Detailed Rationale

Crisil Ratings has downgraded its ratings on the bank facilities of Nahar Industrial Enterprises Limited (NIEL) to 'Crisil BBB+/Stable/Crisil A2’ from ‘Crisil A-/Negative/Crisil A2+’.

 

This Rating Rationale (RR) is being published in line with regulatory timelines, while the rated entity has appealed the rating. Crisil Ratings is evaluating the appeal alongwith additional information shared, and shall publish a separate RR after the same is completed.

 

The downgrade in the ratings is driven by weakening of the business risk profile with expected continued moderate operating performance in the textiles division in the current and next fiscal (similar to the last fiscal) and large capex plans in the commercial real estate segment over the medium term while the operating performance in the sugar and warehousing segment remains in line with the expectation. This is likely to keep the debt protection metrics at moderate level as well. 

 

In the nine-month period ending December 2024, the operating income remained at Rs. 1139 crore (4% higher y-o-y), and the earnings before interest depreciation taxes and amortization (EBIDTA) margin, though improved, remained moderate at 3.5% (2.4% during corresponding period previous fiscal). The operating income is expected to increase by 4-5% to ~Rs. 1500 crore in fiscal 2025 and the EBITDA margin is expected to remain moderate at 4 – 4.5% (4.0% last fiscal) as compared to 8.2% in fiscal 2023. Moderation in the operating performance is mainly in the textile segment due to lower realization in the yarn segment vis-à-vis the raw material prices. The operating performance recovery is taking higher than Crisil Ratings’ earlier expectations. Crisil Ratings expects EBITDA margin to improve to around 5% in fiscal 2026, with clearance of high cost inventory in Q2 fiscal 2025 and ease of raw material prices. The operating performance in the sugar and warehousing business is expected to remain steady. In the warehousing segment, the company continues to operate the warehouse in Ludhiana (occupancy 100%) and has also commissioned a warehouse in Kolkata which has started operations from August 2024 with an occupancy of 100%. This is likely to provide stable rentals of around Rs. 30-37 crores in the medium term with an annual escalation of ~ 5%.

 

The company has large capex plans of ~ Rs. 300 – 350 crores over a period of 3-5 years  in the commercial real estate segment to set up more warehouses, school, hotel and high street over the medium term. In addition, the company is also setting up a solar power plan of ~ 10 megawatt (MW), which will be commissioned by December 2025 in the textile segment and is likely to improve the operating efficiency over the medium term. This is planned to be funded through a mix of debt and internal accruals. Overall, the debt is expected to increase to Rs. 580-690 crores (Rs. 532 crores in FY24) over the medium term to support this capex in the real estate segment and incremental working capital requirements. This is likely to impact the debt projection metrics and capital structure over the medium term. Total outside liabilities to Total Networth (TOL/TNW) is expected to remain high over 0.75 times over the medium term (0.71 times as on March 2024) as compared to 0.42 times in March 2023. Adjusted interest coverage is also expected to remain below 2.5-3 times over the medium term as compared to 3.1 and 5.0 times during fiscal 2024 and fiscal 2023 respectively. The company has plans to sell residential and commercial plots over the next 2 years and the cash inflows from the sale are expected to be utilized towards the capex plans. This will remain a key monitorable.

 

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. The ratings also factor in support of the Nahar group. These strengths are partially offset by susceptibility to fluctuations in prices of cotton, cotton yarn and sugarcane, moderation  in operating performance, large capex and working capital requirements.

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 37% revenue while the fabric and sugar segments contributed 46% and 13%, respectively, in fiscal 2024, share of yarn segment has reduced from more than 50%, due to moderation in export demand and will improve in the medium term. Around 8-12% 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 the extent of forward integration increasing to 65% compared to 50% earlier, with presence in the fabric segment, supporting operating efficiency.

 

Furthermore, NIEL is also diversifying its revenue in the commercial real estate segment. It has a warehouse in Ludhiana and Kolkata. It is currently expanding the warehousing facilities and is also developing a large commercial real estate park while is likely to provide steady rental income over the medium  to long term.

 

• Strong support from the Nahar group: The group has strong presence in the domestic textile value chain, with overall revenue of over Rs 7,080 crore in fiscal 2024. NIEL has received financial support from the group by way of loans and preference shares. The company is expected to receive support from promoter investment companies or Nahar Capital during exigencies.

 

Weaknesses:

• Sustained moderation in operating performance: +The operating performance of the company though improved, remained moderate with EBITDA margin at 3.5% in nine month period ending December 2024. The operating margin is expected to remain moderate at 4 – 4.5% in the current (4.0% last fiscal) as compared to 8.2% in fiscal 2023. Moderation in the operating performance is mainly in the textile segment due to lower realization in the yarn segment vis-à-vis the raw material prices. Crisil Ratings expects EBITDA margin to improve to around 5% in fiscal 2026, with clearance of high-cost inventory in Q2 fiscal 2025 and ease of raw material prices. The operating performance in the sugar and warehousing business is expected to remain steady.

 

• Susceptibility to volatility in cotton, cotton yarn and sugarcane prices: The company derives about 85% of revenue from the yarn and fabric segments, which are susceptible to volatility in cotton and cotton yarn prices. The operating margin fluctuated between 4% and 18% over the one decade through 2024. 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 8-12% revenue from the sugar division, higher cane prices impact profitability, moreover recent permission of quota based exports provided by the Government of India (GOI) and minimum support price of sugar provides partial cushion.

 

• Large capex and working capital requirement: The company has large capex plans of ~ Rs. 300 – 350 crores over a period of 3-5 years in the commercial real estate segment to set up more warehouses, school, hotel and high street over the medium term. In addition, the company is also setting up a solar power plan of ~ 5 megawatt (MW) in the textile segment which is expected to be commissioned by September 2025 and is likely to improve the operating efficiency over the medium term. This is planned to be funded through a mix of debt and internal accruals. Overall, the debt is expected to increase to Rs. 580-690 crores (Rs. 532 crores in FY24) over the medium term to support this capex in the real estate segment and incremental working capital requirements. This is likely to impact the debt projection metrics and capital structure over the medium term. Total outside liabilities to Total Networth (TOL/TNW) is expected to remain high over 0.75 times over the medium term (0.71 times as on March 2024) as compared to 0.42 times in March 2023. Adjusted interest coverage is also expected to remain below 2.5-3 times over the medium term as compared to 3.1 and 5.0 times during fiscal 2024 and fiscal 2023 respectively.Timely completion of capex and any cost overrun will remain a key monitorable.

 

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 to be in a similar range over the medium term. To maintain quality, the company procures an entire year’s requirement of cotton during the peak season, resulting in sizeable inventory.

Liquidity: Adequate

The company has adequate liquidity driven by expected annual cash accruals of more than Rs. 60 crores per annum as against repayment obligations of Rs. 25-40 crore in fiscal 2025 and 2026. It also has access to fund-based limits of Rs. 480 crores utilized to the extent of 78% on average over the twelve months period ended December 2024. For warehousing business, the company also has a debt service reserve account covering three months of debt service obligations. Low gearing and healthy networth provide the financial cushion to any adverse conditions or downturns in the business. Further support from Nahar group in case of any exigency provide comfort.

Outlook: Stable

Crisil Ratings believes credit risk profile of Nahar Industrial Enterprises Ltd will continue to be driven by its strong market position and integrated operations over the medium term along with steady rentals from the warehousing segment.

Rating sensitivity factors

Upward factors

• Improvement in operating performance with EBITDA margin in the textile and sugar business remaining above 7 - 9% on a sustained basis.
• Higher than expected improvement in cash accruals and prudent working capital management and capital spending resulting in improvement in the debt protection metrics; adjusted interest coverage remaining going above 3 - 3.5 times on a sustained basis.
• Significant upward revision in the credit view on Nahar Group by Crisil Ratings

 

Downward factors

• Deterioration in operating performance leading to EBITDA margin in the textile and sugar business below 3 – 3.5% on a sustained basis.
• Weakened cash generation, and/or elongation in working capital cycle and/or higher than expected debt funded capex impacting credit metrics; adjusted interest coverage going below 2 -2.5 times on a sustained basis
• 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. The company has forayed into the commercial real estate segment with warehouses operational in both Ludhiana and Kolkata.

Key Financial Indicators*

As on / for the period ended March 31		2024	2023
Operating Income	Rs crore	1473	1774
PAT	Rs crore	10	79
PAT margin	%	0.7	4.4
Adjusted debt / adjusted networth	Times	0.55	0.32
Adjusted Interest coverage	Times	3.07	4.9

*as per analytical adjustments made by Crisil Ratings

Any other information: Not Applicable