| Vardhman Textiles Limited | ||||||||
| Ratings reaffirmed at 'CRISIL AA+/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 AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Vardhman Textiles Limited (VTXL; part of the Vardhman group).
The rating on NCDs worth Rs 195 crore (see ‘Annexure- Details of Rating Withdrawn' for details) has been withdrawn on confirmation from the debenture trustee as these are fully redeemed. The withdrawal is in line with the policy of CRISIL Ratings.
The ratings continue to reflect the strong financial risk profile of the Vardhman group well supported by strong available liquidity. The ratings also factor in diversified business risk profile of the group, especially in the textiles business, and healthy operating capability. 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 a healthy revenue growth of 8% to Rs. 11,951 crore in fiscal 2023, revenue is expected to moderate by 9-10% this fiscal driven by de-growth in price realisation by 15-20%, despite volume growth remaining healthy. Consolidated EBITDA (Earnings before Interest Taxes Depreciation and Amortization) margins are expected to compress from 12.8% last fiscal to 10-10.5% this fiscal, mainly on account of moderation in cotton yarn spreads in current fiscal. In the first half of the fiscal, Vardhman group reported revenue of Rs. 5540 crore and EBITDA margins of 8.7%.
Average yarn prices reached exceptionally high levels in fiscal 2023, driven by elevated cotton prices, which reached highs of ~Rs. 1 lakh per candy during last fiscal. However, with better supply of cotton in cotton season 2023 and expected healthy supply in cotton season 2024, cotton prices are expected to remain low. These lower cotton prices, coupled with lower than expected demand from downstream ready made garments segment will keep yarn prices lower this fiscal. However, volume sale is expected to remain healthy with increased demand for woven fabric on account of continued focus on return to office, sustained sales to downstream players at low prices, recovery in exports due to reopening of Chinese economy and increased cost competitiveness of Indian textiles.
Vardhman Special Steels (VSSL) reported healthy performance in fiscal 2023, supported by increase in sales volume and an uptick in realisation. Operating performance in fiscal 2024 is expected to remain healthy with marginal revenue growth as the capacity is almost fully utilized.
However, strong cash accrual of Rs 800-900 crore this fiscal which is expected to increase to over Rs 1000 crore over the medium term, driven by healthy growth potential and strong market position, will be sufficient for annual repayment obligation of Rs. 300-500 crore.
Financial risk profile of the group remains robust, supported by healthy cash accrual and moderate debt levels. VTXL concluded major capex in fiscal 2023 by adding spindles in two phases: (35,000 spindles and 65,000 spindles). No major capex is planned for VTXL in the near future and only maintenance capex / debottlenecking of Rs. ~350 crore p.a. is expected in the medium term. On the other hand, VSSL’s total expected capex is around Rs 360-370 crore for capacity upgradation and land purchase over fiscal 2024 to fiscal 2026. Considering this capex, debt will remain within Rs. ~1900 crore this fiscal. Gearing which improved to 0.2 times in fiscal 2023 is expected to remain at similar levels this fiscal, while interest cover is expected to moderate from 10.9 times in fiscal 2023 to 8.9 times this fiscal, although to remain healthy. Net debt to EBITDA which turned negative to (0.64) times last fiscal will continue to remain negative at (0.9)-(1.0) times this fiscal.
Liquidity remains strong, with consolidated cash and equivalents of Rs 2,794 crore as on March 31, 2023, and unutilised bank limit of over Rs ~1500 crore in the last 12 months ending August 2023 (backed by drawing power). |
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, Vardhman Special Steel Limited (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:
The Vardhman group is present across the textile, acrylic fibre and steel segments, which accounted for 82%, 3% and 15% of the revenue, respectively, in fiscal 2023, 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 12.3 lakh spindles, accounting for 2% of the total installed spindles in India.
The group is also among the top three woven fabric manufacturers in India, with grey and processed fabric capacity of 180 million meter per annum (mmpa) and 120 mmpa, respectively. It is an approved supplier to large retailers, such as Wal-Mart (rated 'AA/Stable/A-1+' 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 21,000 tonne per annum (TPA).
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 clocking a healthy revenue in fiscal 2023, revenue growth is expected to moderate this fiscal amidst weak demand and stretch in realisation, while the operating margin will contract to 10-10.5% this fiscal from 12.8% last fiscal. Thus, cash accrual is projected at Rs 800-900 crore this fiscal but is expected to increase to over Rs 1,000 crore over the medium term, driven by healthy growth potential and strong market position.
Financial risk profile of the group remains robust, supported by healthy cash accrual and moderate debt levels. VTXL concluded major capex in fiscal 2023 by adding spindles in two phases: (35,000 spindles and 65,000 spindles). No major capex is planned for VTXL in the near future and only maintenance capex / debottlenecking of Rs. ~350 crore p.a. is expected in the medium term. On the other hand, VSSL’s total expected capex is around Rs 360-370 crore for capacity upgradation and land purchase over fiscal 2024 to fiscal 2026. Considering this capex, debt will still remain at Rs. ~1900 crore this fiscal. Gearing which improved to 0.2 times in fiscal 2023 is expected to remain at similar levels this fiscal, while interest cover is expected to moderate from 10.9 times in fiscal 2023 to 8.9 times this fiscal, although to remain healthy. Net debt to EBITDA which turned negative to (0.64) times last fiscal will continue to remain negative at (0.9)-(1.0) times this fiscal.
Better profitability and prudent debt funding will aid debt protection metrics in the medium term. However, any sharp increase in short-term debt for stocking of cotton is a monitorable.
Weaknesses:
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 ~10% and 23.1% in the past decade and is even adversely affected this fiscal and in the past 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.
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. 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. The company has receivables averaging ~50 days, against this, the group had payables of about ~30 days. Gross current assets were high at 165 days as on March 31, 2023, and 198 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. However, VSSL reported an operating profitability of 10.1% in fiscal 2023. The moderation was majorly led by decrease in sale price from effective October, 2022 coupled with higher price of fuel and consumables, and disproportionate increase in key input costs.
The business profile expected to remain healthy with EBITDA per tonne expected to remain in the range of Rs. 7000-10000 per tonne in the medium term. While first half of the fiscal saw some moderation in EBITDA margins, slight recovery is expected in the second half of the fiscal with expected price renegotiation with major customers.
With 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 Rs 2,794 crore as on March 31, 2023, and unutilised bank limit of Rs ~1500 crore in the last 12 months ending August 2023 (backed by drawing power). Strong cash accrual of Rs 800-900 crore this fiscal which is expected to increase to over Rs 1000 crore over the medium term, driven by healthy growth potential and strong market position, will be sufficient for annual repayment obligation of Rs. 300-500 crore. Moderate capex in fiscal 2024 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 • The company has undertaken focussed efforts towards energy conservation and has generated 249 lakh kilowatt-hour (kWH) units of electricity from the renewable source (solar) in fiscals 2023, 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. In addition to fibres purchased from external sources, VTXL has generated recycled and reused products of over 34,000 tonne in fiscal 2023. • 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 ~30% 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 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 2023, the textile business accounted for 83% of the consolidated 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)
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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
Annexure - Details of Rating Withdrawn
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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#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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