Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Sportking India Ltd (Sportking; part of Sportking group) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL A’. The rating on the short-term facilities has also been reaffirmed at ‘CRISIL A1’.

 

The change in outlook reflects the improvement in the business risk profile of Sportking due to the strengthening of market position in the compact cotton yarn industry. This is due to a full year of near-full capacity utilisation resulting in volumes growing by 32% on year in fiscal 2024 post capacity addition. Sportking showcased increase in scale, along with healthy operating efficiency and comfortable financial risk profile, despite the impact on the industry last fiscal. Although the company did not meet the rating sensitivity factors set by CRISIL Ratings due to the adverse impact on the industry last fiscal, Sportking’s resilient and improving performance has been factored in the change in outlook.

 

Revenue in fiscal 2025 is estimated to remain similar to that in fiscal 2024 at Rs 2400-2450 crore owing to continued full utilisation of capacity with healthy demand from downstream segments and stable cotton and cotton yarn prices. In the first quarter of fiscal 2025, Sportking has already reported operating income of Rs 634 crore. This revenue growth will be on the back of 9% increase in operating income in fiscal 2024, due to the 32% increase in volume and 19% degrowth in realisation. Expansion in capacity by almost 35% by the end of fiscal 2023 has resulted in 32% increase in volume sales for fiscal 2024. On the other hand, prices declined, owing to higher availability of cotton in fiscal 2024 over the previous fiscal.

 

Operating margin is expected to remain at 10-12% over the medium term, higher than the 10% achieved last year. This is due to cost savings from solar power projects undertaken by the company and a reduction in the inventory losses experienced in the first half of the previous fiscal, as the industry stabilises. Operating margin stood at 11.7% in the first quarter of fiscal 2025.

 

The financial risk profile remains healthy, backed by comfortable gearing and moderate debt protection metrics. The debt levels though had increased in fiscal 2024 to Rs 920 crore from Rs 477 crore in fiscal 2023 mainly due to debt funded capital expenditure (capex) for solar plant and increase in short term debt due to inventory reverting to normal levels. However, debt is expected to reduce to Rs 700-800 crore in fiscal 2025 in the absence of major capex and utilisation of cash accruals for working capital needs. The interest coverage and net cash accrual to adjusted debt (NCAAD) ratios are expected to improve to 4.2-4.3 times and 0.20 time, respectively, in the medium term from 4.08 times and 0.17 time, respectively, in fiscal 2024. Moreover, gearing and total outside liabilities to tangible networth (TOLTNW) ratios are also likely to improve from 1.01 and 1.16 times, respectively, as on March 31, 2024 to below 0.8 and 0.9 time, respectively, in the medium term.

 

These strengths are partially offset by the large working capital requirement and susceptibility to volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

Preference capital has been treated as equity due to a low coupon rate and no redemption in the medium term.

Key Rating Drivers & Detailed Description

Strengths:

• Strong position in the cotton yarn industry: Sportking has a strong market position in the compact cotton yarn industry, with total spindle capacity expanded to 3.79 lakh and operating income of over Rs 2,413 crore in fiscal 2024. The company benefits from its diversified geographic reach across several markets such as Bangladesh, China, Egypt and the US, and its longstanding relationships with garment retailers in the US and Europe. In fiscal 2025, overseas demand is expected to improve as Indian spinners have become more competitive on account of domestic cotton prices remaining below international prices. Structural changes in overseas markets, such as the China+1 strategy, will also favour players such as Sportking.

 

• Large scale of operations and healthy operating efficiency: Post expansion, Sportking has demonstrated capacity utilisation of ~90% resulting in sales volume growth of ~32%. The company is looking to de-risk its exposure to basic cotton yarn products, by focusing on value-added products such as contamination-free, sustainable and multi-twist cotton yarn, which fetch higher margin.

 

Operating margin should fare better than historical trends due to stable cotton prices resulting in reduced inventory prices.

 

• Improving and healthy financial risk profile: The financial risk profile remains healthy, backed by comfortable gearing and satisfactory debt protection metrics. The debt levels though had increased in fiscal 2024 to Rs 920 crore from Rs 477 crore in fiscal 2023 mainly due to debt funded capex for solar plant and increase in short term debt due to inventory reverting to normal levels. However, debt is expected to reduce to Rs 700-800 crore in fiscal 2025 in the absence of major capex and utilisation of cash accruals for working capital needs. The interest coverage and NCAAD ratios are expected to improve to 4.2-4.3 times and 0.20 time, respectively, in the medium term from 4.08 times and 0.17 time, respectively, in fiscal 2024. Moreover, gearing and TOLTNW ratios are also likely to improve from 1.01 and 1.16 times, respectively, as on March 31, 2024 to below 0.8 and 0.9 time, respectively, in the medium term.

 

Financial flexibility is healthy, as reflected in moderate bank limit utilisation. This, coupled with adequate liquidity, will continue to support debt servicing. Larger-than-expected, debt-funded capex or dividend payout, resulting in a weaker capital structure, will remain a key monitorable.

 

Weaknesses:

• Susceptibility to volatility in raw material prices and forex rates: The company derives over 90% of its revenue from yarn and thus remains susceptible to volatility in the prices of cotton and cotton yarn. As a result, operating margin has fluctuated between 10% and 28% over the 10 fiscals through 2024. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021) where demand spiraled and then fell rapidly. Additionally, as Sportking derives close to half of its revenue from exports, it also remains exposed to fluctuations in forex rates. This risk is mitigated via forex forward contracts or working capital limits in foreign currency.

 

• Large working capital requirement: Gross current assets are high estimated around 178 days as on March 31, 2024, driven by large inventory and receivables.  The company maintains a sizeable stock of raw cotton bales, which are procured seasonally. Hence, there is higher reliance on working capital debt.

Liquidity: Strong

Liquidity is marked by sufficient annual cash accrual of Rs 160-180 crore and moderate bank limit utilisation. With no major capex expected, cash accrual of over Rs 160 crore per annum in the next two fiscals will comfortably cover the term debt obligation of Rs 60-80 crore. Utilisation of bank limit of Rs 460 crore averaged 52% over the 12 months ended March 2024.

Outlook: Positive

Sportking is expected to maintain its strong market position and continue to benefit from its increased scale of operations over the medium term.

Rating Sensitivity factors

Upward factors

• Stable revenue along with healthy operating profitability of 10-12%, thereby improving business risk profile
• Increased cash generation, efficient working capital management and prudent funding of capex, strongly improving debt metrics

 

Downward factors

• Weak operating performance resulting in operating profitability of 7-8% on a sustained basis
• Weakened cash generation, along with elongation in working capital cycle and increased capex impacting debt metrics

About the Company

Sportking, incorporated in February 1989, is a part of the Sportking group. The company manufactures cotton, synthetic and blended yarn in counts ranging from 20s to 46s. It has units in Ludhiana and Bathinda, both in Punjab. The company has a large capacity of 3.79 lakh spindles and dyeing capacity of 20 tonne per day. It manufactures value-added yarns, such as compact, sustainable and contamination-free cotton yarn, which provide higher realisations than normal cotton yarn.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Term loan	NA	NA	31-Mar-2029	35.3	NA	CRISIL A/Positive
NA	Term loan	NA	NA	30-Sep-2031	49.2	NA	CRISIL A/Positive
NA	Cash credit*	NA	NA	NA	460	NA	CRISIL A/Positive
NA	Foreign exchange forward^	NA	NA	NA	38.81	NA	CRISIL A/Positive
NA	Term loan	NA	NA	30-Sep-2027	54.3	NA	CRISIL A/Positive
NA	Term loan	NA	NA	30-Jun-2027	25.4	NA	CRISIL A/Positive
NA	Term loan	NA	NA	31-Mar-2031	37.5	NA	CRISIL A/Positive
NA	Term loan	NA	NA	30-Sep-2031	47.4	NA	CRISIL A/Positive
NA	Term loan	NA	NA	31-Mar-2028	8.35	NA	CRISIL A/Positive
NA	Term loan	NA	NA	31-Mar-2031	46.45	NA	CRISIL A/Positive
NA	Letter of credit	NA	NA	NA	65	NA	CRISIL A1
NA	Term loan	NA	NA	30-Sep-2031	94.5	NA	CRISIL A/Positive
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	37.79	NA	CRISIL A/Positive

 *Interchangeable with packing credit/packing credit in foreign currency

^forward derivative limit