| Rajapalayam Textile Limited | ||||
| Rating downgraded to 'CRISIL BBB-/Stable' | ||||
| 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 downgraded its rating on the bank facilities of Rajapalayam Textile Limited (RTL) to 'CRISIL BBB-/Stable' from 'CRISIL BBB/Stable'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL 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 |
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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 362,200 spindles and 12,760 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 also 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, although has turned negative in fiscal 2020 due to industry headwin, is expected to improve with cost savings post completion of the modernization project and other cost reduction measures and well supported by its continued focus on more profitable corporate and export orders. * 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 2020, RTL has availed unsecured loans of Rs 10 crore from the promoters to manage the decline in operating performance. RTL's liquidity will improve over the medium term supported by improving accruals over the medium term 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.11 crore at March 31, 2019, which is expected to reduce further due to post tax losses of about Rs 7.4 crore in fiscal 2020). External debt has increased to about Rs.26 crore to fund the ongoing modernization project. Total debt comprises of Rs.37 crore of unsecured loans from promoters, which provides some comfort on the repayment front. Due by negative accruals in fiscal 2020 and increasing debt, RTL's key credit metrics are expected to decline sharply. Despite an anticipated improvement in profitability in fiscal 2021, net cash accruals to total debt and interest coverage ratios are expected to remain below at 0.03 times and 1.0 times in fiscal 2021 which remains below par for the rating category. Overall, despite steady cash generation, scheduled debt repayments, and moderate capex plans, the improvement in networth and debt protection metrics will take longer than earlier expectations. * 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 |
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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 expected to be about negative 3.88 crore in fiscal 2020 (as compared to Rs 2.6 crore in fiscal 2019) given the sharp decline in operating profitability. Cash accruals will be inadequate to meet debt repayment obligations of about Rs 2.3-2.7 crore per annum and hence will be dependent on timely infusion of funds from the promoters and refinancing of term loans. |
| Outlook: Stable |
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CRISIL believes RTL's business risk profile is expected to decline in fiscal 2020 and improve steadily over the medium term with the company expected to focus on more profitable corporate and export orders for higher realisations to offset the volatility in cotton prices. Improving profitability and steady cash generation along with timely promoter infusion should lead to steady improvement in financial risk profile. |
| Rating Sensitivity factors |
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Upward Factors * Higher than expected improvement in operating profit before interest depreciation and tax (OPBDIT) margins above 12% 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 7% * 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 |
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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. |
| 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) | |||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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