Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Vardhman Textiles Limited (VTXL; part of the Vardhman group).

 

The ratings continue to reflect the strong and diversified business risk profile of the Vardhman group, especially in the textiles business, and healthy operating capability. The ratings also factor in strong financial risk profile and robust liquidity. These strengths are partially offset by large working capital requirement, modest market position in the steel industry and susceptibility to volatility in input prices.

 

After an extraordinary fiscal 2022 (in terms of strong revenue growth and decadal high operating profitability), revenue growth will moderate in the first half of fiscal 2023 amid decline in exports and costlier cotton, resulting in lesser cotton yarn-cotton spreads. However, higher new cotton crop expected this season and likely improvement in export competitiveness amid lowering of cotton prices will increase export demand, while domestic demand should remain steady. Weak performance in the first half of fiscal 2023 and stretch in realisation will result in moderation in revenue, while the operating margin may contract to 12-13% in fiscal 2023 from peak levels of ~24% in fiscal 2022. Thus, cash accrual is projected at Rs 800-900 crore this fiscal but is expected to increase to Rs 1,200-1,500 crore over the medium term, driven by healthy growth potential and strong market position.

 

Vardhman Special Steels (VSSL) reported healthy performance in fiscal 2022, supported by increase in sales volume (15.33% year-on-year) and an uptick in realisation. Revenue increased by 47.5% to Rs 1,390 crore in fiscal 2022 from Rs 942 crore in fiscal 2021. Volume grew on account of upward trend in the automobile sector, primarily four-wheelers. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) grew to Rs 191 crore in fiscal 2022 from Rs 113 crore in the previous fiscal, driven by improved realisations, increase in the share of value-added products and cost-optimisation initiatives undertaken by the group; the Ebitda margin, too, improved to 13.7% from 12.0% in the said period. Profit grew to Rs 101 crore in fiscal 2022 from Rs 44 crore in fiscal 2021.

 

Financial risk profile of the group remains robust, supported by healthy cash accrual and moderate debt levels. Capital expenditure (capex) is expected to be moderate over the next two fiscals. Thus, net debt to Ebidta, which stood at 2.41 times in fiscal 2021 and improved to 0.84 time in fiscal 2022, is projected at below 1.25 times over the medium term.

 

Liquidity remains comfortable, with consolidated cash and equivalents of over Rs 1,800 crore as on March 31, 2022, and unutilised bank limit of over Rs 1,700 crore as on October 30, 2022 (backed by drawing power). Against this, debt repayment was modest at ~Rs 500 crore in fiscal 2023.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of VTXL and its subsidiaries, Vardhman Acrylics Ltd (Vardhman Acrylics) and Vardhman Spinning & General Mills Ltd. This is because all the entities, collectively referred to as the Vardhman group, are in the textile business and have an integrated treasury and strong intra-group operational linkages, including procurement of cotton. The business and financial risk profiles of the subsidiary of VTXL, VTL Investments Ltd, and its associate, VSSL, have also been combined because of history of support from the group and demonstrated track record. The business and financial risk profiles of Vardhman Yarns and Threads Ltd (VYTL) have not been included since fiscal 2017, as VTXL has divested most of its stake in VYTL and is now a minority shareholder.

 

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:

Strong, diversified business risk profile, especially in the textiles business: The Vardhman group is present across the textile, fibre and steel segments, which accounted for 85%, 3% and 12% of the revenue, respectively, in fiscal 2022, Though the group is a small player in the steel business, it has a strong market position in the cotton yarn and fabrics segment, backed by large capacity and established relationships with leading global apparel manufacturers. It is one of the largest spinners in the domestic market and has installed capacity of 12 lakh spindles, accounting for 2% of the total installed spindles in India. Additional capacities of around 97,000 spindles to be added by fiscal 2025 and 1,30,000 spindles by fiscal 2026 should help sustain the healthy growth momentum over the medium term.

The group is also among the top three woven fabric manufacturers in India, with grey and processed fabric capacity of 1,550 looms and 170 million metre per annum, respectively. It is an approved supplier to large retailers, such as Wal-Mart (rated 'AA/Stable/A-1+' by S&P Global Ratings), GAP (rated 'BB-/Negative' by S&P Global Ratings), Hennes & Mauritz and Aditya Birla Fashion & Retail Ltd ('CRISIL AA/Stable/CRISIL A1+'). The group is also one of the largest players in the domestic acrylic fibre market with capacity of 20,000 tonne per annum (TPA). The capacity expansion at Madhya Pradesh will augment the company's presence in the textile sector.

Healthy operating capability: The group's strong business position in the textiles business is reinforced by its healthy operating capability. The group has continuously invested towards enhancing its spinning productivity. Being one of the largest consumers of raw cotton in the country'it procures over 15 lakh bales per annum, the group enjoys a preferred-buyer status and considerable pricing benefits.

 

After an extraordinary fiscal 2022 (in terms of strong revenue growth and decadal high operating profitability), revenue growth will moderate in the first half of fiscal 2023 amid decline in exports and costlier cotton, resulting in lesser cotton yarn-cotton spreads. However, higher new cotton crop expected this season and likely improvement in export competitiveness amid lowering of cotton prices will increase export demand, while domestic demand should remain steady. Weak performance in the first half of fiscal 2023 and stretch in realisation will result in moderation in revenue, while the operating margin may contract to 12-13% in fiscal 2023 from peak levels of ~24% in fiscal 2022. Thus, cash accrual is projected at Rs 800-900 crore this fiscal but is expected to increase to Rs 1,200-1,500 crore over the medium term, driven by healthy growth potential and strong market position.

 

Strong financial risk profile: Net cash accrual may decline to Rs 800-900 crore in fiscal 2023 and Rs 1,100-1,200 crore in fiscal 2024 (from Rs 1,682 in fiscal 2022), led by average operating profitability. Capex will likely remain moderate over the next three years; hence, debt should decrease to Rs 1,200-1,300 crore in fiscals 2023 and 2024 from Rs 2,144 crore currently. Better profitability and prudent debt funding will aid debt protection metrics. However, any sharp increase in short-term debt for stocking of cotton is a monitorable.

 

Debt/Ebitda is expected at 0.93 time in fiscal 2023 compared with 0.84 time in fiscal 2022, aided by lower debt and higher operating margin. The ratio is expected below 1 time in fiscal 2024 because of moderation in debt and operating profit.

 

Weaknesses:

Vulnerability of operating profitability to volatility in input prices: The group remains susceptible to volatility in prices of the key raw materials, cotton (which accounts for half the cost of yarn) and steel. Cotton prices are exposed to risks such as unfavourable monsoon or pest attacks and are linked to the international demand/supply scenario. Though the group benefits from the large procurement and adequate risk management systems of VTXL, profitability remains susceptible to volatility in raw material prices. Operating margin fluctuated between 13.9% and 23.9% in the past decade and was adversely affected in fiscals 2020, 2018, 2015 and 2012, when profitability was hit by slowdown in demand from China and government interventions. Similarly, in the steel business, operating margin depends on prices of raw materials, such as sponge iron, manganese and nickel.

 

Large working capital requirement: As cotton is a seasonal crop, its availability and quality are general issues that come up after the cotton season. Driven by its commitment to deliver quality products, the group procures cotton during the season and maintains large inventory at the end of the fiscal. Inventory levels fall by September as the stock is consumed in the first half of the fiscal. They start increasing once the cotton season begins from October and remain high in March. VTXL has receivables averaging 51 days (though they were higher at 63 days as on March 31, 2021, amid the Covid-19 pandemic). Against this, the group had payables of about 29 days.

 

Gross current assets were high at 275 days as on March 31, 2021, and 196 days as on March 31, 2022 (against an average of 200-220 days for the five fiscals prior to March 2022). In the steel business, dependence on the automotive industry has resulted in sizeable working capital requirement, as reflected in receivables of 59 days and inventory of 93 days as on March 31, 2022.

Modest, though improving, market position in the steel business: Through VSSL, the group has a relatively smaller presence in the steel business. As it derives over 85% of its revenue from the automotive sector, it remains susceptible to cyclicality in this segment. Better utilisation and focus on cost optimisation ensured steady performance, as reflected in the operating margin rising to 13.7% in fiscal 2022 from 2.4% in fiscal 2015. 

 

VSSL saw one of its best quarterly performances in terms of topline and profit after tax (PAT) in the first quarter of fiscal 2023 owing to higher realisation, revived domestic and export demand and increase in volume growth. Growth is attributed to about 20% increase in volume and about 20% price increase from original equipment manufacturers. With better-than-expected recovery in demand from end-user segments, revenue should remain higher than expected. Sizeable volume but higher cost may contribute to slightly lower margin in fiscal 2023 than expected. However, cost-control measures and initiatives undertaken for better procurement will support the margin in the coming years, with debt protection metrics expected to remain comfortable over the medium term.

Outlook: Stable

The Vardhman group will sustain its healthy credit risk profile, backed by strong market position in the textiles business, diversified product portfolio and strong liquidity.

Rating Sensitivity factors

Upward Factors

• Substantial ramp-up in revenue and market share, driven by product diversity, with the operating margin remaining steady at over 18%
• Debt-to-Ebitda ratio declining below 1.0 time on a steady-state basis
• Healthy liquidity surplus of at least Rs 800 crore

 

Downward Factors  

• Net debt-to-Ebitda ratio exceeding 1.2 times on a sustained basis in fiscal 2023 due to larger-than-expected capex, stretch in the working capital cycle or a sharp decline in Ebitda
• Sizeable reduction in liquidity due to buyback of shares, more-than-expected dividend payout, and additional capex

About the Vardhman group

The Vardhman group, headed by Mr S P Oswal, is one of the leading textile groups in India, with operations across the yarn, fabric, sewing threads, fibre, special alloys and garment sectors. In fiscal 2022, the textile business accounted for 85% of the consolidated operating income, followed by the fibre segment (3%) and the steel alloy segment (12%). The group has 18 production plants in Punjab, Madhya Pradesh, Gujarat and Himachal Pradesh.

 

VSSL produces special and alloy steels and has capacity of 200,000 TPA of steel billets and 180,000 TPA of steel-rolled products. Vardhman Acrylics manufactures acrylic fibre and has capacity of 20,000 TPA.

 

For the quarter ended June 30, 2022, VTXL registered revenue of Rs 2,812 crore and operating profit of Rs 525 crore against Rs 1,927 crore and Rs 479 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
INE825A07076	Non Convertible Debentures	1-Jun-20	6.83%	1-Jun-23	195	Simple	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	1000	Simple	CRISIL A1+
NA	Fixed deposits	NA	NA	NA	0	Simple	CRISIL AA+/Stable
NA	Cash credit	NA	NA	NA	100	NA	CRISIL AA+/Stable
NA	Cash credit*#	NA	NA	NA	720	NA	CRISIL AA+/Stable
NA	Cash credit#	NA	NA	NA	550	NA	CRISIL AA+/Stable
NA	Cash credit^#	NA	NA	NA	430	NA	CRISIL AA+/Stable
NA	Foreign bill purchase	NA	NA	NA	120	NA	CRISIL AA+/Stable
NA	Fund-based facilities	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Letter of credit and bank guarantee@	NA	NA	NA	190	NA	CRISIL A1+
NA	Letter of credit and bank guarantee	NA	NA	NA	250	NA	CRISIL A1+
NA	Proposed rupee term loan	NA	NA	NA	1617.46	NA	CRISIL AA+/Stable
NA	Rupee term loan	NA	NA	Dec-24	402.25	NA	CRISIL AA+/Stable
NA	Rupee term loan	NA	NA	Mar-26	43	NA	CRISIL AA+/Stable
NA	Rupee term loan	NA	NA	Dec-24	470.72	NA	CRISIL AA+/Stable
NA	Rupee term loan	NA	NA	Dec-27	280	NA	CRISIL AA+/Stable
NA	Rupee term loan	NA	NA	Dec-27	150	NA	CRISIL AA+/Stable
NA	External commercial borrowings	NA	NA	Aug-24	42.8	NA	CRISIL AA+/Stable