Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A-/Stable/CRISIL A2+' ratings on the bank facilities of Nahar Industrial Enterprises Limited (NIEL).

 

The reaffirmation factors in expected moderation in operating performance in fiscal 2023, on the back of significant improvement in fiscal 2022. Slowdown in demand and compression in cotton yarn spread are expected to impact the performance in the first of fiscal 2023, but some improvement is expected in the second half of this fiscal. The company, in fiscal 2022, reported revenue growth of over 40% and earnings before interest, tax, depreciation and amortisation (Ebitda) margin above 15% (compared with 6-7% in the past three fiscals). As a result, debt protection metrics were comfortable, as reflected in interest coverage ratio and net cash accrual to total debt ratios of 5.8 times and 0.3 time, respectively, in fiscal 2022.

 

With expected moderation, the Ebitda margin is expected to decline to around 10%, but will continue to be higher than historical levels because of modernisation of Lalru and Bhiwadi plants. Owing to moderation in operating margin and debt funded capital expenditure (capex) the financial risk profile will moderate from fiscal 2022 levels.

 

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 improving financial risk profile 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, Oswal Woollen Mills Ltd, Nahar Polyfilms Ltd, MonteCarlo Fashions Ltd, 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.

 

In the first half of fiscal 2023, demand has reduced owing to deferred purchases on account of decadal high cotton yarn prices and expectation of fall in prices post commencement of cotton season. Therefore, buyers are buying for immediate consumption only. Demand is expected to pick up in the second half of this fiscal owing to reduced inventories of textile players.

 

• Healthy diversity and large scale of operations: The company has presence in cotton yarn, fabric and sugar segments. The yarn segment contributed to around 56% revenue while the fabric and sugar segments contributed 38% and 6%, respectively, in fiscal 2022. Around 6-8% of revenue comes from the sugar business, which insulates the company from cyclicality in the textile industry.

 

Furthermore, 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.

 

• Strong support from the Nahar group: The group has strong presence in the domestic textile value chain, with overall revenue of over Rs 8,400 crore in fiscal 2022. NIEL has received financial support from the group by way of loans and preference shares. It received preference shares of Rs 116 crore (includes Rs 40 crore from Nahar Capital) in the past three fiscals. The company will continue to receive support from promoter investment companies or Nahar Capital during exigencies.

 

• Improving financial risk profile: The financial risk profile is moderate yet improving as the company turned profitable at PAT level for the first time since fiscal 2018. Networth was strong at Rs 892 crore as on March 31, 2022. Gearing and total outside liabilities to tangible networth ratio are expected to remain below 0.6 time and 0.8 time, respectively, over the medium term. Because of decline in profitability and large, debt-funded capex, interest coverage and net cash accrual to adjusted debt ratios are expected to moderate to 4 times and around 0.2 time, respectively, over the medium term.  

 

Debt declined to Rs 56 crore as on March 31, 2022, from Rs 86 crore a year earlier, supported by higher profitability and prepayment of term loans. Expected capex of Rs 205 crore in fiscal 2023 to 2025 for setting up an ethanol plant and modernisation of yarn capacities will be funded through low-cost term loan of Rs 150 crore. Expected net cash accrual of Rs 130-150 crore per annum will be sufficient to meet term debt obligation.

 

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 5% and 17% over the 10 fiscals through 2022. 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 spiralled and then fell rapidly. Additionally, as NIEL derives around 6% 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 are estimated at 212 days as on March 31, 2022. To maintain quality, the company procures an entire year’s requirement of cotton during the peak season, resulting in sizeable inventory.

Liquidity: Adequate

Bank limit utilisation averaged 84% for the 12 months through May 2022. Expected net cash accrual of Rs 130-150 crore per annum will sufficiently cover yearly debt obligation of Rs 35 crore per annum over the medium term. Planned capex of Rs 205 crore in fiscals 2023 to 2025 will be funded through low-cost debt of Rs 150 crore. Furthermore, adequate cushion of Rs 30-40 crore in bank limits even during peak season provides comfort.

Outlook: Stable

NIEL will continue to benefit from its strong market position and integrated operations over the medium term, given the favourable outlook on the cotton yarn and sugar industries.

Rating Sensitivity factors

Upward factors

• Steady recovery in operating performance and Ebitda leading to cash accrual above ~Rs 150 crore on a sustained basis
• Improved cash generation and prudent working capital management leading to sustenance low gearing
• Improvement in the credit risk profile of the Nahar group or weakening of strategic importance of the entity for the group

 

Downward factors

• Weak operating performance resulting in cash accrual of less than Rs 80-90 crore
• Further stretch in the working capital cycle or larger-than-expected, debt-funded capex resulting in weakening of debt metrics
• Moderation in the credit risk profile of the Nahar 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.

 

For the 3 months ended June 30, 2022, the company generated profit after tax (PAT) of Rs 26.4 crore on sales of Rs 455.31 crore, against PAT of Rs 34.80 crore on sales of Rs 416.66 crore during the corresponding period of the previous fiscal.

Any other information: Not applicable