Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Rajapalayam Mills Ltd (RML, part of Ramco group) to ‘Negative’ from ‘Stable’ while reaffirmed the rating at ‘CRISIL A+’, The Short term rating has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook factors in moderation in business performance during fiscal 2024, and expectation of weaker-than-anticipated performance in fiscal 2025. Amid challenging business conditions,  growth in revenue and operating margin has been impacted, and led to lower cash accrual. With debt levels having gone up owing to sizeable capex incurred recently, the company will also need to partly refinance its debt obligations.

 

In the first quarter of fiscal 2025, revenue grew by 8.5% to Rs 218 crore, as compared to Rs 201 crore in the corresponding period of the previous fiscal. Operating margin, though improved to 7.3% in the first quarter of fiscal 2025, from 5.96% in first quarter of fiscal 2024, lagged earlier expectations, due to a change in the input mix and increase in employee cost (partly offset by reduced operating losses in the recently commissioned fabric segment). Nevertheless, utilisation levels of the fabric division remained modest at 45-50% during the first quarter of fiscal 2025. Quicker ramp up of revenue from this division is a key monitorable.

 

Revenue was flat at Rs 860 crore in fiscal 2024, as compared to Rs 864 crore in fiscal 2023, as realisations moderated in line with fall in cotton yarn spreads, amidst subdued demand from domestic and overseas customers. Revenue from the spinning division fell by 3%, due to a sharp drop in revenue from the open-ended yarn segment. The open ending (OE) spinning segment saw revenue decline by 21% to Rs 100 crore, as against Rs 123 crore in fiscal 2023, owing to lower realisations and volume. This was partially offset by the ring spinning segment, which reported flat revenue for the fiscal. In September 2023, Phase II of the fabric capacity commenced operations with ~174 looms, taking the total capacity to ~328 looms. In fiscal 2024, RML generated 66% of its revenue through the ring spinning yarn division, while the open-ended spinning and fabric segments contributed 11.4% and 22.4%, respectively. However, post capacity expansion in the fabric division, its share of revenue is expected to increase from around 22% to around 30% over the next two fiscals. Hence, after posting flattish revenue growth in fiscal 2024, RML is likely to record 9-10% growth in revenue over the medium term, supported by incremental contribution from fabrics, healthy order visibility from key customers and gradual improvement in export demand.

 

Operating margin declined to 10.6% in fiscal 2024 from 15.5% in fiscal 2023, mainly on account of unfavorable cotton-yarn spreads, increase in share of higher cost imported cotton, decline in high-margin exports and increase in power cost. However, for fiscal 2025, the margin is expected to bounce back to 12-12.5%, aided by improved cotton – yarn spreads, higher share of revenue from value-added yarn, reduced losses in the fabric segment and shift towards renewable solar power. Further, modernisation and mercerisation undertaken over the past 2-3 fiscals should also enhance operating efficiency going forward.

 

Financial risk profile remains moderate, marked by lower-than-expected cash accrual, owing to weak cotton-yarn spreads and low utilisation at recently enhanced capacities; increase in adjusted debt, due to large capex (towards mercerisation and fabric capacity expansion); and additional guarantees extended to weaker group entities. RML has debt obligation of around Rs 105 crore and Rs 107 crore, in fiscals 2025 and 2026, respectively. Adjusted gearing (debt including guarantees provided) stood at 2.53 times as on March 31, 2024. Gearing is likely to be steady over the medium term, as expected cash accrual may not suffice inadequate leading to partial refinancing of debt obligations.

 

The ratings continue to draw support from material liquid investments held by RML in The Ramco Cements Ltd (rated ‘CRISIL A1+’), the flagship company of the Ramco group, and in other group entities. Market value of these investments was around Rs 2,900 crore as on September 6, 2024. RML has encumbered 52-54% of these  investments to raise project term debt and corporate loans to cover its working capital requirement and debt obligation. However, part of these investments could be diluted if needed, as done in the past. Besides, the ratings also draw comfort from the flexibility to refinance debt and ability to procure additional funding at attractive rates. The promoters too have demonstrated the track record to infuse funds to cover the capex and operational expenses.

 

The ratings reflect the established position of RML in the domestic spinning segment, monetisation of the recent capacity expansion in the fabric division and higher demand from domestic and export markets. The ratings continue to factor in RML’s market presence in the finer count yarn segment, driven by extensive experience of the promoters and average operating efficiency, backed by synergies with other textile units of the Ramco group, and financial flexibility supported by investments in 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.

Analytical Approach

CRISIL Ratings has arrived at the standalone ratings of RML, based on the credit profile of RML and has notched up the overall ratings, based on the strength and support of the Ramco group. CRISIL Ratings believes that RML will, in case of exigencies, receive the needed operational and financial support from the Ramco Group, given operational synergies between textile companies in the group, the common promoters, shared brand name, and given that it is the leading textile company of the Ramco group. Outstanding amount against corporate guarantees provided to other Ramco group companies has been included under RML’s debt.

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 1936, as the first venture of the Ramco group, which also has five other companies in the textile business. RML 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. It enjoys an established market position, driven by longstanding relationships with customers. Forward integration into fabric manufacturing has helped in diversification of the revenue profile and will also insulate RML from volatility in demand, as demand for fabric does not fluctuate much. RML has further enhanced the fabric capacity by adding ~174 looms, operational since September 2023.

 

• Average operating efficiency, driven by synergies with other textile units of the Ramco group: Traditionally, RML enjoys healthy realisations, given its presence in higher count yarns. It also benefits from economies of scale via large capacities and operational synergies with other textile units of the Ramco group. For instance, centralised purchase of cotton for all textile entities of the group brings in cost efficiency and reduces the logistic cost. Availability of power from the captive windmills, having capacity of 35.15 megawatt (MW), also lowers the cost of power and fuel considerably. About 55% of power requirement of the spinning and fabric units in Tamil Nadu is met via captive windmills. Besides, procurement of solar power from Green infra (9.5 MW) and Cleanmax (7.5 MW), through the group captive power scheme, should provide the full benefit from fiscal 2026 as against anticipated from fiscal 2025 earlier. Post commencement of solar power consumption, RML will be able to meet more than 85% of its power requirement through renewable sources, resulting in considerable cost saving of Rs 7-8 crore per annum. This, along with anticipated improvement in cotton-yarn spreads, will lead to a higher operating margin of 12-13% in the near to medium term.

 

• Financial flexibility supported by investments in group companies and being part of Ramco group: The large market value of investments, held by RML in group companies - Ramco Cements, Ramco Industries Ltd (Ramco Industries, rated ‘CRISIL A1+’), Ramco Systems Ltd - amounted to around Rs 2,900 crore as on September 6, 2024. Though these are strategic investments, they can be pledged or sold in case of exigencies. Shares of Ramco Cements, amounting to Rs 55 crore, were sold in the first quarter of fiscal 2024, to fund the expansion in the fabric unit. RML has also availed a term loan of around Rs 532 crore by providing a non-disposal undertaking/pledge against 54% of its stake in Ramco Cements. Besides, a portion of its holding in Ramco Cements has been encumbered as security in the capacity of corporate guarantor for term loan of Rs 40 crore availed by Sandhya Spinning Mills Ltd (SSML).

 

RML benefits significantly from being part of the Ramco group and having common bankers. Larger entities such as Ramco Cements and Ramco Industries allow the company to raise debt to fund its working capital requirement and refinance its sizeable debt obligation, as witnessed in previous fiscals. Besides, the promoters have also supported group companies via fund infusion as well as temporary loans.

 

Weaknesses:

• Modest financial risk profile: Financial risk profile has been moderate due to sizeable debt availed to fund capex of around Rs 1,000 crore over the past 5-6 fiscals. In fiscal 2022, RML invested Rs 155 crore in order towards addition of spindles, expansion of fabric capacity and technological upgradation for processing value-added yarn such as mercerised yarn. RML further invested Rs 400 crore in fiscal 2023 for undertaking Phase II of fabric capacity expansion, and it was majorly debt-funded. In fiscal 2024, RML incurred capex of Rs 98 crore for purchase of back process machineries, improvement in electrical infrastructure and maintenance purposes. With completion of almost all the planned capex programmes capex for fiscals 2025 and 2026 will be limited towards maintenance and likely to be within Rs 25-30 crore. Stable non-operating income from investments in Ramco group companies provides some stability to cash flow.

 

With high debt levels, the company will need to seek refinance as cash accrual will be inadequate to service the debt obligation. Therefore, debt protection metrics may remain moderate over the medium term. Gearing and interest cover are expected to be in the range of 2.7-3.0 times and 1.4-1.6 times, respectively, for fiscal 2025.

 

• Working capital-intensive operations and susceptibility to volatility in cotton and yarn prices: The key raw material, cotton, constitutes about 95% of the raw material cost and yarn (the output product) 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 4-6 months, thereby exposing the margin to any steep decline in cotton prices post procurement. However, this would be partly offset by back-to-back medium-to-long term sales contracts with yarn customers.

Liquidity: Adequate

Liquidity at RML is supported by its sizeable holdings in Ramco group companies valued around Rs 2,900 crore as on September 6, 2024, in addition to funding support expected from the group and promoters. In case of financial exigencies, RML could raise additional debt by utilising its stake in Ramco Cements and Ramco Industries. The company has already availed around Rs 532 crore as term debt through a non-disposal undertaking of shares of Ramco Cements. RML has also created encumbrance of 8 lakh shares of Ramco Cements in its capacity as a corporate guarantor for the loan availed by SSML. Strong refinancing capabilities and established relationships with lenders will enable the company to tide over cash flow mismatches.

 

Expected cash accrual of Rs 50-60 crore may not suffice to cover the term debt obligation of Rs 105 crore in fiscal 2025 and Rs 107 crore in fiscal 2026. This will necessitate refinancing of debt obligations. However, the company has demonstrated the track record of arranging for additional loans, ahead of the repayment schedule. Sanctioned Working capital limit of Rs 751 crore out of which, the Company has utilized Rs.458 Crores,  averaging about 94% (of drawing power) over the 12 months ended June 30, 2024. Any sizeable monetisation of assets or investments, equity raising, and utilisation of proceeds for reduction in debt can help ease liquidity going forward.

Outlook: Negative

CRISIL Ratings believes the business risk profile of RML will continue to benefit from its longstanding relationships with clients, focus on more profitable corporate orders, geographical reach in overseas markets and forward integration into fabric manufacturing. However, ramp up in utilisation of the recently enhanced fabric capacities, remains critical. Financial risk profile should gradually improve, with steady monetisation of the expanded capacity, leading to higher accrual and progressive repayment of debt over the medium term. The Ramco group is also likely to extend timely support in case of financial exigencies.

Rating sensitivity factors

Upward factors:

• Improvement in the credit profile of key Ramco group entities.
• Sustainable revenue growth and improvement in operating margin to ~15% 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 below 10-11%, impacting cash generation.
• Higher-than-expected debt-funded capital spending, or a stretch in the working capital cycle, delaying expected improvement in debt metrics.
• Increase in encumbrance levels on its investments in listed group entities crossing more than 75% of the current holding levels by way of pledge or non-disposal undertaking.
• 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 PAC 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, which is based in Rajapalayam, Tamil Nadu, has four manufacturing facilities in and around the region. It has a combined capacity of 1,51,808 spindles, 328 looms and 2,960 rotors. RML also has wind power facilities aggregating 35.15 MW and captive solar power of 17.0 MW commissioned from this fiscal.

 

The company reported revenue of Rs 218 crore and loss after tax of Rs 15 crore in the first quarter of fiscal 2025, vis-à-vis revenue of Rs 201 crore and profit after tax of Rs 41 crore in the corresponding period of the previous fiscal.

About the Group

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

Any other information: Not Applicable