Detailed Rationale

CRISIL Ratings has upgraded its long-term rating on the bank loan facilities of Rajapalayam Mills Limited (RML) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Positive’. Its ratings on the short term debt facilities of RML have been reaffirmed at ‘CRISIL A1’.

 

The upgrade reflects CRISIL Ratings expectations that RML will continue to benefit from its established position in the domestic spinning and yarn segment, post completion of its sizeable capacity expansion, with stable demand from both domestic and export market. Besides, the company’s modern operating facilities and initiatives to enhance value added offerings, will ensure operating margins range between a healthy 17-19% over the medium term. The company’s debt metrics which remain moderately elevated due to sizeable debt taken for the recent capex, are expected to gradually correct over the medium term, with ramp up of operations, from the recently completed capex, resulting in higher cash generation.

 

RML’s performance  has witnessed healthy growth in the first nine months of fiscal 2023 despite the sector headwinds driven by stable demand from both domestic as well as export customers. The company produces value added, customized yarn which are less volatile, and the demand has remained steady while the realizations registered a healthy growth due to pass on of increase in cotton prices. RML’s fabric division also registered healthy revenue growth in the nine month period of fiscal 2023, driven by steady demand and growth in realizations. Overall, revenues registered growth of 35% YoY in the nine month period of fiscal 2023, compared to the corresponding period last fiscal. Operating profitability has also remained healthy at ~17% in the nine month period of fiscal 2023, albeit lower than ~19% recorded last fiscal, due to increase in power costs. RML’s exports also have not been materially impacted as it exports majorly to Japan which was comparatively less impacted, compared to USA, where demand pressures are seen rising. RML’s exports to Europe were also not impacted due to value added nature of the yarn and established relationship with customers.

 

To capitalize on the strong end market demand, RML invested Rs. 149 crores till end of February 2022 in spindle and fabric capacity expansion, technology upgrade for processing of value added yarn like mercerized yarn. While the full benefit of this investment was derived in fiscal 2023, RML invested a further ~Rs 400 crore in fiscal 2023 towards phase 2 of fabric capacity expansion (addition of 174 looms to the existing 154 looms). The second phase of fabric capacity expansion was funded through term loans of Rs.280 crores, Rs.35 crores through divestment of shares in Ramco group companies, Rs. 55 crore through a bridge loan and the balance through equity/ accruals. The expansion was completed in March 2023 and commercial operations are expected to commence from June 2023. Order enquiries from existing customers for the expanded fabric division have been strong with ~60% of the expanded capacity already booked, providing good revenue visibility. The incremental revenue contribution from the expanded capacity is estimated at Rs.250-300 crores (at peak utilisation). Hence, RML’s revenues are expected to cross Rs.1000 crores in fiscal 2024 supported by incremental revenue contribution from fabrics and healthy order visibility from the key customers.

 

Overall, RML has invested ~Rs.1000 crores over the past 5-6 fiscals in modernizing the machineries, developing its capability to produce value added yarn and forward integration to fabrics. Modernisation has improved the operating efficiencies of the entity while value added yarns & fabric insulates RML from sharp volatility, associated with commodity products. Hence, operating profitability is expected to sustain above 17% in fiscal 2024 with cotton prices also moderating, and demand remaining steady. Besides, RML will invest and enter into agreement to procure solar power which will help control  power costs and reduce its dependance on external source to ~15% over the medium term, from 35% in fiscal 2023.

 

Financial risk profile remains moderate, albeit is expected to improve over the medium term. Debt metrics are moderate, with gearing estimated at ~2 times at March 31, 2023. RML had intended to sell shares of Ramco group companies amounting to Rs.90 crores in fiscal 2023 to fund the fabric expansion. However due to volatile market environment, RML sold shares worth only Rs.35 crores of shares while the rest was funded through bridge loan of Rs.55 crores. The bridge loan was recently rolled over, and is intended to be repaid post sale of shares in group companies in fiscal 2024. RML does not have any significant capex plans over the near to medium term; hence incremental debt addition will remain limited; that said, progressive debt repayments on term loans and retirement of the bridge loan, along with better cash generation will help improve debt metrics. 

 

The ratings continue to factor in RML’s established market position in finer count yarn segment driven by extensive experience of promoters, and healthy operating efficiency driven by synergies with other textile units of the Ramco group and modern facilities.. These strengths are offset by a modest financial risk profile, working-capital-intensive operations, and susceptibility of operating profitability to sharp volatility in cotton and yarn prices.

 

The rating continues to draw support from material liquid investments held by RML in Ramco group flagship, The Ramco Cements Ltd (Ramco Cements, rated ‘CRISIL A1+’), as well as in other group companies; the market value of these investments was about Rs. 2,583 crores as on April 19, 2023.

Analytical Approach

The ratings of RML continue to factor need based timely support expected from the Ramco Group. CRISIL Ratings believes that RML will, in case of exigencies, receive support from the Ramco Group for timely repayment of debt obligations, due to operational synergies between textile companies in the group, common promoters, shared name and demonstrated financial support extended in case of exigencies in the form of unsecured loans by stronger entities in the group.

 

Outstanding amounts against corporate guarantees provided to weaker Ramco group companies has been included as debt of RML.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in finer count yarn segment driven by extensive experience of promoters: RML, which was established in 1938, and was Ramco group’s first venture and the group has five other companies in the textile business. The company specializes in manufacturing yarn of finer counts ranging from 4s to 300s (single/double yarn), besides other value-added products like mercerized, melange, slub and gassed yarn and enjoys an established market position in the same driven by long-standing relationship with its customers. The forward integration into fabric manufacturing has diversified the revenue profile and will insulate RML from demand volatility as fabric demand is comparatively less volatile. RML has further enhanced the fabric capacity by addition of 166 looms in fiscal 2023 which will further enhance the diversity in revenues.

 

• Healthy operating efficiency driven by synergies with other textile units of the Ramco group and modern facilities: RML enjoys healthy realizations due to its presence in higher count yarns and also supported by benefits of economies of scale. The company also benefits from operational synergies with other textile units of the Ramco group. For instance, cotton purchase is centralized for all of the group’s textile entities resulting in cost effective purchase and lower logistics cost. Operating efficiencies also benefit from captive availability of power from its windmills with capacity of 35.15 MW, which effectively lowers the power and fuel costs. About 65% of power requirement of spinning and Fabric Units in Tamil Nadu is met through captive power generation by windmills. Also , with proposed procurement of solar power through captive mode, RML will be able to meet more than 80% of its power requirement through captive mode.

 

Earlier, operating profitability had declined in fiscal 2020 and fiscal 2021 due to adverse movement in yarn prices and partly due to the lower capacity utilization in fabric segment caused by Covid-19 related lockdown. The operating profitability recovered in fiscal 2022 to ~19%, driven by healthy demand scenario and better cotton vs cotton yarn spreads. While there has been a slight dip, operating profitability still remain healthy at ~17% in fiscal 2023, as well, despite the sectoral headwinds, due to improvement in operating efficiencies and higher share of value added products. Besides, the company has in recent years, invested heavily in modernizing its facilities, benefit of which is being reflected in health operating margins.

 

• Financial flexibility supported by investments in Ramco group companies: RML’s large market value of investments, completely unpledged, held in group companies amounted to about ~ Rs.2,583 crores as on April 19,2023. Though these are strategic investments, these are available for pledging or sale, in case of exigencies. Furthermore, RML benefits significantly from being part of the Ramco group and having common bankers with some of the larger entities such as Ramco Cements Limited (rated CRISIL A1+) and Ramco Industries Limited (rated CRISIL A1+), allowing it to raise low-cost debt to fund its working capital requirements, as well as refinance its sizeable debt obligations, as witnessed over the previous two years.

 

Weakness:

• Modest financial risk profile: RML’s financial risk profile is moderate at present, largely due to sizeable debt levels, availed to fund the capex plans over the past 4-5 fiscals. RML’s gearing is estimated to be ~2 times as on March 31, 2023. Other debt protection metrics also remain moderate for the rating category; net cash accruals to total debt and interest coverage ratios are estimated at under 0.2 times and 3.50 times, respectively, in fiscal 2023. The company generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows. No major capex spend is expected over the medium term, except for routine modernization. Hence, CRISIL Ratings expects improving cash generation from monetization of recent concluded capex, and progressive debt repayment will result in debt metrics gradually improving from fiscal 2024 onwards. The same will be a key credit monitorable.

 

• Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: RML’s key raw material, cotton, which constitutes about 95% of its raw material cost, is a highly seasonal commodity. Also, good quality Indian cotton is available only during the peak cotton season i.e. October to March. Bulk procurement of cotton leads to high peak inventory holding period of four to six months, thereby exposing the company’s margin to any steep decline in cotton prices subsequent to procurement. However, this would be partly offset by back to back yarn orders covered by RML over a medium to long term sales contracts entered with the yarn customers. The company, as a policy, procures cotton in bulk and maintains an inventory of four to six months, leading to large working capital requirements.

Liquidity: Adequate

RML has adequate liquidity, largely supported by its sizeable unpledged holdings in Ramco group companies of about Rs.2,583 crores as on April 19,2023 as well as expected forthcoming funding support from the group in case of exigencies. It is the largest textile entity of the Ramco group, and enjoys healthy relationships with lenders, which aid in refinancing of existing term debt obligations as well, for project funding.

 

RML is expected to generate net cash accruals of over Rs.100 crores per annum over the near term supported by healthy performance. RML’s working capital lines of Rs 639 crores, were highly utilised at about 95% (of drawing power) over the 12 months period ended December 2022. CRISIL believes that RML's strong refinancing capabilities and established relationship with lenders, will enable it to tide over any cash flow mismatches. RML’s long term repayment obligations remain high at around Rs.74crores in fiscal 2024 and Rs.96 crores in fiscal 2025; however, accruals are expected to suffice to meet the obligations. No significant capex spend is likely over the medium term,

Outlook Stable

CRISIL Ratings believes RML's business risk profile will continue to benefit from its long-standing relationships with clients, focus on more profitable corporate orders, geographical diversity into export markets and forward integration into fabric manufacturing. Timely stabilisation and ramp up of recently completed capacity expansion, will be critical. The financial risk profile is expected to gradually improve driven by steady monetization of new expanded capacity leading to higher accruals and progressive repayment of debt obligations over the medium term.

Rating Sensitivity factors

Upward factors:

• Improvement in credit profile of key Ramco group entities
• Sustainable revenue growth and sustenance of operating margins above 18-20% through better realizations on orders, and monetisation of recent capacity expansion, leading to better than expected cash generation.
• Better than expected cash generation, prudent working capital management, and capex spend, which along with progressive debt repayment, will lead to continued improvement in debt metrics

 

Downward factors

• Sluggish business growth, and sustained decline in operating profitability below 12-13%, impacting cash generation
• Higher than expected debt-funded capital spending, or a stretch in the working capital cycle, or additional guarantees provided to group companies, delaying expected improvement in debt metrics
• Any significant deterioration in the credit profile of key Ramco group entities impacting the overall group's credit profile.

About the Company

Incorporated in 1936, RML was founded by Mr. P A C Ramasamy Raja, founder of the South India-based Ramco group. RML manufactures cotton yarn of counts ranging from 4s to 300s (single/double yarn), besides other value-added products; the company is based in Rajapalayam, Tamil Nadu. It has four manufacturing facilities in and around Rajapalayam. It has a combined capacity of 1,51,808 spindles and 2,960 rotors. RML also has wind power facilities aggregating to 35.15 megawatts (MW), which helps it control power costs.

 

The Ramco group includes Ramco Cements (rated ‘CRISIL A1+’), Ramco Industries Limited (rated ‘CRISIL A1+’), Ramco Systems Ltd, besides textile entities such as RML, The Ramaraju Surgical Cotton Mills Ltd (rated ‘CRISIL A-/Stable/ CRISIL A2+’), Sri Vishnu Shankar Mills (‘CRISIL BBB/Stable/CRISIL A3+’), Sandhya Spinning Mill Ltd (rated ‘CRISIL BB+/Positive/CRISIL A4+’), Rajapalayam Textile Limited (‘CRISIL BBB-/Stable) and Sri Harini Textiles Ltd.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Working capital loan#	NA	NA	NA	607	NA	CRISIL A+/Stable
NA	Working capital loan^	NA	NA	NA	45	NA	CRISIL A+/Stable
NA	Foreign Exchange Forward^	NA	NA	NA	6	NA	CRISIL A1
NA	Letter of Credit & Bank Guarantee^	NA	NA	NA	30.95	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Feb-32	140	NA	CRISIL A+/Stable
NA	Long Term Loan^	NA	NA	Jul-30	85.96	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Mar-32	140	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Jun-28	163.63	NA	CRISIL A+/Stable
NA	Long Term Loan^	NA	NA	Jun-24	13.09	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Mar-24	6.15	NA	CRISIL A+/Stable
NA	Short Term Loan	NA	NA	Sep-23	55	NA	CRISIL A1
NA	Working Capital Term Loan	NA	NA	Jun-26	32.84	NA	CRISIL A+/Stable
NA	Working Capital Term Loan	NA	NA	Sep-26	21	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	0.84	NA	CRISIL A+/Stable

^ - Interchangeable with Fund Based Limit to the extent of Rs. 170 Crores; Includes Sub-limit of Rs.18.32 Crores for Working Capital Term Loan, Rs. 88.92 Crores for Term Loan,Rs. 20 crores for Cash credit, Rs. 70 Crores for WCDL, Rs. 50 Crores for purchase bill discounting, Rs.70 Crores for EPC / PCFC,  Rs. 70 Crores for Foreign Bill discounting, Rs. 15 Crores for letter for credit backed bill discounting, Rs. 40 Crores for Letter of Credit, Rs. 70 Crores for FCDL, Rs. 40 Crores for L/C (RM), Rs. 40 Crores for SBLC for Buyers credit and Rs. 5 Crores for Bank Guarantee.

# - Working Capital Loan includes Fund based and Non-fund based limit viz. Cash Credit, WCDL, PDB, EPC, PCFC, FBD, FCNRB,  LCBD, Letter of Credit, SBLC for BC, Bank Guarantee, Forex Forward etc.