Detailed Rationale

CRISIL Ratings has upgraded its rating on the long term bank facilities of Rajapalayam Textile Limited (RTL) to ‘CRISIL BBB/Stable’ from ‘CRISIL BBB-/Stable’.

 

The rating upgrade reflects the better than expected growth in fiscal 2021 driven by higher share of corporate orders and higher offtake in second half of fiscal 2021. Profitability also improved in fiscal 2021 especially in the second half of the year driven by high capacity utilisation, high margin corporate orders, cost savings due to modernization as well as improved spread between cotton and yarn. RTL’s performance was impacted in the past due to adverse market trends and exit of high margin large customers and sub-optimal capacity utilisation.

 

In fiscal 2022, the performance is expected to further improve driven by strong order book. Profitability expected to be above 13% over the medium term driven by higher orders in premium segment, high capacity utilisation and favorable market trends.

 

Rating also reflects the continued operational and financial flexibility derived from being part of the Ramco group. Promoters have history of infusing funds in the form of unsecured loans in RTL. In fiscal 2021, Promoters have infused Rs.1.24 Cr to meet repayment obligations. Prior to that, in fiscal 2020, Promoters had infused Rs.10.26 Cr in the form of Unsecured loans in RTL.

 

The ratings continue to factor in extensive experience of RTL’s promoters in the textile industry, healthy operating efficiency driven by synergies with other textile units of the Ramco group and adequate financial flexibility derived from being part of the established Ramco group. These rating strengths are partially offset by RTL’s weak financial risk profile, high working capital intensity of operations and susceptibility of operating margins to inherent volatility in cotton and yarn prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered support from the Ramco group, due to operational synergies between textile companies in the group, common promoters, and demonstrated financial support extended in case of exigencies, in the form of unsecured loans or corporate guarantees by stronger entities in the group.

Key Rating Drivers & Detailed Description

Strengths

• Extensive experience of promoters in the textile industry: Promoters have extensive experience in the textile industry, specifically cotton yarn, through Rajapalayam Mills Ltd (RML; rated ‘CRISIL A/Negative/CRISIL A1’) established nearly 80 years back in 1938. The group has six companies in the textile business with combined capacity of 328,592 spindles and 10,772 rotors, whose operations are managed with guidance from the promoters. The rich experience of the promoters in the textile industry has helped textile companies in the group to garner more business through strengthening marketing initiatives as well as improve internal efficiencies through better processes and higher plant integration.

 

• Moderate operating efficiency driven by synergies with other textile units of the Ramco group: RTL enjoys healthy realisations due to its focus on value added count yarns, and benefits from economies of scale with other textile units of the Ramco group. Cotton purchase is centralized for all the textile entities of Ramco group resulting in cost effective purchase and lower logistics cost. RTL’s operating profitability has improved to 11% in fiscal 2021 from -7% in fiscal 2020. Over the medium term, operating margins are expected to sustain above 13%.

 

• Adequate financial flexibility derived from being part of Ramco group: RTL benefits significantly from being part of the Ramco group, which enjoys a strong relationship with lending community and has a demonstrated track record of supporting entities in the group during exigencies by extending inter corporate deposits on arms-length basis and through corporate guarantees. The group has a track record of nil default instance in any of its companies over the past 80 years. The bankers are kept common with most of the companies in group to facilitate any individual company raise debt when required and at lower rates. CRISIL expects the demonstrated support extended by the stronger entities in the group to RTL to continue in case of exigencies. During fiscal 2021, RTL has availed unsecured loans of Rs 1.24 crore from the promoters to manage the repayment obligations.

 

RTL’s liquidity will improve over the medium term supported by improving accruals and continued support from the Ramco group.

 

Weakness:

• Weak financial risk profile: RTL’s financial risk profile has remained modest over time. Its financial risk profile is constrained by low net worth (~Rs.1crore at March 31, 2021, which is expected to reduce further due to expected post tax losses over the medium term. External term debt is at Rs.12 Cr in fiscal 2021 accumulated due to capex plans undertaken in past. Total debt comprises of Rs.38 crore of unsecured loans from promoters, which provides some comfort on the repayment front.

 

The debt protection metrics have improved in fiscal 2021, however remains weak for the rating category. Over the medium term, with steady increase in profitability and accruals there will be improvement in financial profile.

 

• Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: RTL’s key raw material, cotton, which constitutes about 95% of its raw material cost, is a highly seasonal commodity, and good quality cotton is available only during the peak cotton season i.e. October to March. RTL as a policy procures cotton in bulk and maintains an inventory of three to four months, leading to large working capital requirements. Additionally, it also exposes the company’s margin to any steep decline in cotton prices subsequent to procurement. In case of large corporate orders, high quality cotton needs to be imported from other countries, leading to higher working capital requirements.

Liquidity: Adequate

Rajapalayam Textiles Ltd (RTL) has adequate liquidity driven by expected forthcoming funding support from the group in case of exigencies. Liquidity also benefits from anticipated improvement in cash accruals and the financial flexibility it enjoys by being part of the established Ramco group. RTL’s cash accruals are at about Rs.1.5Cr in fiscal 2021(as compared to negative Rs 3.9 crore in fiscal 2020) given the improvement in profitability. Cash accruals will be adequate to meet debt repayment obligations of about Rs 2.5-4 crore per annum.

 

RTL’s operations are also working-capital-intensive, driven by large inventory requirements because of seasonal availability of its key raw material, cotton. During fiscal 2021, the gross current assets (GCA) is 178 days compared to 182 days in fiscal 2020. The working capital requirements are expected to be met from its existing bank lines of Rs 20 crore, which has been utilized at 51% through the twelve months period ended June 2021.

 

CRISIL Ratings believes that RTL’s liquidity will remain adequate over the medium term supported by improving cash accruals, moderate capex requirements and anticipated timely support from promoters.

Outlook: Stable

CRISIL Ratings believes RTL’s business risk profile is expected to improve steadily over the medium term with the company expected to get more profitable corporate orders. Improving profitability and steady cash generation along with timely promoter infusion should lead to steady improvement in financial risk profile.

Rating Sensitivity Factors

Upward factors

• Higher than expected improvement in operating profit before interest depreciation and tax (OPBDIT) margins above 16% and prudent working capital management, leading to substantial increase in accruals
• Greater than expected improvement in debt protection metrics (interest coverage ratio above 2.5 times)

 

Downward factors

• Sustained weaker operating performance leading to OPBDIT margins below 10%
• Higher than expected debt-funded capital spending, or a continued stretch in the working capital cycle with GCA days greater than 200 days.
• Any significant deterioration in the credit profile of key Ramco group entities impacting the overall group’s credit profile

About the Company

Incorporated in 2014, RTL is promoted by Smt. R. Sudarsanam. Currently, RTL manufactures cotton yarn with value added counts and has a capacity of 16,800 spindles and 1344 rotors in Rajapalayam, Tamil Nadu.

 

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

Any other information:

RTL has not paid dividends for the past 2 years and this is expected to continue over the next 3 years. RTL does not enter into any derivative transactions.