Rating Rationale
November 21, 2024 | Mumbai
Vardhman Textiles Limited
Ratings reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+': NCD Withdrawn
 
Rating Action
Total Bank Loan Facilities RatedRs.5416.23 Crore
Long Term RatingCRISIL AA+/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Fixed DepositsCRISIL AA+/Stable (Reaffirmed)
Rs.150 Crore Non Convertible DebenturesWithdrawn (CRISIL AA+/Stable)
Rs.1000 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
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 AA+/Stable/CRISIL A1+' ratings on the bank loan facilities and debt instruments of Vardhman Textiles Ltd (VTXL; part of the Vardhman group).

 

The rating on non-convertible debentures (NCDs) worth Rs 150 crore (see 'Annexure - Details of Rating Withdrawn' for details) has been withdrawn on confirmation from the debenture trustee that these are fully redeemed. The withdrawal is in line with the CRISIL Ratings policy for withdrawal of ratings.

 

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

 

At the consolidated level, operating income is expected to remain steady at Rs 11,000-11,500 crore in fiscal 2025, compared with Rs 11,244 crore in fiscal 2024. This is after a decline of 6% in fiscal 2024 from Rs 11,951 crore in fiscal 2023. The operating income will remain steady on account of continued healthy capacity utilisation, stable realisation of cotton yarn and marginal revenue growth in the steel business as the capacity is fully utilised. Consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) margin is expected to improve to 12.0-12.5% in fiscal 2025 from 10.6% in fiscal 2024 owing to increase in spread between cotton and yarn prices and also improved profits in fabric business. In the first half of fiscal 2025, the group has reported revenue of Rs 5,721 crore and Ebitda margin of ~13%.

 

However, strong consolidated cash accrual of Rs 1,050-1,100 crore in fiscal 2025, which is expected to increase to over Rs 1,100 crore over the medium term, driven by healthy profitability and strong market position, will sufficiently cover annual debt obligation of Rs 200-500 crore.

 

The group has announced capital expenditure (capex) of Rs 2,700-2,800 crore, of which ~Rs 2,500 crore is for the textile division for the next two fiscals and Rs 300-350 crore for the steel segment over the next three fiscals. The company will be investing in expansion of yarn division, installation of nylon and polyester fabric division, digitisation and modernisation of the existing facility, and green energy.

 

At the group level, the financial risk profile will likely remain strong, albeit net debt is expected to increase to Rs 1,400-1,500 crore over the medium term. Debt has increased owing to higher inventory and sizeable capex plans. Debt protection metrics will remain comfortable, with interest coverage and net cash accrual to adjusted debt (NCAAD) ratios expected at 8.5-9.5 times and 0.4-0.5 time, respectively, in fiscal 2025, as against 8.36 times and 0.54 time, respectively, in fiscal 2024. This will be supported by repayment of debt and improvement in profitability. Capital structure will moderate slightly, albeit remain comfortable, with gearing and total outside liabilities to tangible networth (TOLTNW) ratio expected at 0.2-0.25 time and 0.3-0.35 time, respectively, over the medium term, as against 0.19 time and 0.31 time, respectively, as on March 31, 2024.

 

Liquidity remains strong, with consolidated cash and equivalents of approximately Rs 1300 crore as against debt repayment of Rs 200-500 crore and total fund-based limit of Rs 1920 crore with utilised limit of Rs 7 crore as on 30th Sep 2024 and 12-month average utilisation of 18%.

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 the entities, collectively referred to as the Vardhman group, are in the same business and have common treasury and strong operational linkages, including procurement of cotton. The business and financial risk profiles of the subsidiary, VTL Investments Ltd, and its associate, Vardhman Special Steel Ltd (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:

  • Diversified business risk profile, especially in the textile segment: The Vardhman group is present across the textile, acrylic fibre and steel segments, which accounted for 82%, 3% and 15% of revenue, respectively, in fiscal 2024, Though the group is a small player in the steel business, it has strong market position in the cotton yarn and fabrics segment, backed by its large capacity and established relationships with leading global apparel manufacturers. It is one of the largest spinners in the domestic market with installed capacity of 12.3 lakh spindles, accounting for 2% of the installed spindles in India.

 

The group is also among the top three woven fabric manufacturers in India, with grey and processed fabric capacity of 220 million metre per annum (mmpa) and 180 mmpa, respectively. It is an approved supplier to large retailers, such as Walmart (rated 'AA/Stable/A-1+' by S&P Global Ratings), Hennes and Mauritz, and Aditya Birla Fashion and 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 21,000 tonne per annum (TPA).

 

  • Healthy operating capabilities: At the group level, 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 preferred-buyer status and pricing benefits.

 

After decline in the operating income by 6% and fall in operating margin to 10.6% due to drop in realisation by 15-18%, the operating income is expected to remain steady and operating margin is expected to improve to 12-13% over the medium term, leading to net cash accrual of Rs 1,050-1,100 crore.

 

  • Strong financial risk profile: The financial risk profile was robust, despite capex of Rs 2,700-2,800 crore over two fiscals, supported by healthy cash accrual and improving profitability.

 

Net debt is expected to increase to Rs 1,400-1,500 crore over the medium term. Debt protection metrics will remain comfortable, with interest coverage and NCAAD ratios expected at 8.5-9.5 times and 0.4-0.5 time, respectively, in fiscal 2025, compared with 8.36 times and 0.54 time, respectively, in fiscal 2024. The metrics will remain supported by repayment of debt and improvement in profitability. Capital structure is expected to moderate, albeit remain comfortable, with gearing and TOLTNW ratio expected at 0.2-0.25 time and 0.3-0.35 time, respectively, over the medium term (0.19 time and 0.31 time, respectively, in fiscal 2024).

 

Weaknesses:

  • Vulnerability of operating profitability to volatility in input prices: The group remains susceptible to volatility in prices of key raw materials, such as cotton (which accounts for 50% of the cost of yarn) and steel. Cotton prices are exposed to risks such as unfavourable monsoon or pest attacks and are linked to international demand and supply. 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 10% and 23.1% in the past decade and has been adversely affected in fiscal 2025 and in fiscals 2020, 2018, 2015 and 2012, when profitability was hit by slowdown in demand from China and government intervention. In the steel business, the operating margin depends on prices of 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 cotton season and maintains large inventory at the end of the fiscal. Thus, inventory falls by September as the stock is consumed in the first half of the fiscal and starts increasing once the cotton season begins, from October, and is sizeable in March. In the steel business, dependence on the automotive industry has resulted in sizeable working capital requirement, as reflected in receivables of 49 days and inventory of 165 days as on March 31, 2024. At the group level, receivables were ~50 days against payables of ~30 days. Gross current assets were large at 227 days as on March 31, 2024, and 165 days as on March 31, 2023.
     
  • 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 10% in fiscal 2024 from 2.4% in fiscal 2015. The operating profitability of VSSL is expected at 9-10% in fiscal 2025

 

However, the business risk profile will likely remain healthy with Ebitda per tonne expected at Rs 7,000-10,000 over the medium term. With cost-control measures and initiatives undertaken for better procurement, the debt protection metrics will likely remain comfortable over the medium term.

Liquidity: Strong

Liquidity will likely remain strong supported by expected cash accrual of Rs 900-1,000 crore against debt obligation of Rs 200-500 crore in the medium term. The consolidated cash and equivalent of Rs 1,300 crore as on September 30, 2024. Furthermore, the group has access to fund-based limit of Rs 1,120 crore, with unutilised limit of Rs 1,113 crore and 12-month average utilisation of 18%.

 

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

  • The company has undertaken focused efforts towards energy conservation and has generated 290 lakh kilowatt-hour (kWH) units of electricity from the renewable source (solar) in fiscals 2024, leading to a reduction CO2 emission in the atmosphere.
  • The company has deployed water management practices and processes all liquid waste. Cotton, polyesters and other fibres are recycled to reduce waste. VTXL has treated approximately 9 million KL (kilo litres) of waste water across different plants in fiscal 2024.
  • It has implemented policies on gender diversity and inclusion, human rights, prevention of sexual harassment as well as zero tolerance for child labour. Gender diversity at VTXL is substantially higher than industry peers, with women employees comprising ~33.8% of the workforce over the past few years against peer average of ~10%.
  • VTXL has an adequate governance structure, with most of its board comprising independent directors and presence of an investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

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 its strong market position in the textile business, diversified product portfolio and strong liquidity.

Rating sensitivity factors

Upward factors:

  • Substantial increase in revenue and market share driven by product diversity, with operating margin remaining steady over 18%
  • Debt to Ebitda ratio declining below 1.0 time on a steady-state basis
  • Healthy liquid 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 large capex, stretched working capital cycle or sharp decline in Ebitda
  • Sizeable reduction in liquidity due to buyback of shares, sizeable dividend payout and additional capex

About the Group

The Vardhman group, headed by Mr S P Oswal, is one of the leading textile groups in India with operations across yarn, fabric, sewing threads, fibre, special alloys and garment segments. In fiscal 2024, the textile business accounted for 83% of the total operating income, followed by the fibre segment (3%) and the steel alloy segment (15%). The group has 15 manufacturing units spread across four states.

 

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 21,000 TPA.

Key Financial Indicators (the Vardhman group—VTXL + VSSL—adjusted by CRISIL Ratings)

As on / for the period ended March 31

Unit

2024

2023

Revenue

Rs crore

11244

11951

PAT

Rs crore

684

870

PAT margin

%

6.1

7.3

Adjusted debt / adjusted networth

Times

0.19

0.20

Interest coverage

Times

8.36

10.86

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument
Date of
Allotment
Coupon
Rate (%)
Maturity
Date
Issue size
(Rs.Crore)
Complexity
Level
Rating assigned
with outlook
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 Cash Credit$  NA NA NA 430 NA CRISIL AA+/Stable
NA Foreign Bill Purchase NA NA NA 120 NA CRISIL AA+/Stable
NA Letter of credit & Bank Guarantee@ NA NA NA 190 NA CRISIL A1+
NA Proposed Rupee Term Loan NA NA NA 1935.66 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 30-Sep-27 244.79 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 30-Jun-25 279.83 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 31-Mar-25 42.95 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 31-Dec-24 205 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 30-Jun-25 51.19 NA CRISIL AA+/Stable
NA Rupee Term Loan NA NA 30-Sep-27 116.81 NA CRISIL AA+/Stable

#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)
*Includes Rs 200 sublimit for foreign bill purchase
@Letter of credit & bank guarantee limits are interchangeable
$Interchangeable with WCDL, Import Sight LC, FCNR loan, Import Usance LC, Inland LC (Usance/Sight). Sublimit: Rs 280 crore for Import Sight LC, Rs 100 crore for BG, Rs 280 crore for LC of capex usance.

Annexure - Details of Rating Withdrawn

ISIN Name of the
instrument
Date of
Allotment
Coupon
Rate (%)
Maturity
Date
Issue size
(Rs.Crore)
Complexity
Level
Rating assigned
with outlook
INE825A08066  Non Convertible Debentures  20-Mar-23 7.70 27-Mar-24 150 Simple  Withdrawn 

Annexure - List of Entities Consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Vardhman Acrylics Ltd

Full consolidation

Subsidiaries, same line of business, integrated treasury and strong operational linkages

Vardhman Spinning & General Mills Ltd

Full consolidation

VTL Investments Ltd

Full consolidation

Subsidiary

Vardhman Special Steels Ltd

Full consolidation

Associate, history of support from the group and demonstrated track record, common banking and treasury operations

Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 5226.23 CRISIL AA+/Stable 14-06-24 CRISIL AA+/Stable 24-11-23 CRISIL AA+/Stable 09-12-22 CRISIL AA+/Stable 22-11-21 CRISIL AA+/Stable CRISIL AA+/Stable
      --   -- 03-03-23 CRISIL AA+/Stable 28-10-22 CRISIL AA+/Stable 09-09-21 CRISIL AA+/Stable --
      --   --   -- 20-06-22 CRISIL AA+/Stable   -- --
Non-Fund Based Facilities ST 190.0 CRISIL A1+ 14-06-24 CRISIL A1+ 24-11-23 CRISIL A1+ 09-12-22 CRISIL A1+ 22-11-21 CRISIL A1+ CRISIL A1+
      --   -- 03-03-23 CRISIL A1+ 28-10-22 CRISIL A1+ 09-09-21 CRISIL A1+ --
      --   --   -- 20-06-22 CRISIL A1+   -- --
Commercial Paper ST 1000.0 CRISIL A1+ 14-06-24 CRISIL A1+ 24-11-23 CRISIL A1+ 09-12-22 CRISIL A1+ 22-11-21 CRISIL A1+ CRISIL A1+
      --   -- 03-03-23 CRISIL A1+ 28-10-22 CRISIL A1+ 09-09-21 CRISIL A1+ --
      --   --   -- 20-06-22 CRISIL A1+   -- --
Fixed Deposits LT 0.0 CRISIL AA+/Stable 14-06-24 CRISIL AA+/Stable 24-11-23 CRISIL AA+/Stable 09-12-22 CRISIL AA+/Stable 22-11-21 F AAA/Stable F AAA/Stable
      --   -- 03-03-23 CRISIL AA+/Stable 28-10-22 CRISIL AA+/Stable 09-09-21 F AAA/Stable --
      --   --   -- 20-06-22 CRISIL AA+/Stable   -- --
Non Convertible Debentures LT 150.0 Withdrawn 14-06-24 CRISIL AA+/Stable 24-11-23 CRISIL AA+/Stable 09-12-22 CRISIL AA+/Stable 22-11-21 CRISIL AA+/Stable CRISIL AA+/Stable
      --   -- 03-03-23 CRISIL AA+/Stable 28-10-22 CRISIL AA+/Stable 09-09-21 CRISIL AA+/Stable --
      --   --   -- 20-06-22 CRISIL AA+/Stable   -- --
External Commercial Borrowings LT   --   -- 24-11-23 CRISIL AA+/Stable 09-12-22 CRISIL AA+/Stable 22-11-21 CRISIL AA+/Stable CRISIL AA+/Stable
      --   -- 03-03-23 CRISIL AA+/Stable 28-10-22 CRISIL AA+/Stable 09-09-21 CRISIL AA+/Stable --
      --   --   -- 20-06-22 CRISIL AA+/Stable   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit^# 430 HDFC Bank Limited CRISIL AA+/Stable
Cash Credit$ 430 YES Bank Limited CRISIL AA+/Stable
Cash Credit*# 720 State Bank of India CRISIL AA+/Stable
Cash Credit# 550 ICICI Bank Limited CRISIL AA+/Stable
Cash Credit 100 Kotak Mahindra Bank Limited CRISIL AA+/Stable
Foreign Bill Purchase 10 HDFC Bank Limited CRISIL AA+/Stable
Foreign Bill Purchase 50 ICICI Bank Limited CRISIL AA+/Stable
Foreign Bill Purchase 60 Kotak Mahindra Bank Limited CRISIL AA+/Stable
Letter of credit & Bank Guarantee@ 20 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee@ 55 Kotak Mahindra Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee@ 65 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee@ 50 ICICI Bank Limited CRISIL A1+
Proposed Rupee Term Loan 1935.66 Not Applicable CRISIL AA+/Stable
Rupee Term Loan 244.79 HDFC Bank Limited CRISIL AA+/Stable
Rupee Term Loan 279.83 HDFC Bank Limited CRISIL AA+/Stable
Rupee Term Loan 205 ICICI Bank Limited CRISIL AA+/Stable
Rupee Term Loan 51.19 HDFC Bank Limited CRISIL AA+/Stable
Rupee Term Loan 116.81 Kotak Mahindra Bank Limited CRISIL AA+/Stable
Rupee Term Loan 42.95 Axis Bank Limited CRISIL AA+/Stable
#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)
*Includes Rs 200 sublimit for foreign bill purchase
@Letter of credit & bank guarantee limits are interchangeable
$Interchangeable with WCDL, Import Sight LC, FCNR loan, Import Usance LC, Inland LC (Usance/Sight). Sublimit: Rs 280 crore for Import Sight LC, Rs 100 crore for BG, Rs 280 crore for LC of capex usance.
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Cotton Textile Industry
CRISILs criteria for rating fixed deposit programmes
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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