Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating to the long term bank loan facilities of Sintex Industries Ltd. (SIL)

 

The re-affirmation of ratings centrally factors the strong parentage of Reliance Industries Ltd (RIL; ‘CRISIL AAA/Stable/CRISIL A1+') and the financial, operational and managerial support SIL receives from RIL given the strategic importance of former to the latter. RIL has 70% shareholding in SIL and has provided unconditional and irrevocable guarantee to the entire term debt of SIL. The rating also factors in RIL's ability to successfully turn around stressed assets and nurture businesses by leveraging its experience across diverse sectors including textiles.

 

The assets and operations of SIL bode well in the overall textile value chain of RIL and provide for synergy benefits at group level by way of optimization with RIL’s fibre/yarn/fabric/garment segment on the supply side and with the apparel & fashion segment housed under Reliance Retail Ventures Ltd (RRVL; CRISIL AAA/Stable/CRISIL A1+) on the demand side.

 

SIL itself has established market position being one of the largest cotton yarn spinners in terms of installed capacity at single location in India and with capability to produce a wide range of yarn count, value added blends and special blends along with established relationships with suppliers and customers. These strengths are partially offset by modest financial risk profile, and susceptibility to sharp volatility in cotton and yarn prices.

 

Operating income grew by ~20% during fiscal 2024 owing to higher production with earnings before interest, tax, depreciation and amortization (EBITDA) margin improving from 4.0% in fiscal 2023 to 5.7% in fiscal 2024 due to better absorption of fixed costs on account of increase in sales volumes. The operating performance is expected to improve over the medium-term as synergy benefits accrue owing to linkages with RIL group.

 

Revenue for six months ended September 2024 is around ~Rs 1,900 crores with EBITDA margin improving from 5.7% for fiscal 2024 to ~6.7% in the first half of fiscal 2025 owing to improvement in sales realizations leading to improvement in earnings profile. The end user demand has been muted in ongoing fiscal however, revenue for fiscal 2025 is expected to reflect a marginal growth over fiscal 2024 due to improved sales realization. Further, margins are expected to have a upside in the current fiscal owing to expected power costs savings and better sales realizations. Over the medium term, the synergy benefits are expected to improve the margins further due to strong parentage.

 

SIL was under financial stress and recently got acquired at the end of March 2023 by RIL and Assets Care & Reconstruction Enterprise Limited (ACRE) after their resolution plan was accepted by the NCLT. As such, the financial risk profile although improved in fiscal 2024 from fiscal 2023 remains modest due to large bank debt and weak cash accruals. Net debt to EBITDA (excluding optionally fully convertible debenture [OFCD] subscribed by RIL) stood at around 8.9 times in fiscal 2024. Debt protection metrics also remained modest with adjusted interest coverage at 1.29 times. However, with expected ramp up in operations, the operating profits should ramp up gradually over the medium term and shall result in improvement in the financial risk profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SIL and its subsidiary, as they have operational, financial linkages and common management.

 

CRISIL Ratings has also applied its parent notch-up framework to factor in the support available to SIL from RIL.

 

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:

• Expected synergy benefits from linkages with textile business of RIL group: RIL is present across the entire value chain of the textile business. The textile related manufacturing facilities of RIL and other group entities are primarily located in Gujarat and surrounding areas. SIL is expected to benefit from RIL’s domain experience in the textile business and track record of turning around stressed assets. The benefit of forward integration could also be accrued as yarn manufactured by SIL can be used for garment manufacturing in group’s facilities. The common sourcing of raw material and proximity of RIL group’s plant with SIL’s plant will lead to cost and logistics savings.

 

• Strong support from parent; RIL: RIL is the majority shareholder having equity stake of 70% post implementation of resolution plan. The company has received financial support from RIL which has infused Rs 600 crore by way of equity and Rs 900 crores by way of OFCD (optionally fully convertible debentures) totalling to Rs. Further, RIL has extended unconditional and irrevocable guarantee to the entire term debt of SIL. Besides this, SIL will get operational and managerial support as highlighted above.

 

• Established market position: SIL is amongst the larger cotton yarn players and has manufacturing capacity of over 6.73 lakh spindles as on March 31, 2024. It also has a huge network with established suppliers and customers. It has capability to manufacture wider range of yarn count and specialised yarn leading to reduced dependence on market prices of yarn and increased customer stickiness. The product portfolio is also diversified with capability to manufacture blended yarn such as polyester cotton and special blend cotton modal, flax/ viscose etc which is supplied to marquee domestic and global customers.

 

It is further aided by proximity of its plant to the port which provides easy access to export markets which it undertakes through its subsidiary, BVM Overseas Ltd leading to geographical diversification. The market position will be further enhanced with RIL’s network of suppliers and customers.

 

Weaknesses:

• Modest financial risk profile: SIL was under financial stress and got acquired at the end of March 2023 by RIL and Assets Care & Reconstruction Enterprise Limited (ACRE) after their resolution plan was accepted by the NCLT. As such, the financial risk profile although improved in fiscal 2024 from fiscal 2023 remains modest due to large bank debt and weak cash accruals. Net debt to EBITDA (excluding optionally fully convertible debenture [OFCD] subscribed by RIL) stood at around 8.9 times in fiscal 2024. Debt protection metrics also remained modest with adjusted interest coverage at 1.29 times. However, with expected ramp up in operations, the operating profits should ramp up gradually over the medium term and shall result in improvement in the financial risk profile. Further capex is expected to remain minimal and shall be funded out of internal accruals. Any capex pertaining to expansion is contingent on realization of blocked subsidy amount.

 

Additionally, the financial risk profile is supported by presence of long tenure debt with ballooning repayment which will lead to minimal repayment in the initial years. Any capex outlay over the medium term is expected to be carried out of accruals.

 

• Susceptibility to volatility in cotton and yarn prices: SIL’s key raw material, cotton, is a highly seasonal commodity. Further, good quality Indian 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, thereby exposing the company’s margin to any steep decline in cotton prices subsequent to procurement. However, the risk would be partly offset by procurement of cotton at group level leading to lower pressure on working capital requirements.

Liquidity: Strong

SIL has term debt against which repayments will commence in fiscal 2026. SIL has principal repayments of ~Rs 143 crores in fiscal 2026 for which the net cash accruals are expected to be sufficient due to expected improvement in profitability in next fiscal. The liquidity is also supported by cash and cash equivalents of ~Rs 70 crore as on September 30, 2024.

 

However, SIL's liquidity is primarily driven by the ample liquidity of its parent RIL, and SIL’s ability to raise funds at competitive rates as a RIL group entity. RIL has exceptional financial flexibility given its demonstrated ability in accessing the capital markets, its large, reported cash and liquid investments of Rs 2,19,899 crore as on September 30, 2024, and significant bank lines, which remain moderately utilized.

Outlook: Stable

CRISIL Ratings believes SIL will continue to benefit from its strategic importance to RIL and established market position despite moderate financial risk profile. The stable outlook reflects CRISIL Rating’s view of stable outlook on the credit ratings of RIL.

 

CRISIL Ratings believes RIL’s credit risk profile will continue to be supported by the highly integrated operations in the core business of O2C, healthy profitability in its digital and retail businesses, and exceptional liquidity.

Rating sensitivity factors

Upward factors

• Realisation of expected synergies with RIL group leading to sustained improvement in RoCE
• Increase in shareholding of RIL to more than 80% along with majority representation on entity’s board

 

Downward factors

• Sustained decline in operating performance on account of lower synergies leading to subdued RoCE
• Any weakening in the credit profile of RIL or reduction in ownership of SIL to less than 50%.
• Any weakening of support philosophy of RIL towards SIL.

About the Company

SIL is a leading manufacturer of yarns and fabrics which was incorporated in 1935 as Bharat Vijay Mills in Kalol, Gujarat. The yarn division is situated in Lunsapur, Gujarat and textile division is situated in Kalol, Gujarat. The capacity stood over 6.73 lakh spindles as on March 31, 2024. The company produces 100% cotton combed compact, 100% carded compact and 100% wet linen yarns and various blended yarns such as poly/cotton and special blends such as flax/cotton , flax/viscose, cotton/modal, cotton/bamboo etc.

 

On March 28, 2023, the company was acquired by RIL and ACRE post allotment of shares following the approval of their resolution plan by NCLT. RIL holds 70% stake while ACRE and erstwhile secured financial creditors holds stake of 10% and 20% respectively.

About the Parent

RIL is one of India's largest private sector companies, with diverse interests, including petrochemicals, oil refining, and upstream oil and gas exploration and production. RIL has strong competitiveness in the global oil refining and petrochemicals business, arising from its integrated business model with superior Complexity Index of 21.1 for its Jamnagar site, which makes it amongst the most complex sites in the world.

 

RIL has also established its presence in the consumer facing business space by providing retail and digital services, which currently are RIL's principal growth driver. RRL is India's largest retail entity by revenue, while RJIL has also become India's largest telecom service provider by revenue market share. The group is now in the process of establishing itself in the green energy space.

Key Financial Indicators(consolidated)- Adjusted by CRISIL Ratings

Particulars	Units	2024	2023
Revenue	Rs crore	3632.19	3170.31
PAT	Rs crore	(17)	2,761*
PAT margin	%	(0.4)	85.9
Adjusted debt/adjusted networth	Times	1.81	1.78
Interest coverage	Times	1.29	0.17

*PAT before exceptional items is -ve Rs 3525.07 crore

Any other information: Not Applicable