Detailed Rationale

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

 

The ratings upgrade is driven by additional information provided by the management during the appeal process which included clarity on the amount and utilisation of funds from the sale of commercial and residential plots over the next 3-5 years, breakup of the profitability between the textiles, sugar and warehousing businesses, while reassuring the group’s support philosophy along with its liquidity position.

 

The company is planning to sell its commercial and residential plots over the next 3-5 years with an expected annual inflow of around Rs. 50 crores. This will be utilized towards reduction of working capital debt. This is expected to improve the debt protection metrics. The adjusted interest coverage is expected to be 2.6 times in fiscal 2025 and improve to 3.8 – 4.2 times over the medium term. The capital structure is likely to remain comfortable with total outside liabilities to tangible networth (TOLTNW) ratio expected to remain below 0.75 time over the medium term (expected to be ~0.75 time as on March 31, 2025) despite large capital expenditure (capex) of Rs 300-350 crore in the commercial real estate segment over the next 3-5 years. The debt service coverage ratio (DSCR) for the warehousing segment is also expected to remain healthy at ~1.4 times. Movement of the debt protection metrics will remain a key monitorable.

 

The company has shared the breakup of the profitability between the textiles & sugar and warehousing business. Although performance in the textiles and sugar divisions remain lower than previous fiscals and our expectations, it has improved in the nine-month period ending December 31, 2024. The operating income of the textiles and sugar segments increased to Rs 1,139 crore (4% higher on-year), and the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin improved to 3.9% (2.6% during the corresponding period of the previous fiscal). The Ebitda margin is expected to improve to 4-4.5% in fiscal 2025 as compared to 4% in fiscal 2024 (8.2% in fiscal 2023) and is expected to increase to above 5% over the medium term. Recovery of the operating performance in the textiles and sugar segments remain a key monitorable. The operating performance in the warehousing business is expected to remain steady.

 

The ratings also reflect the company’s established market position in the cotton yarn and fabric business, and 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, and large capex and working capital requirement.

Analytical Approach

The Nahar group comprises NIEL, Nahar Spinning Mills Ltd (rated ‘Crisil A/Negative/Crisil A1’), Oswal Woolen 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 metres 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 geographical 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. The share of the yarn segment has reduced from more than 50%, due to moderation in export demand and will improve over 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 3,00,000 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 warehouses in Ludhiana and Kolkata. It is currently expanding the warehousing facilities and is also developing a large commercial real estate park which is likely to provide steady rental income over the medium to the long term.

 

• Strong support from the Nahar group: The group has a 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 3.9% (textiles and sugar) in the nine-month period ending December 31, 2024. The operating margin is expected to remain moderate at 4-4.5% in the current fiscal (4.0% last fiscal) as compared to 8.2% in fiscal 2023. Moderation in operating performance is mainly in the textile segment due to lower realisation in the yarn segment vis-à-vis the raw material prices. Crisil Ratings expects the Ebitda margin to improve to above 5% in fiscal 2026, with clearance of high-cost inventory in the second quarter of the current fiscal and lower raw material prices. The operating performance in the sugar and warehousing businesses is expected to remain steady.

 

• Susceptibility to volatility in cotton, cotton yarn and sugarcane prices: The company derives about 85% of its 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 10 fiscals through 2024. Demand for cotton and yarn is driven by global demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021), wherein demand spiraled and then fell rapidly. Additionally, as NIEL derives 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 and minimum support price of sugar provides a partial cushion.

 

• Large capex and working capital requirement: The company is planning large capex of Rs 300-350 crore over a period of 3-5 years in the commercial real estate segment to set up more warehouses, school, hotel and high street. In addition, the company is also setting up a solar power plant 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. The company is planning to sell its commercial and residential plots over the next 3-5 years with expected annual inflow of around Rs 50 crore. This will be utilized towards reduction of working capital debt. This is expected to improve the debt protection metrics. The adjusted interest coverage is expected to be 2.6 times in fiscal 2025 and improve to 3.8 – 4.2 times over the medium term. Capital structure is expected to remain comfortable with total outside liabilities to total networth (TOL/TNW) is expected to remain below 0.75 time over the medium term (expected ~0.75 time as on March 2025) despite large capex plans. The DSCR for warehousing segment is also expected to remain healthy at ~1.4 times. Movement of the debt protection metrics 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 accrual of more than Rs 60 crore per annum as against debt obligation of Rs 25-40 crore in fiscals 2025 and 2026. It also has access to fund-based limits of Rs 480 crore which have been utilised at 78% on average over the 12 months through December 2024. For the warehousing business, the company also has a debt service reserve account covering three months of debt obligation. Low gearing and healthy networth provide the financial cushion to any adverse conditions or downturns in the business. Further support from the Nahar group in case of any exigency provides comfort.

Outlook: Negative

Crisil Ratings believes the credit risk profile of NIEL may weaken, over the medium term, due to moderation in operating profitability and exposure to risks related to capex in the commercial real estate 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
• 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 going below 3.5 – 4% 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 2.75-3 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 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