| Rajapalayam Mills Limited | ||||||
| Rating outlook revised to 'Negative'; ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has revised the rating outlook on the long-term bank facilities of Rajapalayam Mills Limited (RML) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL A'. The short-term rating has been reaffirmed at 'CRISIL A1'. |
| Analytical Approach |
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The ratings of RML factor in the support expected from Ramco Group. CRISIL believes that RML will, in case of exigencies, receive distress 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 |
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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 in textiles business, 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 slub, mercerised, melange 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 looms (Airjet/ Rapier) and 32 looms (with Jacquard), on steady monetization from fiscal 2021, 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 75% of power requirement of spinning Units in Tamil Nadu is met through captive power generation by windmills. Operating profitability has declined over the past two years (estimated 11% in fiscal 2020, compared to 14.3% in fiscal 2018) due to adverse movement in yarn prices and partly due to the ongoing modernization of spinning units. This is expected to improve from fiscal 2021 with commercial production of the installed fabric capacity and modernization of units. * 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 1,940 crore as on April 20, 2020. Though these are strategic investments, these are available for pledging or sale to promoter group, 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 and RIL, 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. Weaknesses: * Modest financial risk profile: RML's financial risk profile is constrained by the sizeable debt and corporate guarantees extended to the group companies in the textile business. RML's adjusted gearing (including Rs.39 crore loan outstanding against corporate guarantees) stands at 1.73 times as on March 31, 2019 while the net cash accruals to total debt (NCATD) and interest coverage ratios stood at 0.11 times and 3.64 times, respectively, in fiscal 2019. However, the company also generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows. During fiscal 2020, RML received Rs 10 crore of non-operating income through receipt of subsidies for ongoing fabric expansion, while 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 on existing debt and reduction in corporate guarantees outstanding, 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 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. RML as a policy procures cotton in bulk and maintains an inventory of four to six months, leading to large working capital requirements. Additionally, there was an increase in unsold stock as of fiscal 2020, leading to increase in short term working capital, which is expected to moderate through the year. |
| Liquidity Adequate |
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Despite the expected sub-dued annual cash accruals of ~Rs 30 crore, annual debt obligation of Rs 75-90 crore in fiscal 2021 and 2022 and highly utilised working capital lines (Rs 513 crore of bank lines utilised at 98% of drawing power over 12 month period ending March 2020), RML liquidity is adequate, largely supported by its sizeable unpledged holdings in Ramco group companies (whose market value stood at about Rs.1,940 crore as on April 20, 2020) as well as expected funding support from the group in case of exigencies. Being part of Ramco group, RML also enjoys healthy relationships with lenders. |
| Outlook: Negative |
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CRISIL believes RML's business risk profile will be impacted by the demand slowdown in the cotton textile market, further intensified by the Covid-19 related impact on the end market demand. Any steeper impact on order book or price realization leading to further delay in monetizing of the fabric capacity will remain key rating monitorable. |
| Rating Sensitivity factors |
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Upward factors: * Sustainable improvement in operating margins to above 14% through better realizations on orders, along with prudent working capital management 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 * Steady monetization of the ongoing fabric capacity expansion translating to growth in revenue and improvement in profitability. Downward factors * Sustained decline in operating profitability below 9% despite the cost optimization measures and support from fabric segment. * Higher than expected debt-funded capital spending, or a stretch in the working capital cycle * Any significant deterioration in the credit profile of key Ramco group entities impacting the overall group's credit profile. |
| About the Company |
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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 132,722 spindles and 5480 rotors. RML also has wind power facilities aggregating to 35.15 megawatts (MW), which helps it control power costs. |
| Key Financial Indicators | ||||||||||||||||||||||||
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| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#Interchangeable with buyers credit to the extent of Rs 15 crore @earlier rated as Derivative facility |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#Interchangeable with buyers credit to the extent of Rs 15 crore @earlier rated as Derivative facility | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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