industrial thread manufacturer. Coats provides management input, export orders, product support (including technology upgrade), and assistance in raw material procurement to MCPL. The support received from Coats has helped MCPL to retain its leadership position in the threads industry in India.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 1,631 1,629
Profit After Tax (PAT) Rs.Crore 48 64
PAT margin % 2.9 3.9
TOL/TNW Times 2.7 2.7
Interest coverage Times 9.56 11.12

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs.Cr)		 Complexity Level Rating Assigned with Outlook
NA Short-Term Debt NA NA 7-365 days 20 Simple CRISIL A1+
NA Cash Credit^ NA NA NA 50 NA CRISIL AA-/Stable
NA Letter of Credit^^ NA NA NA 200 NA CRISIL A1+
^Interchangeable with other fund-based limits
^^Interchangeable with other non-fund-based limits
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    --    --    --    --  26-07-17  Withdrawal  CRISIL AA-/Stable 
Short Term Debt  ST  20.00  CRISIL A1+      30-07-19  CRISIL A1+  31-07-18  CRISIL A1+  26-07-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  50.00  CRISIL AA-/Stable      30-07-19  CRISIL AA-/Stable  31-07-18  CRISIL AA-/Stable  26-07-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
Non Fund-based Bank Facilities  LT/ST  200.00  CRISIL A1+      30-07-19  CRISIL A1+  31-07-18  CRISIL A1+  26-07-17  CRISIL A1+  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
Cash Credit^ 50 CRISIL AA-/Stable Cash Credit^ 50 CRISIL AA-/Stable
Letter of Credit^^ 200 CRISIL A1+ Letter of Credit^^ 200 CRISIL A1+
Total 250 -- Total 250 --
^Interchangeable with other fund-based limits
^^Interchangeable with other non-fund-based limits
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 rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

 Anuj Sethi
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Gautam Shahi
Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
gautam.shahi@crisil.com

Komal Baharnani
Rating Analyst - CRISIL Ratings
CRISIL Limited
B:+91 22 3342 3000
Komal.Baharnani@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL