Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB/Stable’ rating on the long-term bank facilities of Rajapalayam Textiles Ltd (RTL).

 

The rating reflects expectation of gradual improvement in business performance in the near to medium term, supported by steady cotton-yarn spreads, better availability of cotton and cost efficiency measures. While revenue growth will be modest, operating margin is expected to be in the range of 7-8%. Albeit, continuing net losses will continue to impact networth, leading to modest debt metrics and sub-par financial risk profile.

 

The rating continues to benefit from the managerial, operational and financial support provided by the Ramco group. The promoters have been regularly supporting RTL by infusing funds via unsecured loans. As of June 30,2024, unsecured loans were outstanding at Rs 39.2 crore (out of total debt of Rs 66 crore). Interest on these loans has also been waived off temporarily, due to weak profitability.

 

Revenue stood at Rs 16 crore for the first quarter of fiscal 2025, compared with Rs 18 crore during the corresponding period of the previous fiscal. Revenue remained modest amidst the oversupply and fall in realisations, though capacity utilisation was high around 90%. The open-ended (OE) yarn division is also likely to witness sluggish revenue on account of excess supply in the domestic market. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin improved to 8.4% in the first three months of fiscal 2025, from 3.8% during the corresponding period of the previous fiscal, driven by increase in share of value-added yarns, power cost saving and other operating efficiencies. Revenue declined marginally to Rs 72 crore in fiscal 2024, from Rs 78 crore during fiscal 2023, led by a fall in realisations, owing to oversupply and pricing pressures. However, operating margin was at 2.3% in fiscal 2024 as compared to 0.3% in fiscal 2023 with improvement in cotton-yarn spreads.

 

The ratings reflect the extensive experience of the promoters in the textile industry, benefits from synergies with other group entities and support derived from being part of the Ramco group. These strengths are offset by volatility in the operating margin, the sub-par financial risk profile and large working capital requirement.

Analytical Approach

To arrive 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:  The promoters have been engaged in the textile industry for the past 8-9 decades, specifically in the cotton yarn business. The group operates six companies with a combined capacity of 4,24,256 spindles and 7,352 rotors. Longstanding experience of the promoters has helped these entities garner business through strong marketing initiatives and improve their internal efficiency via centralised raw material procurement, better processes and higher plant integration for enhanced order book management.

 

Operating efficiency benefits driven by synergies with other textile units of the Ramco group: Cotton purchase is centralised for all textile entities of Ramco group, resulting in cost efficiency and reduced logistics cost. RTL has spent nearly Rs 2.15 crore to avail group captive power of 3.15 MW. This came onstream from early fiscal 2025, and will help lower power cost.

 

Adequate financial flexibility derived from being a part of the Ramco group:

RTL benefits significantly from being part of the Ramco group, which enjoys a strong relationship with the lending community and has a demonstrated track record of extending inter-corporate deposits to group entities, on an arms-length basis, in case of exigencies, and providing corporate guarantees for debt raised by weaker group entities. The group has ensured zero default in all its companies over the past 80 years. The bankers are common across most of the companies so as to avail attractive coupon rates. Going forward, liquidity of RTL is likely to improve, supported by better cash accrual and continued support from the Ramco group.

 

Weaknesses:

Volatility in operating margin due to varying cotton-yarn spreads: Operating margin was low at 2.3% in fiscal 2024, primarily due to increase in power cost and muted demand impacting realisations. The margin is expected to recover to 7-8% over the medium term, yet remain lower than 10% seen in fiscal 2021. This will impact cash generation materially, and necessitate additional support from the promoters/lenders.

 

Sub-par financial risk profile: Financial risk profile has weakened with net losses eroding the networth. Total debt has been stagnant at around Rs 60 crore between fiscals 2021 and 2024, and this included loans from promoters (Rs 38 crore). External term debt stood at Rs 11 crore in fiscal 2024, while short-term borrowings were around Rs 17 crore. While interest coverage ratio will improve to over 3 times in fiscal 2025 from under 0.8 time in fiscal 2024, net losses will completely erode the networth, resulting in adverse leverage metrics. Gradual improvement in interest cover ratio is likely over the medium term.

 

Large working capital requirement and susceptibility to volatility in cotton and yarn prices: Cotton forms nearly 95% of raw material cost and it is a highly seasonal commodity.  Good quality cotton is available only during the peak season between October and March. Bulk procurement leads to a high peak inventory holding period of 4-6 months, which then makes the operating margin susceptible to any steep decline in prices post procurement.

Liquidity: Adequate

Expected net cash accrual of around Rs 4.2 crore and Rs 5.8 crore for fiscals 2025 and 2026 should suffice to cover the debt obligation of Rs 2.7 crore and Rs 2.9 crore and minimal annual capex of less than Rs 1 crore. Utilisation of the bank limit (Rs 30 crore) averaged around 70% for the 12 months ended July 31, 2024. Nevertheless, direct fund infusion or arrangement via guarantees from stronger group entities or by promoters will support RTL in case of financial contingencies.

Outlook: Stable

CRISIL Ratings believes RTL’s business risk profile will remain at moderate levels over the near term, due to slow revenue growth while operating margins will benefit from focus on profitable orders and better cotton-yarn spreads. However, the financial risk profile will remain sub-par for the rating category due to high debt levels, and continuing net losses, which will result in weak debt protection metrics. That said, timely support from Ramco group is expected to be forthcoming in the event of financial stress.

Rating Sensitivity Factors

Upward factors

• Substantial improvement in operating performance, marked by operating profit before depreciation, interest and tax (OPBDIT) margins above 8-10%.
• Continued improved in accruals partly from investments along with prudent working capital management, benefiting key debt protection ratios.

 

Downward factors

About the Company

Incorporated in 2014, RTL has been promoted by Smt. R Sudarsanam of the Ramco group. The company manufactures cotton yarn with value added counts and has a capacity of 19,200 spindles and 1,344 rotors in Rajapalayam, Tamil Nadu.

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 RTL, 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 Mills Ltd (‘CRISIL A+/Negative/CRISIL A1’).

Any other information: Not Applicable