Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Nahar Industrial Enterprises Ltd (NIEL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at 'CRISIL A-‘. The short term rating has been reaffirmed at ‘CRISIL A2+’.

 

The revision in outlook reflects moderation in performance over the near to medium term, marked by expected decline in profitability and credit metrics.  In the first half of current fiscal, operating income declined by ~20% to Rs. 735 crore and earnings before interest depreciation taxes and amortization (EBIDTA) margin also moderated to ~1.3% from 10.7% during corresponding period last fiscal mainly due to lower operating performance in the yarns and fabric segment partly offset by steady operating performance in the sugar segment. Operating performance in the yarns and fabric segment was impacted due to compression in cotton yarn spreads (difference between yarn and cotton prices) and inventory losses.

 

Average yarn prices had reached exceptionally high levels in fiscal 2023, driven by elevated cotton prices, which reached highs of ~Rs. 1 lakh per candy during last fiscal. It has now declined to ~Rs. 60-63,000 per candy in November 2023.  Prices are expected to remain low with better supply in the current season and the demand is expected to revive as well. Overall, the revenue is expected to moderate by 8-10% due to lower price realization and the EBITDA margin is expected to moderate to 3-4% in full fiscal, as compared to around 8% during previous fiscal. Company is currently executing a capital expenditure of ~ Rs. 40 crores in the yarns and fabric segment which should support the operating profitability over the medium term which will remain a key monitorable going forward.

 

Debt protection metrics, although healthy, is likely to moderate during the current fiscal. Adjusted interest coverage ratio and total debt to EBITDA ratio is likely to moderate to ~ 3 times and to over 4 times compared to 5.0 times and 2.1 times respectively in fiscal 2023.

 

Moreover, company is also increasing its presence in warehousing segment with a capital expenditure of ~ Rs. 105 crores out of which ~Rs.37 crores is already incurred in H1FY2024. This is likely to increase the revenue to Rs. 30 crores in next 2 years compared to ~ Rs. 18 crores in the current fiscal. This is likely to support the overall profitability and the financial risk profile of the company over the medium term.

 

The ratings continue to reflect the company’s established market position in the cotton yarn and fabric business, large scale of operations with moderate integration across the textile value chain and healthy operating efficiency. The ratings also factor in stable financial risk profile & healthy financial flexibility and support from the Nahar group. These strengths are partially offset by susceptibility to fluctuations in prices of cotton, cotton yarn and sugarcane, and large working capital requirement.

Analytical Approach

The Nahar group comprises NIEL, Nahar Spinning Mills Ltd (rated ‘CRISIL A/Negative/CRISIL A1’), Oswal Woollen Mills Ltd, Nahar Polyfilms Ltd, Monte Carlo Fashions Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), and Nahar Capital and Financial Services Ltd (Nahar Capital). These companies are under the same management, with Mr Jawaharlal Oswal as the group's chairman. CRISIL Ratings has applied its group notch-up framework to factor in the support expected from the Nahar group. Also, CRISIL Ratings believes NIEL will likely receive financial support from the Nahar group during exigencies.

 

Preference shares have been treated as 75% equity and 25% debt as per criteria.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the yarn and fabric business

NIEL is one of India’s largest cotton yarn and fabric manufacturers with spinning capacity of over 2.2 lakh spindles, weaving capacity of 515 looms and fabric processing capacity of 584 lakh meter per annum. The company has an established position in the domestic market. Domestic clients include many large, reputed home textile and denim manufacturers. The company also has longstanding relationships with international garment retailers in the US and Canada, and thus, benefits from diversified geographic reach.

 

Healthy diversity and large scale of operations

The company has presence in cotton yarn, fabric and sugar segments. The yarn segment contributed to around 42% revenue while the fabric and sugar segments contributed 44% and 10%, respectively, in fiscal 2023, share of yarn segment has reduced from more than 50%, due to moderation in export demand and will improve in the medium term. Around 6-8% of revenue comes from the sugar business, which insulates the company from cyclicality in the textile industry.

 

NIEL’s credit risk profile benefits from its large scale of operations and moderate integration. The company consumes over 400,000 bales of cotton every year and is one of the largest buyers of cotton in India. Large-scale procurement should keep bargaining power high over the medium term. Also, operations are partially forward integrated, with presence in the fabric segment, supporting operating efficiency.

 

Furthermore, NIEL is also diversifying its revenue in real estate segment. It has a warehouse in Ludhiana and has further plans to develop warehouse space in Kolkata and a mixed-use industrial park in village Mundian. This is likely to provide steady rental income over the medium term.

 

Strong support from the Nahar group

The group has strong presence in the domestic textile value chain, with overall revenue of over Rs 7,700 crore in fiscal 2023. NIEL has received financial support from the group by way of loans and preference shares. It received preference shares of Rs 40 crore (excludes Rs 76 crore from Cotton County Retail as the same has been merged with NEIL) in the past three fiscals. The company will continue to receive support from promoter investment companies or Nahar Capital during exigencies.

 

Stable financial risk profile and healthy financial flexibility

Adjusted gearing and total outside liabilities to tangible networth ratio stood at 0.32 and 0.42 times as on March 2023 and are expected to remain below 0.5 times and ~ 0.6 time, respectively, over the medium term despite having a capex plan of ~ Rs. 48 crores for the up-gradation of weaving looms and also for captive power plant and Rs. 105 crores (out of which ~Rs. 37 crores is already incurred) in the warehousing segment over the next two years. Low gearing ratio and average fund based bank limit utilization (35% for the 12 months through August 2023) provides healthy financial flexibility.

 

Because of decline in profitability, net cash accrual will decline to below Rs. 100 crores this fiscal as compared to Rs. 127 crores previous fiscal, however it will be sufficient to meet term debt obligation. Moreover, the available bank limits should be adequate to meet the incremental working capital requirements.

 

Weaknesses:

Susceptibility to volatility in cotton, cotton yarn and sugarcane prices

The company derives over 90% of revenue from the yarn and fabric segments, which are susceptible to volatility in cotton and cotton yarn prices. The operating margin fluctuated between 6% and 18% over the one decade through 2023. Demand for cotton and yarn is driven by global demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscal 2012, 2015, 2018, 2020 and 2021), wherein demand spiraled and then fell rapidly. Additionally, as NIEL derives around 6-8% revenue from the sugar division, higher cane prices impact profitability. However, minimum support price of sugar provides partial cushion.

 

Large working capital requirement

Operations are working capital intensive because of seasonal availability of cotton and sugarcane, leading to high reliance on short-term debt. Gross current assets stood in the range of 141 – 238 days over the past five fiscals and are estimated at less than 200 days during fiscal 2024. To maintain quality, the company procures an entire year’s requirement of cotton during the peak season, resulting in sizeable inventory.

Liquidity: Adequate

Fund based bank limit utilisation averaged 35% (limits as on August 2023 were Rs. 563.5 crores) for the 12 months through August 2023. Annual cash accruals and unutilized bank lines should be sufficient to meet the debt obligation and incremental working capital requirements over the medium term. Liquidity is further aided by being part of the Nahar group.

Outlook: Negative

CRISIL Ratings believes credit risk profile of Nahar Industrial Enterprises Ltd 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 Factor

• Improvement in operating performance with EBITDA margin remaining above 7 - 9% on a sustained basis.
• Steady cash generation and prudent working capital management and capital spending resulting in sustenance of capital structure at healthy level.
• Significant upward revision in the credit view on Nahar Group by CRISIL Ratings

 

Downward factor

• Deterioration in operating performance leading EBITDA margin below 3 - 4%.
• Weakened cash generation, along and/or elongation in working capital cycle increased capex impacting credit metrics.
• Downward revising in the credit view of Nahar group by CRISIL Ratings or weakening of strategic importance of the entity for the group.

About the Company

NIEL is part of the Nahar group, a business conglomerate that operates in the spinning, garment and hosiery segments.

 

The company has manufacturing units at Ludhiana, Lalru and Amloh in Punjab, and Bhiwadi in Rajasthan. It undertakes spinning, dyeing, weaving and fabric processing activities. Besides, it has a sugar mill of 4,000 tonne of cane per day capacity in Amloh, and a cogeneration power plant with capacity of 14.5 MW.

 

During the first six months of fiscal 2024, on a consolidated basis, the company has reported net loss of Rs. 14.7 crore on a total income of Rs. 735 crores compared to a profit after tax (PAT) Rs. 54 crore on total income of Rs. 923 crores during the corresponding period last fiscal.

Key Financial Indicators

As on / for the period ended March 31		2023	2022
Operating Income	Rs crore	1774	1984
PAT	Rs crore	79	157
PAT margin	%	4.4	7.8
Adjusted debt/adjusted networth	Times	0.32	0.86
Adjusted Interest coverage	Times	4.9	5.7

*as per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	563.5	NA	CRISIL A-/Negative
NA	Long-term loan	NA	NA	Mar-2037	138.54	NA	CRISIL A-/Negative
NA	Letter of credit and bank guarantee*	NA	NA	NA	51.13	NA	CRISIL A2+
NA	Letter of credit and bank guarantee**	NA	NA	NA	16	NA	CRISIL A2+
NA	Letter of credit and bank guarantee	NA	NA	NA	43	NA	CRISIL A2+
NA	Proposed term loan	NA	NA	NA	187.83	NA	CRISIL A-/Negative

*Including Forward Contract(FC)/LER Limit of Rs.5.13 Crores

**Including Forward Contract(FC)/LER Limit of Rs.5.00 Crores