Detailed Rationale

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

 

The rating reflects the company’s established position in the cotton yarn and fabric business, large scale of operations with moderate integration across the textile value chain, diversification through the sugar business and support from the Nahar group. These strengths are partially offset by susceptibility to volatility in cotton, cotton yarn and sugarcane prices, average financial risk profile, and large working capital requirement.

 

NIEL’s operating performance improved significantly in the second half of fiscal 2021 with increasing demand of yarn from China and Bangladesh which resulted in revenue growth of 61% over the first half of the fiscal. Performance is expected to recover in fiscal 2022 with revenue growth expected above 20% driven by expectation of stable demand for yarn, low base of last fiscal and gradual recovery in fabric demand to pre-Covid levels by the second half of fiscal 2022. Operating margin is expected to improve to 12% in fiscal 2022 driven by improving spreads between the prices of cotton and cotton yarn and higher efficiency due to modernisation of its plants. CRISIL expects revenue growth to normalise to 8-10% thereafter with operating profitability in 10-12% range in the medium term.

 

Healthy cash accrual of Rs 120-140 crore per annum, and moderate debt funded capital expenditure will result in sustenance of gearing at one time over next two fiscals. With expected sustenance of operating performance, the debt protection metrics are likely to recover, with interest coverage and net cash accrual to total debt (NCATD) ratios expected to increase to 3.5-4 times and 17-20%, respectively, in fiscal 2022 and 2023 from 1.78 times and 7%, respectively, for fiscal 2021.

 

Liquidity was adequate, with bank limit utilisation averaging 88% (unutilised bank lines of Rs 58-60 crore) for the 11 months through July 2021. Cash accruals are expected to remain sufficient against repayments in fiscal 2022. Further, company has sufficient cushion in bank limits for meeting any short term exigencies.

Analytical Approach

The Nahar group comprises NIEL, Nahar Spinning Mills Ltd, Oswal Woollen Mills Ltd, Nahar Polyfilms Ltd and MonteCarlo Fashions Ltd, Nahar Capital and Capital Services. These companies are under the management, with Mr Jawaharlal Oswal as the group's chairman. CRISIL Ratings has considered the standalone business and financial risk profiles of NIEL, as there are nil material linkages between the companies. CRISIL Ratings has factored in expected financial support from the Nahar group in case of any exigency.

 

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

Key Rating Drivers & Detailed Description

Strengths

Established position in the yarn and fabric business: NIEL is one of India’s largest cotton yarn and fabric manufacturers with spinning capacity of over 2.5 lakh spindles and weaving capacity of 515 looms and with fabric processing capacity of 584 lacs meters 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 the diversified geographic reach. In fiscals 2020 and 2021, export demand moderated due to decline in demand from China, ban on exports to Pakistan and reduced competitiveness of Indian spinners in the global market due to higher domestic cotton prices compared with global prices along with supply disruptions owing to Covid-19.

 

Furthermore, processed fabric (80% of total fabric sales) is taking longer to recover with demand for formal wear still not picking up. Performance is expected to recover in fiscal 2022 as demand for Indian cotton yarn continues to remain high, while fabric demand is expected to reach pre-Covid levels in the second half of fiscal 2022.

 

Healthy diversity and large scale of operations with moderate integration: NIEL has healthy product diversity through presence in cotton yarn, fabric and sugar segment. The yarn segment contributed around 50% to the revenue while the fabric and sugar segments contributed 36% and 14% respectively in fiscal 2021. Around 14% of the revenue comes from the sugar business, which insulates the company from cyclicality in the textile industry.

 

Further, NIEL’s credit profile benefits from its large scale of operations and moderate integration. NIEL consumes over 400,000 bales of cotton every year, and is therefore, 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.

 

Healthy financial flexibility through support from the Nahar group: The Nahar group has strong presence in the domestic textile value chain with combined revenue of over Rs 5,457 crore in fiscal 2021. NIEL has received financial support from the group in the past through loans and preference shares. It has received preference shares of Rs 116 crore (includes Rs 40 crore from Nahar Capital) and loans and advances of Rs 22 crore in the past three fiscals. CRISIL expects support to continue from promoter investment companies or Nahar Capital in case over the medium term

 

Weaknesses

Susceptibility to volatility in cotton, cotton yarn and sugarcane prices: The company derives over 85% of total revenue from the yarn and fabric segment, which is susceptible to volatility in cotton and cotton yarn prices. The operating margin fluctuated between 5% and 17% over the 10 fiscals through 2021. 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 spiralled and then fell rapidly. Additionally, as NIEL derives around 14% revenue from the sugar division, higher cane prices also impact profitability. However, minimum support price in sugar provides partial cushion.

 

Modest albeit improving financial risk profile: The financial risk profile is average as the company suffered continuous losses in the three fiscals through 2021. Networth, however, is strong at an estimated Rs 725 crore as on March 31, 2021. Debt declined from Rs 969 crore as on March 31, 2018, to Rs 696 crore as on March 31, 2021. Adjusted gearing improved in tandem from 1.44 times as on March 31, 2018, to an estimated 1.01 times as on March 31, 2021 supported by low capital expenditure and modest cash accrual.

 

With expected sustenance of improved operating performance, net cash accruals are likely to increase to Rs 120-140 core in fiscal 2022 and 2023 which will be sufficient for funding its annual debt obligations of RS 40-55crore and partly capex. Company has capex plan of Rs 200 crore in fiscal 2022 and fiscal 2023 for ethanol plant and modernisation of existing yarn capacities, funded through low cost long term loan of Rs 155 crore. As a result, debt metrics are likely to improve on sustained basis in the medium term. For instance, interest coverage is expected to improve to 3.5-4 times in fiscal 2022 and 2023 aided by improved profitability and lower cost of borrowings. Steady rental income of Rs 50-60 lacs per month from its warehouse and monetization of existing land parcels will further support the financial risk profile.

 

Large working capital requirement: Operating efficiency is low compared with other players as the company produces yarn of lower counts (6s-40s) and has a small share (25%) in the export market. The operating margin was 5-18% in the past decade. Furthermore, return on capital employed also remained subdued at negative 0.5% to 12% during the period.

 

Company has undertaken several measures to improve its operating margins, including modernisation of its Lalru and Bhiwadi units, availing state electricity duty exemption benefits and setting up solar plant at Bhiwadi which would help maintain operating margins to ~8-10% and thus reduce downside risks to profitability in negative cycles

 

Working capital requirement remains large (gross current assets estimated at 238 days in fiscal 2021), driven by seasonal availability of cotton and sugarcane, leading to high reliance on short term debt. Although the cotton procurement policy has been changed to maintain lower raw material inventory, sizeable working capital loans and low profitability constrain the debt protection metrics.

Liquidity: Adequate

Bank limit utilisation averaged 88% for the 12 months through July 2021. Expected net cash accrual of above Rs 120-140 crore per annum will sufficiently cover debt obligation of Rs 49 crores and Rs 55 crores in fiscal 2022 and fiscal 2023 respectively. Company has planned a capex of Rs 200 crore in fiscal 2022 and 2023 which will be funded by low cost debt of Rs 110 crore (at ~4-5% for ethanol plant due to interest subvention) and of Rs 45 crore. Gearing is expected to remain at 1-1.1 times due to debt funded capex. Further, adequate cushion of Rs 65-70 crores in bank limits even during peak season provides comfort.

Outlook: Stable

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

Rating Sensitivity Factors

Upward factors

• Steady and sustained recovery in operating performance, and recovery of EBITDA leading to cash accruals of above 150cr on a sustained basis
• Improved cash generation and prudent working capital management leading to gearing improving below 0.7-0.8 times
• Improvement in credit profile of Nahar group

 

Downward factors

• Weak operating performance resulting in cash accruals of less than Rs 80-90 crore
• Elongation in working capital cycle or higher than expected debt funded capex resulting in weakening of debt metrics.
• Moderation in credit profile of Nahar group

About the Company

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

 

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

 

For the 3 months ended June 30, 2021, the company generated PAT of Rs 34.79 crore on sales of Rs 416.66 crore, against loss of Rs 33.32 crore on sales of Rs 174.54 crore during the corresponding period of the previous fiscal

Key Financial Indicators

As on/for the period ended March 31		2021	2020
Revenue	Rs.Crore	1418	1572
PAT	Rs.Crore	-10	-26
PAT margin	%	-0.7	-1.6
Adjusted debt/Adjusted networth	Times	0.94	0.99
Interest coverage	Times	1.78	1.63

*Provisional

Any other information: Not applicable