Rating Rationale
February 04, 2022 | Mumbai
Sangam (India) Limited
Rating outlook revised to 'Positive'; Rating reaffirmed
 
Rating Action
Rs.100 Crore Fixed DepositsF A/Positive (Outlook revised from 'Stable'; rating reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the fixed deposits (FD) of Sangam (India) Limited (SIL; part of Sangam Textiles Group) to ‘Positive’ from ‘Stable’ and reaffirmed the ‘FA’ rating.

 

Revision in outlook reflects expectations of better than anticipated improvement in group’s operating performance in fiscal 2022 which is expected to sustain over the medium term.

 

Healthy demand from domestic and export as well as better realisation in its both cotton and denim segment should support the sustained improvement in revenue. It has also resulted in operating margin to remain above 11.5% over in the past 3 quarters’ ended Q3 fiscal 2022. With better profitability, debt protection metrics are expected to improve. While the group is undertaking capex, the same is expected to be executed in a phased manner and with group’s improving liquidity on back of better operating performance net cash accruals to repayment obligation should remain at over 2 times; and debt to EBIDTA would stay restricted to around 2.5 times over the medium term. 

 

Rating reflects extensive industry experience of promoters, established market position with large scale and integrated nature of operations along with diversified product base. Rating also factors in moderate financial risk profile. These strengths are partially offset by presence in a highly fragmented industry with exposure to intense competition, susceptibility of the operating performance to volatility in raw material prices and risk related to ongoing capex.

Analytical Approach

CRISIL Ratings has consolidated business and financial risk profile of SIL with Sangam Ventures Ltd (SVL) together referred to as Sangam Textiles Group. This is because SVL is the wholly owned subsidiary of SIL and SIL is expected to provide corporate guarantee for the debt facilities to be availed in SVL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive experience of promoter: The founding promoter Mr. Ram Pal Soni has over 3 decades of experience in the textile industry and have developed understanding of industry dynamics. Further, second generation has also joined business and takes active part in daily operations. The promoter along with professional management setup over the course of his presence in the industry has developed an extensive network of suppliers and customers in domestic as well as export market which has not only resulted in repeat order from existing customer but also addition of new customers.

 

  • Established market position with large scale of operation, integrated nature of operations and diversified product base: Sangam Textiles group has healthy market share of India’s PV dyed yarn segment. Group has integrated nature of operations with presence in yarn, fabric and garment segments of textile. Further, group has capacity to process synthetic, denim as well as cotton. Its integrated nature of business provides supports the market position compared to only yarn manufacturers. Group has already achieved a revenue of around Rs 1700 crore as on Dec 2021 against Rs 1369 crore in fiscal 2021.

 

  • Moderate financial risk profile: Group’s total outside liabilities to adjusted networth (TOLANW) of 1.5 times on a networth base of Rs 548 crore as on March 31, 2021 represents moderate capital structure. TOLANW has been on improving trend and in spite of debt funded capex it is expected to remain in range of 1.3-1.5 times over the medium term. Interest coverage ratio is around 5 times for fiscal 2021. On account of ongoing/upcoming capex plans, the debt would stay elevated but would be restricted at 2.5-2.7 times, debt to EBIDTA levels, over the medium term.

 

Weaknesses:

  • Presence in a highly fragmented industry with exposure to intense competition: Group operates in the highly fragmented industry. With presence of large number of players, organized and unorganized, the polyester yarn industry is intensely competitive which limits the company's bargaining power. Further, group has also presence in the Denim segment which had seen stress in term of demand as well as realization from customers. However, these risks are partly mitigated by group’s large scale and integrated nature of operations.

 

  • Susceptibility of operating performance to volatility in raw material prices: Group's major raw material includes Polyester Staple Fibre (PSF), viscose staple fiber (VSF) and cotton. While inventory for PSF and VSF is moderate group builds up inventory for the cotton during season. Major variation in raw material prices can impact operating performance. Further, on account of the commodity nature of some raw material, their prices are market-driven, resulting in limited pricing flexibility with customers. While improved realisation has resulted in operating margin to improve to 11-12% during 9MYTD fiscal 2022 against 8-9% till fiscal 2021, sustenance of same to remain key rating sensitivity factor.

 

  • Risk related to ongoing capex: Group is undertaking capex for setting up of new spinning unit in 2 phases and a green field project for garment manufacturing in SVL. While phase 1 is about to achieve commercial operation in April 2022, phase 2 and garment manufacturing unit are in niche stages. While group has done such projects in past and demand continues to remain healthy, group is exposed to moderate project risk and timely completion of these capex plans without major cost overrun to remain monitorable.

Liquidity: Adequate

Cash accrual, projected at above Rs 180 crore per annum over fiscal 2022 and fiscal 2023, should comfortably meet the yearly maturing debt obligation of Rs 60-70 crore per annum. In addition, it will act as cushion to the liquidity of the company. Group had cash and cash equivalent of around Rs 10 crore as on March 31, 2021. Bank limit utilisation has been moderate and averaged at 84% for the 12 months through October 2021. Group has capex plans of Rs 140 crore per annum in fiscal 2021 and around Rs 260 crore in fiscal 2023 which will be funded through debt (75%) and internal accruals.

Outlook: Positive

CRISIL Ratings believe that Sangam Textiles group would continue benefit from the extensive experience of its promoters, supported integrated nature of operations, and healthy demand to maintain improved operating profit margin.

Rating Sensitivity factors

Upward factors:

  • Sustained growth in revenue and operating margin remaining above 12% resulting in much higher accruals and improvement in debt protection metrics.
  • Improvement in working capital cycle with improvement in realisation from debtors over 6 months.
  • Sustenance of the capital structure and debt protection metrics.

 

Downward factors:

  • Drop in revenue or drop in operating margin below 10% resulting in lower than expected net cash accruals
  • Stretch in working capital cycle or significant debt funded capex or support to group companies weakens financial risk profile, particularly liquidity and with debt to EBIDTA increasing to above 3 times.

About the Group

Incorporated in 1984, SIL is among the major producers of PV dyed yarn in India with 238,608 spindles. The company has 30 mmpa fabric manufacturing capacity, 72 mmpa fabric processing capacity and 48 mmpa denim fabric manufacturing capacity. Its flagship fabric brands are C9, Sangam Suitings and Sangam Denim. Incorporated in Dec 2021, SVL is a wholly owned subsidiary of SIL and is undertaking a green field project to set up a manufacturing unit.

Key Financial Indicators (Consolidated)

Particulars

Unit

2021

2020

Revenue

Rs crore

1369

1790

Profit after tax (PAT)

Rs crore

4

13

PAT margin

%

0.3

0.7

Adjusted debt / adjusted networth

Times

0.94

1.24

Adjusted interest coverage

Times

2.67

2.32

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned with outlook
NA Fixed Deposits NA NA NA 100 Simple FA/Positive

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Sangam Ventures Limited

Full

SVL is wholly owned subsidiary of SIL

Sangam (India) Limited

Full
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits LT 100.0 F A/Positive   -- 04-03-21 F A/Stable   --   -- --
All amounts are in Rs.Cr.
Criteria Details
Links to related criteria
The Rating Process
Understanding CRISILs Ratings and Rating Scales
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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