| Rajapalayam Mills Limited | ||||||
| Rated amount enhanced | ||||||
| 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 reaffirmed the ratings on the bank facilities of Rajapalayam Mills Limited (RML) at 'CRISIL A/Stable/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 and gassed yarn and enjoys an established market position in the same driven by long-standing relationship with its customers. The planned fabric capacity expansion of 122 looms, on monetization in fiscal 2020, will further strengthen RML's market position. * 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, which was healthy at 20% in fiscal 2017, declined to 14% in fiscal 2018, and was at 18% in the first half of fiscal 2019, due to lower business levels, following loss of a key customer of the group, and volatile yarn prices. * 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 2,455 crore as on March 1, 2019. 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. Weakness * 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.98.6 crore loan outstanding against corporate guarantees) stands at 1.27 times as on March 31, 2018 while the net cash accruals to total debt (NCATD) and interest coverage ratios stood at 0.17 times and 4.32 times, respectively, in fiscal 2018. However, the company also generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows. Increase in debt for funding the expansion project will result in temporary moderation in credit metrics (e.g. gearing of 1.4-1.5 times) in the interim. Albeit, better cash generation, progressive debt repayment on existing debt and reduction in corporate guarantees outstanding, will result in credit metrics gradually improving from fiscal 2021 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. |
| Liquidity |
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RML has adequate liquidity, largely supported by its sizeable unpledged holdings in Ramco group companies of about Rs.2336 crores. It is the largest textile entity of the Ramco group, and enjoys healthy relationships with lenders, which aid in refinancing of existing term debt obligations as well, as project funding. |
| Outlook: Stable |
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CRISIL 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 steady evacuation of captive wind power. Timely implementation of the planned fabric capacity expansion, and stabilisation thereafter, will be critical. Project related debt will lead to a temporary moderation in key credit metrics, which will gradually recover from fiscal 2021, as project benefits are available, resulting in better cash generation. |
| 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, and one facility in Andhra Pradesh. It has a combined capacity of 137,522 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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Any other information: Not applicable |
| 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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**Includes Sub-limits of Rs. 13.71 Crores for Working Capital Term Loan, Rs. 20 Crores for Term Loan, Rs. 50 Crores for purchase of bill discounting, Rs. 45 Crores for Foreign Bill discounting, Rs. 15 Crores for letter for credit-backed bill discounting, Rs. 40 Crores for Letter of Credit, Rs.60 Crores for Capex LC and Rs. 40 Crores for SBLC for Buyers Credit #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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