Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Rajapalayam Mills Limited (RML) to ‘Positive’ from ‘Negative’ and reaffirmed the rating at ‘CRISIL A’. The short term rating has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook follows the better than expected performance driven by higher demand from export as well as domestic customers for yarn and monetization of fabric resulting in revenue growth of 73% in 9M FY22 over the corresponding previous period. Operating margins too improved materially to 19.7% in 9M’22 from 7.2% in 9M’21 driven by favourable spread between cotton and yarn given the improved demand scenario, benefit of higher utilization in yarn division, ramp up in newly added fabric division, benefit of value addition through mercerization of yarn and forward integration into fabric business.

 

To capitalize on the strong end market demand, RML invested Rs. 149 crores till end of Feb’22 spindle and fabric capacity expansion, technology upgrade for processing of value added yarn like mercerized yarn. While the full benefit of this investment will be derived in fiscal 2023, RML will be further investing Rs 430 crore over fiscals 2023 and 2024 towards phase 2 of fabric capacity expansion (addition of 166 looms to the existing 154 looms, of which 32 looms are expected to be added by May 2022). This will be completed by April 2023 and is expected to commence commercial operations from  June,2023.Order enquiries from existing customers for the fabric division has been strong which provides adequate revenue visibility. This will be funded through term loans of Rs.280 crores, Rs.90 crores through selling of shares in group companies and the balance amount of Rs.60 crores through raising equity / Internal Accruals.

 

Financial risk profile remains moderate, albeit improving. While debt funded capex and working capital requirement will maintain debt at elevated levels over the medium term, higher accruals, equity infusion and monetization of liquid investments will provide offset.

 

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 availability of low cost power. 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. 2,660 crores as on March 16,2022.

Analytical Approach

The ratings of RML factor in the support expected from Ramco Group. CRISIL 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. Further, 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 mercerised, 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 (installed capacity of 90 Airjet/ Rapier looms and 32 looms with Jacquard), and further capacity addition in fiscal 2022 & fiscal 2023 will further strengthen RML’s market position over the medium term.

 

Healthy operating efficiency driven by synergies with other textile units of the Ramco group and availability of low cost power: RML enjoys healthy realisations 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. Earlier, operating profitability had declined over fiscal 2020 & 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. However, the cotton vs yarn spreads recovered from H2’21 driven by high demand and therefore operating profitability increased to 19.75% in 9M’22.

 

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.2,660 crores as on March 16,2022. 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 CRISILA1+), 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 constrained by the sizeable debt availed for the ongoing capacity expansion as well as working capital requirements. RML’s adjusted gearing is estimated at ~1.7 times as on March 31, 2022; Debt protection metrics remain below par for the rating category; net cash accruals to total debt and interest coverage ratios estimated at <0.2 times and <3.50 times, respectively, in fiscal 2022. The company generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows. Additionally, potential sale of non-core land assets is expected to support cash flows over the medium term. CRISIL expects improving cash generation, progressive debt repayment will result in credit metrics gradually improving from fiscal 2022 onwards.

 

Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: RML’s key raw material, cotton, constitutes about 95% of its raw material cost, is a highly seasonal commodity and 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. RML 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.2,660 crores as on March 16,2022 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 >100 crores in fiscal 2022; it is expected to improve over the medium term driven by better business performance. RML’s working capital lines of Rs 555 crore, are highly utilised at about 96% (of drawing power) over the 12 months period ended January 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 95 crores in fiscal 2023, however accruals are expected to be comfortable to meet the obligations based on the current order books of Yarn and Fabrics.

Outlook: Positive

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 and value addition in yarn. Timely implementation of the planned capacity expansion, and stabilisation, thereafter, will be critical. Any steeper impact on order book or price realization leading to delay in monetizing of the expanded capacity will remain key rating monitorable.

 

Higher debt levels will temporarily impact credit metrics, which will gradually recover from fiscal 2022, as project benefits are available, resulting in better cash generation. 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:

• Steady growth in revenues and sustained improvement in operating margins at 17-19% through successful monetisation of expanded capacitates and better realizations on orders, leading to marked increase in accruals.
• Greater than expected decline in gearing (below 1.5 times) and improvement in debt protection metrics over the medium term due to higher cash accruals and tighter working capital management.

 

Downward Factors:

• Sustained decline in operating profitability below 10% despite the cost optimization measures and support from fabric manufacturing.
• Higher than expected debt-funded capital spending, or a stretch in the working capital cycle resulting in gearing increasing >2.0 times
• 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 147,920 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	Cash Credit	NA	NA	NA	267.0	NA	CRISIL A/Positive
NA	Cash Credit#	NA	NA	NA	20.0	NA	CRISIL A/Positive
NA	Foreign Exchange Forward^	NA	NA	NA	4.0	NA	CRISIL A1
NA	Letter of Credit & Bank Guarantee#	NA	NA	NA	13.82	NA	CRISIL A/Positive
NA	Working Capital Demand Loan	NA	NA	NA	115.0	NA	CRISIL A/Positive
NA	Long-Term Loan	NA	NA	Jun-2028	203.01	NA	CRISIL A/Positive
NA	Long-Term Loan	NA	NA	May-2022	0.17	NA	CRISIL A/Positive
NA	Long-Term Loan#	NA	NA	Jun-2024	26.18	NA	CRISIL A/Positive
NA	Long-Term Loan	NA	NA	Mar-2024	13.84	NA	CRISIL A/Positive
NA	Long-Term Loan#	NA	NA	June-2030	90.0	NA	CRISIL A/Positive
NA	Long-Term Loan	NA	NA	Apr-2032	140	NA	CRISIL A/Positive
NA	Working Capital Term Loan	NA	NA	Mar-2023	32.5	NA	CRISIL A/Positive
NA	Working Capital Term Loan	NA	NA	Sep-2026	27.5	NA	CRISIL A/Positive
NA	Working Capital Term Loan	NA	NA	Jun-2026	45.47	NA	CRISIL A/Positive
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	233.97	NA	CRISIL A/Positive

#Interchangeable with Fund based Limit to the extent of Rs.150 Crores ; Includes Sub-limits of Rs.34.02 Crores for Working Capital Term Loan, Rs.90 Crore for Term Loan, Rs.60 Crores for Capex L/C, Rs.70 Crores for WCDL, Rs.50 Crore for purchase of bill discounting, Rs.45 Crore for Foreign Bill discounting, Rs.15 Crore for letter for credit-backed bill discounting, Rs.40 Crore for Letter of Credit, Rs.66 Crore for Capex LC, Rs.40 Crore for SBLC for Buyers Credit and Rs.5 Crores for Bank Guarantee

^earlier rated as Derivative facility