Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Rajapalayam Mills Ltd (RML, part of Ramco group).

 

The ratings reflect CRISIL Ratings expectations that RML will continue to benefit from its established position in the domestic spinning, yarn and fabric segment, supported by better demand from both domestic and export markets. The ratings continue to factor in RML’s market standing in finer count yarn segment driven by the extensive experience of the promoters, and healthy operating efficiency backed by synergies with other textile units of the Ramco group and financial flexibility supported by investments in Ramco group companies. These strengths are offset by the modest financial risk profile, working-capital-intensive operations, and susceptibility to sharp volatility in cotton and yarn prices.

 

RML’s revenue has witnessed flattish growth in the first nine months of fiscal 2024  despite volume growth of 12% on year basis. This is on account of moderation in average realization by 9% in-line with fall in cotton-yarn spreads due to subdued demand from both domestic and export customers. During the same period, while spinning division’s revenues declined by 2%, fabric division’s revenues grew by 6% owing to higher volumes, which offset impact of lower realizations.  In September 2023, RML commenced operations of Phase II of fabric capacity with  174 Looms, thereby taking the total capacity to   328 looms. Fiscal 2025 will be the first full year of operations for the entire fabric capacity. Accordingly, the share of revenues from the fabric capacity is expected to increase from current levels of ~22% to around ~30% over the next 2 fiscals. Hence, after remaining flattish in fiscal 2024, RML’s revenue is expected to grow by 9-10% over the medium term supported by incremental revenue contribution from fabrics, healthy order visibility from key customers and gradual improvement in export demand.

 

Operating profitability declined by 630 basis points to 10.8% during the first nine months of fiscal 2024 as compared to 17.1% in the corresponding period of the previous fiscal. Decline in margin is mainly on account of unfavorable cotton-yarn spreads, increase in share of higher cost imported cotton, decline in high margin exports sales and increased power cost. Accordingly for fiscal 2024, margins are expected to decline over fiscal 2023 levels and remain at 10-10.5% while they are expected to improve to pre-covid levels of ~14-15% from fiscal 2025 onwards. This will be aided by improved cotton – yarn spreads, incremental contribution from high margin fabric segment, shift towards renewable solar power, through group captive procurement thereby reliance on external power is said to come down to ~15% from next fiscal from over ~35% in fiscal 2023. Further benefit of modernization and mercerization exercise undertaken by RML over the past 2-3 fiscals is also expected to aid in improvement of operating efficiency going forward.

 

RML’s financial risk profile is moderate due to lower than anticipated cash generation, owing to weak cotton-yarn spreads, and low utilisation levels at recent enhanced capacities, as well as higher than anticipated adjusted debt levels, due to higher capex(towards mercerization and fabric capacity expansion in the past fiscals) as well as additional guarantees given to weaker group entities. Adjusted gearing (debt including guarantees given) is expected to remain at just over 2.5 times at March 31, 2024, compared to expectations of ~2 times, and improve to ~2 times only by fiscal 2026 aided by steady ramp up of expanded capacity and progressive repayment of debt.

 

The ratings continue to draw support from material liquid investments held by RML in Ramco group flagship company, Ramco Cements Ltd (rated ‘CRISIL A1+’), as well as in other group companies; the market value of these investments was Rs.~2900 crore as on February 29, 2024. Part of these investments can be diluted should the need arise. Besides, the ratings also draws comfort from the flexibility to refinance the debt obligations as witnessed in the past and ability to procure additional funding at attractive rates. Promoters have also demonstrated track record to infuse funds to meet the capex and to support operations in the past.

Analytical Approach

CRISIL ratings have arrived at the standalone ratings of RML based on RML’s credit profile and overall ratings have been notched up based on the strength and support of the Ramco group. CRISIL believes that RML will, in case of exigencies, receive necessary need base operational and financial support from the Ramco Group, given operational synergies between textile companies in the group, common promoters, shared name, and given that it is the leading textile company of the Ramco group. Outstanding amounts against corporate guarantees provided to other 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 the extensive experience of the promoters: RML was established in 1938 and was Ramco group’s first venture. The group has five other companies in the textile business. The company specialises in manufacturing yarn of finer counts ranging from 4s to 300s (single/double yarn), besides other value-added products such as 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 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, which has been operational since September 2023 and will further enhance the diversity in revenue.

 

• Healthy operating efficiency driven by synergies with other textile units of the Ramco group: RML traditionally enjoys good realisations due to its presence in higher count yarns and also benefits from economies of scale via its large capacities. The company also benefits from operational synergies with other textile units of the Ramco group. For instance, cotton purchase is centralised for all textile entities of the group resulting in cost effective purchase and lower logistics cost. Operating efficiency also benefits from captive availability of power from its windmills with capacity of 35.15 megawatt (MW), which effectively lowers the power and fuel costs. About 55% of power requirement of spinning and fabric units in Tamil Nadu is met through captive power generation by windmills. Also  with the commencement of procurement of solar power from Green infra (9.5 MW) and Cleanmax (7.2 MW) from the fourth quarter of fiscal 2024 onwards, RML will be able to meet more than 85% of its power requirement through renewable sources, resulting in considerable cost savings of Rs 7-8 crore per annum. This along with anticipated improvement in cotton-yarn spreads, will lead to better operating profitability over the near to medium term.

 

• Financial flexibility supported by investments in Ramco group companies, and being part of Ramco group: RML’s large market value of investments, held in group companies - Ramco Cements, Ramco Industries Ltd (Ramco Industries, rated ‘CRISIL A1+’), Ramco Systems Ltd - amounted to ~ Rs.2900 crore as on February 29, 2024, are strategic investments, but  available for pledging or sale, in case of exigencies. It may be noted that shares of Ramco Cements shares amounting to Rs.55 crores were sold in the first quarter of fiscal 2024, to fund the fabric expansion plans. Further, RML has already availed Rs.              548 crs of term loan from lenders by providing a non-disposal undertaking/pledge against 53% of shares held by it in Ramco Cements. Besides, some portion of its holding in Ramco Cements has also been pledged Apart from the above, RML has also pledged for a Rs. 15 crores loan availed from Barclays Bank for general corporate purposes.

 

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, and Ramco Industries, 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 fiscals. Besides, promoters have also supported companies in the group through fund infusion as well as temporary loans.

 

Weaknesses:

• Modest financial risk profile: RML’s financial risk profile is moderate due to the sizeable debt availed to fund the capex plans over the past 4-5 fiscals. In fiscal 2022, RML invested Rs 155 crore in spindle and fabric capacity expansion, technology upgrade for processing of value-added yarn such as mercerised yarn. RML invested a further ~Rs 400 crore in fiscal 2023 towards Phase II of fabric capacity expansion, and the same was majorly debt-funded. RML also repaid the bridge loan of Rs 55 crore availed for fabric expansion capex in the first quarter of fiscal 2024 by selling shares of Ramco Cements. However, RML availed a further loan of Rs 60 crore from EXIM bank and Rs 15 crore of loan against shares from Barclays Bank in fiscal 2024, to fund its needs and also as cash generation was impacted due to weak demand scenario, and lower product realisations. The company generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows.

 

Debt levels are likely to gradually come down with capex intensity reducing, progressive repayment of debt, and supported by better cash generation. Therefore, debt metrics are also expected to gradually improve from fiscal 2025 onwards. Adjusted gearing and interest cover are expected to improve to 2.26 times and 2.25 times respectively by end March 2025 and ~2 times and over 2.5 times by March 2026, from just over 2.5 and 2.2 times at March 2024. .

 

• 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. 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 after procurement. However, this would be partly offset by back-to-back medium-to-long term sales contracts entered with 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’s expected cash accruals of Rs.100-110 crore per annum will be tightly matched to meet repayment obligations of Rs.100-110 crore over medium term necessitating refinancing. However, company has demonstrated track record of arranging for additional loans, in advance of repayments. RML’s working capital lines of Rs 746 crore remains highly utilised at about 95% (of drawing power) over the 12 months ended January 2024.

 

RML’s liquidity is largely supported by its sizeable holdings in Ramco group companies of about Rs.2,900 crore as on February 29,2024 as well as expected funding support from the group in case of exigencies. In case of extreme financial exigencies, part of this stake in Ramco Cements and Ramco Industries can be pledged to raise additional borrowings. Also, it may be noted that the company has already availed Rs.548 crore of term loan from lenders by non disposal undertaking of Ramco cements shares. Apart from the above, RML has also pledged 1.40 lakh shares of Ramco Industries for loan availed with Barclays. CRISIL Ratings believes that RML's strong refinancing capabilities and established relationship with lenders, will enable it to tide over any cash flow mismatches.

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 the recently completed capacity expansion, will be critical. The financial risk profile is expected to gradually improve driven by steady monetisation 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 the credit profile of key Ramco group entities.
• Sustainable revenue growth and improvement in operating margin to 16-17% through better realisations on orders, and monetisation of recent capacity expansion, leading to marked increase in accruals.
• Better-than-expected cash generation, and prudent working capital management, 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 to 12-13%, impacting cash generation.
• Higher-than-expected debt-funded capital spending, or a stretch in the working capital cycle, delaying expected improvement in debt metrics.
• Any significant deterioration in the credit profile of key Ramco group entities impacting the group's overall 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 MW.

 

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

 

The company reported revenues of Rs. 635 crore and profit after tax (PAT) of Rs.41 crore in 9 months of fiscal 2024, compared to revenues of Rs. 640 crore and PAT of Rs. 39 crore in corresponding period of fiscal 2023.

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	737	NA	CRISIL A+/Stable
NA	Foreign Exchange Forward^	NA	NA	NA	6	NA	CRISIL A1
NA	Letter of Credit & Bank Guarantee^	NA	NA	NA	46.11	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Jan-2032	140	NA	CRISIL A+/Stable
NA	Long Term Loan^	NA	NA	Jul-2030	78.65	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Mar-2032	140	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Jun-2028	132.09	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Aug-2025	8.32	NA	CRISIL A+/Stable
NA	Long Term Loan^	NA	NA	Jun-2024	5.24	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	31-Mar-2024	1.54	NA	CRISIL A+/Stable
NA	Long Term Loan	NA	NA	Aug-2031	45	NA	CRISIL A+/Stable
NA	Working Capital Term Loan	NA	NA	Jun-2026	25.26	NA	CRISIL A+/Stable
NA	Working Capital Term Loan	NA	NA	Sep-2026	16.5	NA	CRISIL A+/Stable
NA	Working Capital Term Loan	NA	NA	Oct-2028	60	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	55.75	NA	CRISIL A+/Stable

^Interchangeable with Fund Based Limit to the extent of Rs.  175 Crores; Includes Sub-limit of Rs. 5.24 Crores for Working Capital Term Loan, Rs. 78.65 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 (Purchase / Sales) , , 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.