| Sportking India Limited | ||||||
| Ratings reaffirmed at 'CRISIL A/Stable/CRISIL A1' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities of Sportking India Limited (Sportking).
Revenue is expected to grow by 5-6% in fiscal 2024, driven by nearly 20% rise in volume. The company has expanded its current capacity by almost 35% in fiscal 2023. The first phase of the capital expenditure (capex) that entailed addition of 40,800 spindles became operational in the second half of fiscal 2023. The second phase of 63,072 spindles commenced production towards end of fiscal 2023. With total of 234 MT/day capacity, the company should reach an average utilisation of 90-95% and derive nearly 20% growth in volume. High utilisation levels will be driven by healthy downstream demand, reducing inventory with retailers and increased demand from fabric makers, with easing of raw material prices. Other conducive factors include increased demand from China with reopening of the economy, and enhanced competitiveness of domestic cotton yarn, with Pakistan experiencing a lower cotton crop yield. Prices may decline by 15% in this cotton season, owing to a higher yield in fiscal 2024 over the previous fiscal.
Operating margin may normalize from to nearly 12% in this fiscal from 12.6% in fiscal 2023 as the company reported high profit in first quarter of the previous fiscal on account of elevated cotton yarn spreads. As the differential between prices of cotton yarn and cotton (cotton yarn spreads) normalise this fiscal, the margin will reduce, but will remain healthy, at levels similar to the pre-Covid era. Operating margin is likely to improve in the medium term with cost savings from solar power projects undertaken by the company.
The financial risk profile remains healthy, backed by a comfortable gearing and satisfactory debt protection metrics. Small capex being incurred this fiscal to set up a solar plant, and higher procurement of inventory in the next cotton season may increase long and short-term debt in fiscal 2024. Resultantly, gearing may go up to 0.68 time as on March 31, 2024 from 0.57 time as on March 31, 2023, due to the buyback of shares, yet it will remain below 0.6 time in the medium term. Interest coverage ratio, though likely to normalise from 12.1 times in fiscal 2023 to 8.5-9 times in fiscal 2024, will be higher than that seen pre-Covid. Working capital requirement will remain high given the nature of business. However, higher cash accrual will reduce dependence on external working capital debt in the medium term.
The ratings continue to reflect the strong position of Sportking in the compact cotton yarn industry, its large scale of operations and healthy financial risk profile. 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 an 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 revenue of over Rs 2,205 crore in fiscal 2023. 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 2024, overseas demand is expected to improve as Indian spinners have become more competitive on account of a better cotton yield over the previous fiscal, and a lower cotton yield in Pakistan. Structural changes in overseas markets, such as the China+1 strategy, will also favour players like Sportking.
Large scale of operations and healthy operating efficiency Post the expansion, Sportking will consume about 6 lakhs bales of cotton every year and thus become one of the largest buyers of cotton in India. Large scale of procurement will keep its bargaining power high over the medium term. 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.
Healthy capacity utilisation of nearly 95%, following addition of 40,800 spindles in September 2022 and 63,072 spindles in March 2023, should strengthen the business risk profile.
Operating margin should fare better than historical trends due to improved spreads but will moderate from peak levels of fiscal 2022 owing to compression in spreads.
Improving and healthy financial risk profile The financial risk profile remains healthy, backed by a comfortable gearing and satisfactory debt protection metrics. Small capex being incurred to set up a solar plant, and higher procurement of inventory in the next cotton season may increase long and short-term debt in fiscal 2024. Resultantly, gearing may go up to 0.68 time as on March 31, 2024, from 0.57 time as on March 31, 2023, due to the buyback of shares, yet it will remain below 0.6 time in the medium term. Interest coverage ratio, though likely to normalise from 12.1 times in fiscal 2023 to 8.5-9 times in fiscal 2024, will be higher than that seen pre-Covid. Working capital requirement will remain high given the nature of business. However, higher cash accrual will reduce dependence on external working capital debt in the medium term.
Financial flexibility is healthy, as reflected in low 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 revenue from yarn and thus remains susceptible to volatility in prices of cotton and cotton yarn. As a result, the operating margin has fluctuated between 10% and 28% over the 10 years through fiscal 2023. 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 foreign exchange forward contracts or working capital limits in foreign currency.
Large working capital requirement Gross current assets are high estimated around 131 days as on March 31, 2023, driven by large inventory and receivables. The company maintains a sizeable stock of raw cotton bales, which are procured on a seasonal basis. Hence, there is higher reliance on working capital debt. |
Liquidity: Strong Liquidity is marked by sufficient cash accrual of over Rs 200 crore and negligible bank limit utilisation. Expected cash accrual of over Rs 200 crore in the next two fiscals will comfortably cover the term debt obligation of Rs 40-80 crore and the planned capital expenditure for the next two fiscals. Bank limit of around Rs 350 crore averaged 15% over the 12 months ended March 31, 2023. |
Outlook: Stable Sportking will maintain its strong market position and continue to benefit from its increased scale of operations over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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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 manufacturing 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. |
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)
*Interchangeable with packing credit/packing credit in foreign currency ^forward derivative limit |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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