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Detailed Rationale CRISIL Ratings has migrated its rating on the bank loan facilities of Shree Rama Multi-Tech Limited (SRMTL) to ‘CRISIL BBB-/Stable/CRISIL A3’ from ‘CRISIL AA(CE)/Stable/CRISIL A1+(CE)’ .
The rating migration is driven by the revision in the approach of CRISIL Ratings towards credit enhancement provided by the guarantee. The revised approach is based on guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. This rating migration is driven solely by regulatory guidance and does not reflect any change in the credit profile of the bank loan facilities of SRMTL Ltd.
Earlier, CRISIL Ratings had factored in the strength of an unconditional, irrevocable and legally enforceable guarantee issued by Nirma Ltd (CRISIL AA/Stable/CRISIL A1+) for the rated bank loan facilities amounting to Rs 28 crore.
CRISIL Ratings had assessed the guarantee as legally enforceable, irrevocable and unconditional, covering the entire amount and tenure of the rated facility and given it due consideration while assigning the rating with a ‘CE’ suffix. However, based on the new regulatory guidance, the existing guarantee cannot be considered as a valid credit enhancing support structure for assigning rating with ‘CE’ suffix because it does not have a defined invocation/payment mechanism.
For more details on the revised approach, kindly refer to the CRISIL Ratings criteria document - ‘Criteria for rating instruments backed by guarantees’.
Accordingly, CRISIL Ratings has migrated the ‘CE’ rating for the above facilities to ‘CRISIL BBB-/Stable/CRISIL A3’, which was incidentally the unsupported rating for these facilities earlier. The rating on the proposed working capital facilities of Rs 52 crore has been reaffirmed at ‘CRISIL BBB-/Stable’.
The rating continues to reflect the company’s diversified products, strong clientele and financial flexibility being a part of the Nirma group. Operating margin in the first half of the current fiscal improved as product prices increased to pass on the earlier hike in input cost. The operating margin is expected to sustain as input costs have peaked and may abate. Furthermore, liquidity remains supported by unutilised working capital lines of Rs 9 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, CRISIL Ratings has considered the standalone business and financial risk profiles of SRMTL. CRISIL Ratings has also applied its group notch-up framework to factor in the extent of support available to SRMTL from the Nirma group.
CRISIL Ratings has also applied its criteria for rating instruments backed by corporate guarantees. However, based on the new regulatory guidance, the existing guarantee deed does not meet all the requirements to factor in support of a corporate guarantee for arriving at the ratings. |
Key Rating Drivers & Detailed Description Strengths: 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 to 60-65% of the revenue. The company also exports to Africa and Europe. Revenue is 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 group.
Weaknesses: Modest scale of operations and large working capital requirement: 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 investments towards expansion as well as replacement/modernisation of assets.
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 operating margin.
Average financial risk profile: Debt protection metrics moderated in fiscal 2022 because of steep decline in profitability. Interest coverage and net cash accrual to total debt (NCATD) ratios moderated to 3.60 times and 0.02 time, respectively, in fiscal 2022, from 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 10-15 times and 0.15-0.20 time, respectively, over the medium term.
Large contingent liability: Contingent liability of Rs 177 crore (interest overdue) as of September 2022, 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: Adequate Liquidity is backed by the financial flexibility being part of the Nirma group. On a standalone basis, SRMTL has liquidity supported by average unutilised working capital facility of Rs 9 crore apart from cash accrual vis-à-vis nil long-term debt. Furthermore, 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 SRMTL will continue to benefit from its strong track record, diversified product profile and established client relationships. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1993, SRMTL 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.
For the six months ended September 30, 2022, SRMTL reported profit after tax (PAT) of Rs 1.4 crore and operating income of Rs 100.2 crore, against net loss of Rs 2.9 crore and operating income of Rs 72.5 crore, respectively, for the corresponding period of the previous fiscal. |
About the Parent 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. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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 Bank Lenders & Facilities | ||||||||||||||||||||
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This Annexure has been updated on 24-Jan-2023 in line with the lender-wise facility details as on 19-Aug-2021 received from the rated entity.
Criteria Details
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