| Vardhman Textiles Limited | ||||||||
| 'CRISIL AA+/Stable' assigned to Non Convertible Debentures | ||||||||
| 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 assigned its ‘CRISIL AA+/Stable’ rating to Rs.150 crore non convertible debentures of Vardhman Textiles Limited (VTXL; part of the Vardhman group) and reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and existing debt instruments.
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 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. Operating margin moderated in line with earlier expectation to 11.21% in first nine months of fiscal 2023 and expected to gradually improve next fiscal with lower cotton prices and healthy domestic demand.The company has already achieved revenue of Rs 7,651 crore in the first 9 months of fiscal 2023. Thus, cash accrual is projected at Rs 800-900 crore this fiscal but is expected to increase to over Rs 1000 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. Operating performance in fiscal 2023 is expected to remain healthy with revenue growth of 25-30% and operating margin of 8-10%.
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 1.5 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 1,800 crore as on February 28, 2023 (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’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 moderated in the first 9 months 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 9 months of fiscal 2023 and stretch in realisation will result in moderation in revenue, while the operating margin may contract to 11-13% 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 1.40-1.6 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 1.5 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.
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. |
Liquidity: Strong Liquidity should remain supported by consolidated cash and equivalents of over Rs 1,800 crore in March 2022 and unutilised limit of over Rs 1,700 crore, backed by drawing power. Long-term debt of Rs 400-500 crore per annum over the medium term will be serviced via internal accrual. Moderate capex in fiscal 2023 is likely to be met via marginal debt, internal accrual and any surplus liquidity.
ESG profile The ESG profile of VTXL supports its strong credit risk profile. The textile sector can have a significant impact on the environment on account of water pollution. Textile production is responsible for about 20% of global clean water pollution from dyeing and finishing products. Washing synthetics releases an estimated 0.5 million tonne of microfibres into the ocean in a year. The sector’s social impact is characterised by the impact of products on the health and wellbeing of consumers and on employees and local community.
Key ESG highlights
There is growing importance of ESG among investors and lenders. The company’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensuring ease of raising capital from markets where ESG compliance is a key factor. |
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
Downward Factors
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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 9 month ended December 31, 2022, VTXL registered revenue of Rs 7,651 crore and operating profit of Rs 1,004 crore against Rs 6,915 crore and Rs 1,211 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators (the Vardhman group - VTXL + VSSL - adjusted by CRISIL Ratings)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Includes Rs 200 sublimit for foreign bill purchase #Interchangeable with other non-fund-based limit ^Includes Rs 60 crore as a sub-limit of working capital demand loan/export packing credit (WCDL/EPC) @Letter of credit and bank guarantee limits are interchangeable **Yet to be issued |
Annexure – List of Entities Consolidated
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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 03-Mar-23 in line with the lender-wise facility details as on 03-Aug-21 received from the rated entity.
*Includes Rs 200 sublimit for foreign bill purchase
#Interchangeable with other non-fund-based limit
^Includes Rs 60 crore as a sub-limit of working capital demand loan/export packing credit (WCDL/EPC)
@Letter of credit and bank guarantee limits are interchangeable
Criteria Details
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