Detailed Rationale

CRISIL Ratings has reassigned its ‘CRISIL A1+(CE)’ rating to the short-term bank facilities of Shree Rama Multi-Tech Limited (SRMTL). The long-term rating on the cash credit facility of the company is reaffirmed at `CRISIL AA(CE)/Stable’ and the rating on the proposed working capital facility reaffirmed at ‘CRISIL BBB-/Stable’.

 

CRISIL Ratings had on July 22, 2022, revised its outlook on the cash credit bank facility of SRMTL.to ‘Stable’ from 'Negative’ while reaffirming the rating at ‘CRISIL AA(CE)’’

 

CRISIL Ratings takes into account the strength of the continuing, unconditional and irrevocable corporate guarantee by Nirma Limited (CRISIL AA/Stable/CRISIL A1+) on the bank facilities of SRMTL amounting to Rs 28 crore. CRISIL Ratings also understands that Nirma has taken measures to monitor the cash flow of SRMTL to ensure that all debt obligations are fully met on the due date.

 

The 'CRISIL BBB-/Stable' unsupported rating (without any credit enhancement) on the proposed long-term bank facility of SRMTL factors in the company’s diversified products, strong clientele, and financial flexibility being a part of the Nirma group. The hike in input cost impacted the operating margin in fiscal 2022. However, with gradual pass-on of the cost inflation, the operating margin should improve fiscal 2023 onwards. Further, liquidity remains supported by unutilised working capital lines of Rs 18 crore and nil long-term debt. These strengths are partially offset by modest scale of operations, large working capital requirement, susceptibility to fluctuations in raw material prices, and financial risk profile undermined by a large contingent liability.

Analytical Approach

For arriving at the ratings on the bank facilities guaranteed by Nirma, CRISIL Ratings has applied its criteria for rating instruments backed by corporate guarantees. The 'CE' suffix in the rating reflects the presence of an explicit credit enhancement feature owing to a payment structure that is designed to ensure full and timely repayment of the principal and interest obligations on the bank facilities backed by the corporate guarantee.

 

For arriving at the unsupported rating, CRISIL Ratings has applied its group notch-up framework to factor in the support available to SRMTL from the Nirma group.

Key Rating Drivers & Detailed Description

Strengths

Strength of continuing, unconditional and irrevocable corporate guarantee by Nirma

The credit enhanced rating is based on the strength of the continuing, unconditional and irrevocable guarantee provided by the guarantor (Nirma). The credit quality of the rated facility thus reflects the credit quality of the guarantor. Nirma has taken measures to monitor the cash flow of SRMTL to ensure full and timely servicing of debt obligations on the due date.

 

Diversified product profile and strong customer base

SRMTL manufactures laminated tubes, specialty packaging products and laminates. The company has a diversified client base, with the top 10 customers contributing 60-65% to revenue. The company also exports to Africa and Europe. Revenue shall be supported by healthy order flow, backed by regular order inflow from existing clients and new orders from overseas clients.

 

Financial flexibility being part of the Nirma group

SRMTL is a part of the Nirma group, which holds 42.51% stake in the company. The external bank loan facility guaranteed by Nirma suggests that SRMTL enjoys financial flexibility as part of the Nirma group.

 

Weaknesses

Modest scale of operations

Modest scale is reflected in revenue of Rs 120-150 crore for the five fiscals through 2022. Capacity utilisation remains at ~50%. Revenue may remain constrained in the near term owing to ageing of assets that limits the achievable utilisation. Inadequate cash flow over the years has constrained the investments towards the expansion as well as replacement/modernisation of assets.

 

Large working capital requirement

The working capital cycle may remain stretched in the near term and will remain closely monitored. Gross current assets were 156 days as on March 31, 2022, driven by receivables of 68 days and inventory of 80 days. The company typically gets credit of 45-60 days from the suppliers.

 

Susceptibility to fluctuations in raw material prices

As the cost of procuring the major raw materials (polymers and aluminum) accounts for bulk of the total production cost, variation in their prices may drastically impact profitability. Operating margin was impacted in fiscal 2022 due to increase in raw material prices and job work-related expenses. Limited ability to pass on any drastic price hike further constrains the margin.

 

Average financial risk profile

Debt protection metrics moderated in fiscal 2022 owing to steep decline in profitability. Interest coverage and net cash accrual to total debt (NCATD) ratios moderated to around 3.60 times and 0.02 time, respectively in fiscal 2022, from around 13.00 times and 0.16 time, respectively, in fiscal 2021, due to lower operating profit and cash accrual. Interest coverage and NCATD ratios are expected to improve to around 10-15 times and 0.15-0.20 time, respectively, over the medium term.

 

Large contingent liability

Contingent liability of Rs 164 crore (interest overdue) as on March 31, 2021, pertains to the debt restructuring scheme filed by the company in the Honorable High Court of Gujarat, which rejected the scheme in its order dated February 20, 2020. SRMTL has filed a review petition against the order. Also, it has entered into an agreement with non-convertible debenture/term loan lenders to repay the principle through the rights issuance in fiscal 2023. As a part of the Nirma group, the company is unlikely to be adversely affected by any delay in raising funds. However, settlement of this liability and its funding remain key monitorables.

Liquidity: Strong

Liquidity is strong, backed by the credit enhancement in the form of corporate guarantee and strong liquidity of the guarantor (Nirma). On a standalone basis, SRMTL has adequate liquidity, supported by average unutilised working capital facility of Rs 18 crore apart from cash accrual vis-à-vis nil long-term debt. Further, while SRMTL plans capital expenditure of Rs 10-15 crore, it will likely be funded entirely through cash accrual and would be deferrable in case of cash flow shortage.

Outlook: Stable (for cash credit facility)

The outlook reflects CRISIL Ratings’ view of a ‘Stable’ outlook on the credit risk profile of the guarantor, Nirma

 

The outlook signifies that the financial risk profile of Nirma has strengthened with deleveraging in the Nirma group and is supported by its healthy business risk profile

 

Outlook: Stable (for proposed working capital)

SRMTL will continue to benefit from its strong track record, diversified product profile and established client relationship.

Rating Sensitivity Factors

Upward Factors

• Upgrade in the ratings of Nirma
• Significant improvement in the capital structure and debt protection metrics

 

Downward Factors

• Downgrade in the ratings of Nirma by 1 notch
• Non-fulfilment of obligations referred to under the guarantee and non-adherence to payment timelines critical to ensure performance of the credit enhancement mechanism
• Considerable decline in business performance, profitability, or adverse outcome on crystallisation of the contingent liability impacting the financial risk profile of the company

Adequacy of credit enhancement structure

The rating on the cash credit facility of SRMTL reflects the unconditional and irrevocable guarantee from Nirma. Nirma has taken measures to monitor the cash flow of SRMTL to ensure timely servicing of debt (principal, interest, and other monies payable on the guaranteed bank facility) on the due date.

Unsupported ratings: CRISIL BBB-

CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SRMTL. The company enjoys financial flexibility being a part of the Nirma group. CRISIL Ratings has also applied its group notch-up framework to factor in the extent of support available to SRMTL from the Nirma group.

About the Company

SRMTL, incorporated in 1993, is a Gujarat-based integrated packaging company that manufactures laminated tubes and specialty packaging products. It has installed capacity of 9,514 lakh multi-layer tubes. It has more than 150 clients in India and abroad. SRMTL is a part of the Nirma group, which holds 42.51% stake in the company

About the Guarantor

Nirma, set up by Dr Karsanbhai K Patel in 1980 to manufacture detergents, has expanded operations into soaps, salt, chemicals, and processing of minerals. It has plants in Mehsana, Ahmedabad, Vadodara, Porbandar and Bhavnagar in Gujarat and in Searles Valley in the US.

List of covenants

The material covenants of the instruments are as follows:

• Nirma shall maintain adjusted tangible networth of more than Rs 100 crore
• Adjusted tangible networth of SRMTL shall be positive

Any other information: Not applicable