Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/Negative/CRISIL A1' ratings on the bank facilities and commercial paper of Nahar Spinning Mills Ltd (Nahar Spinning).

 

The ratings factor in sustained business and financial risk profiles, with gradual recovery in operating performance, though short-term headwinds remain. Operating income, for fiscal 2025, is projected to be in line with, fiscal 2024 revenue of to Rs 3,150-3,250 crore, driven by higher volume sales resulting from increased capacity, following the completion of expansion and modernisation capital expenditure (capex) in fiscal 2024. Stable price realisation is also expected to support revenue growth. In the first quarter of fiscal 2025, operating income stood at Rs 821 crore. However, operating margin may recover only to 6-7% this fiscal, though up from a decadal low of 3.4% in fiscal 2024. This recovery should be led by reduced volatility in prices and supply of cotton. While the first quarter of fiscal 2025 saw an operating margin of 6.2%, some moderation in business performance is expected in the second quarter due to the uncertain geopolitical situation in Bangladesh, which may impact exports. However, subsequent quarters is likely to show improvement. Any further developments in the geopolitical situation and the new cotton harvest will remain key areas to monitor.

 

With expected gradual improvement in profitability, financial risk profile should remain comfortable in fiscal 2025. Following the completion of a significant capex in fiscal 2024, the company does not foresee any further debt-funded capex, and therefore expects to reduce its total debt to Rs 1,000-1,050 crore in fiscal 2025, down from Rs 1,151 crore in fiscal 2024. Thus, adjusted gearing and total outside liabilities to tangible networth (TOL/TNW) ratio should improve to approximately 0.70 time and 0.90 time, respectively, as on March 31, 2025, from 0.78 time and 0.95 time a year ago. In terms of liquidity, net cash accrual (NCA) is projected at Rs 130-150 crore in fiscal 2025, a substantial improvement from Rs 33 crore in fiscal 2024; NCA is estimated at Rs 30 crore for the first quarter of fiscal 2025. With this cash flow, the company is well positioned to comfortably meet its annual repayment obligation of Rs 40-50 crore over the medium term.

 

Furthermore, need-based support is available from Nahar Capital and Financial Services Ltd (Nahar Capital).

 

The ratings continue to reflect the company’s strong position in the cotton yarn and knitted garments segments, large scale of operations with moderate integration, moderate though improving financial risk profile and healthy financial flexibility. These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates, uncertain geopolitical situation and large working capital requirement.

Analytical Approach

The Nahar group comprises Nahar Spinning, Nahar Industrial Enterprises Ltd, Oswal Woollen Mills Ltd, Nahar Polyfilms Ltd and Monte Carlo Fashions Ltd. These companies are under the same management, with Mr Jawaharlal Oswal as the group's chairman.

 

CRISIL Ratings has considered the standalone business and financial risk profiles of Nahar Spinning, as there are no material linkages between the group companies. CRISIL Ratings has factored in expected financial support from the Nahar group in case of any exigency.

Key Rating Drivers & Detailed Description

Strengths:

Strong position in the cotton yarn and knitted garment segments

Nahar Spinning is one of the largest cotton yarn manufacturers in India and a leading manufacturer and exporter of knitted garments, with revenue at Rs 3,054 crore in fiscal 2024. The company is also one of the top 10 spinners in the domestic market. It has a strong position in several export markets, such as Bangladesh, China, Egypt and Vietnam. 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.

 

Large scale of operations and moderate integration

The company consumes over 8,00,000 bales of cotton every year and is, therefore, one of the largest buyers of cotton in India. Large-scale procurement will keep the pricing power high over the medium term. Operations are partially forward integrated, with presence in the knitted garment segment supporting operating efficiency. The company is focusing on de-risking its exposure to cotton yarn products and emphasising on value-added yarns, such as cotton melange, organic yarn and multi-twist yarn, which fetch higher margin.

 

Comfortable financial risk profile and healthy financial flexibility

Adjusted gearing and total outside liabilities to tangible networth (TOL/TNW) ratio should improve to approximately 0.70 time and 0.90 time, respectively, as on March 31, 2025, from 0.78 time and 0.95 time a year ago. Due to moderation in profitability, adjusted interest coverage ratio fell to around 1.4 times in fiscal 2024 from 7.8 times in 2023. Though the ratio may improve to above 3 times in fiscal 2025 due to better profitability, it is expected to subsequently improve to above 4 times over the medium term. The company has also undertaken efficiency-improvement measures to remove production bottlenecks along with higher share of value-added products in the overall product mix. Financial flexibility has been healthy, as reflected in moderate bank limit utilisation.

 

Weaknesses:

Exposure to volatility in raw material prices and forex rates

The company derives around 92% of its total revenue from the yarn segment, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin has fluctuated between 3% and 23% over the past 10 fiscals through 2024. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen six cycles (fiscals 2012, 2015, 2018, 2020, 2021, 2024), wherein demand spiralled and then fell rapidly. Additionally, as Nahar Spinning derives close to half of its revenue from the overseas markets, it is susceptible to significant volatility in forex rates, shipping cost and geopolitical situations.

 

Modest operating efficiency and large working capital requirement

Operating efficiency of Nahar Spinning is lower than that of other players because of the product mix, more power expense and higher export-oriented products. This resulted in high volatility in the operating margin. The company has also undertaken efficiency-improvement measures to remove production bottlenecks, including modernisation of plants during fiscals 2022 to 2024.

 

Operations have been working capital intensive (gross current assets are estimated at 208 days as on March 31, 2024), driven by seasonal production of cotton, leading to high inventory in March. Although change in the cotton procurement policy to maintain higher inventory until November will lead to increased working capital utilisation, this is mitigated by proportionate increase in cash accrual. Working capital loans are expected to constitute around 75% of debt levels over the medium term.

Liquidity: Strong

Unutilised bank lines stood above Rs 380 crore as of May 2024. Expected net cash accrual of Rs 150-200 crore per year will be sufficient to cover the yearly debt obligation of Rs 40-50 crore over the medium term. The company has completed capex for increasing capacity utilisation and modernisation of its unit; no further debt-funded capex is envisaged for the medium term. Furthermore, Nahar Capital, which has investment assets amounting to Rs 1,621 crore (as on March 31, 2023) on a consolidated basis, will extend need-based support.

Outlook: Negative

The credit risk profile of Nahar Spinning may weaken over the medium term due to geopolitical situations and adverse movements in cotton prices resulting in weak operating performance, though the financial risk profile is expected to sustain.

Rating Sensitivity Factors

Upward Factors

• Steady and sustained improvement in operating performance, with earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin improving to 7-9% on a sustained basis
• Steady cash generation and prudent working capital management and capital spending, resulting in sustenance of healthy capital structure

 

Downward Factors

• Sustained deterioration in operating performance, with Ebitda margin remaining below 4-5%
• Moderation in cash accrual, stretch in the working capital cycle and higher-than-expected debt-funded capex impacting the credit metrics

About the Company

Nahar Spinning is the flagship company of the Nahar group, a business conglomerate that operates in the spinning, garments and hosiery segments. After the group was restructured in fiscal 2007, Nahar Spinning acquired the entire textile business of the erstwhile Nahar Exports Ltd, while the group holdings and other investments were transferred to a new company, Nahar Capital.

 

The company has manufacturing units at Ludhiana, Jitwal Kalan, Jodhan and Lalru in Punjab and at Raisen Mandideep in Madhya Pradesh. It undertakes spinning, mercerising-cum-dyeing, knitting and garmenting activities. Moreover, it has two cogeneration power plants in Ludhiana and Lalru, with capacities of 3.8 megawatt (MW) and 4.8 MW, respectively. The company also has solar power stations of 0.81 MW, 0.78 MW and 1.3-MW at Jodhan, Lalru and Mandideep, respectively.

Any other information: Not Applicable