| Vardhman Textiles Limited | ||||||||
| 'CRISIL AA+/Stable' assigned to NCD | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned 'CRISIL AA+/Stable' rating on the proposed NCDs of Vardhman Textiles Limited (VTXL, part of Vardhman group) while reaffirming its 'CRISIL AA+/FAAA/Stable/CRISIL A1+' ratings on the bank loan facilities and debt instruments. |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the business and financial risk profiles of VTXL and its subsidiaries, VMT Spinning Co Ltd (VMT Spinning), Vardhman Acrylics Ltd (Vardhman Acrylics) and Vardhman Nisshinbo Garments Co Ltd (VNGCL). This is because all the entities, collectively referred to as the Vardhman group, are in the textile business, have an integrated treasury and strong intra-group operational linkages, including common procurement of cotton. The business and financial risk profiles of VTXL's subsidiary, VTL Investments Limited and VTXL's associate, Vardhman Special Steels Ltd (VSSL) are also combined because of history of support from the group and past demonstrated track record. CRISIL has not combined the business and financial risk profiles of Vardhman Yarns and Threads Ltd (VYTL) from fiscal 2017 as VTXL has divested most of its stake in VYTL, and is now a minority shareholder. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strong, diversified business risk profile, especially in the textiles business The Vardhman group has a diversified portfolio with presence in the yarn (55% of revenue in fiscal 2019), fabric (28%), and steel (11%) segments. While the group is a small player in the steel business, it has a strong presence in the cotton yarn and fabrics segment, benefiting from large capacity and established relationships with leading global apparel manufacturers (over 600 clients). It is one of the largest spinners in India, with installed capacity of 12 lakh spindles, accounting for 2% of the country's total installed spindles. The group is also among the top three woven fabric manufacturers in India, with grey and processed fabric capacity of 1550 looms and 170 million meter per annum (mmpa), 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 one of the largest players in the domestic acrylic fibre market (3% of revenue), with capacity of 20,000 tonne per annum (tpa). The capacity expansion at Madhya Pradesh will augment presence in the textile sector. * Healthy operating capability The strong business position in the textiles business is reinforced by healthy operating capability. The group has continuously invested in enhancing its spinning productivity. It is one of the largest consumers of raw cotton in the country (procuring over 15 lakh bales per annum), which has led to a preferred-buyer status and considerable pricing benefits. Benefits of scale, and focus on enhancing share of value-added business helped maintain operating profitability at 14% in fiscal 2020 despite challenging industry scenario with steep fall in cotton yarn exports leading to fall in cotton and cotton yarn spreads. * Strong financial risk profile The strong financial risk profile stems from healthy cash accrual (estimated at around Rs 700 crore in fiscal 2020) and robust networth (estimated at over Rs 6000 crore as on March 31, 2020). Moreover, prudent capex (average of Rs 500 crore per annum between fiscals 2012 and 2019) and progressive debt repayment improved the gearing to a healthy below 0.4 time as on March 31, 2020, from 1 time as on March 31, 2013. Interest coverage and net cash accrual to total debt ratios are estimated at ~ 6.5 times and ~0.30 time, respectively, in fiscal 2020. Capex is expected to be low in fiscal 2021 which will keep the debt metrics healthy in spite of lower operating profitability. Weaknesses * Vulnerability of operating profitability to volatility in input prices The group is susceptible to volatility in prices of key raw materials, cotton (which accounts for half the cost of yarn) and steel. Cotton prices are volatile as they are sensitive to factors such as unfavourable monsoon or pest attacks, and are linked to the international demand/supply scenario. Despite the benefits derived from VTXL's large procurement and adequate risk management systems, the group's profitability remains susceptible to volatility in raw material prices. Operating profitability was adversely affected by volatility in cotton prices during fiscals 2020, 2018, 2015, and 2012, when operating margin declined due to slowdown in demand from China and government interventions. Similarly, in the steel business, operating profitability depends on the 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 is generally an issue after the cotton season. Due to its commitment to delivering quality products, the group follows a strategy of procurement during the cotton season and maintains large inventory at the end of the fiscal. The inventory levels fall by September as the inventory is consumed in first half of the fiscal and again increases as the cotton season starts in October. With the cotton procurement starting in October 2019, the same increases by March. VTXL also has receivables of 60 days. Against this, it gets credit of just about 30 days, leading to large working capital requirement, reflected in gross current assets of 188 days as on March 31, 2019 (average of 195 days for the past five fiscals). In the steel business, dependence on the automotive industry resulted in sizeable working capital requirement, with receivables of 88 days and inventory of 73 days as on March 31, 2019. * Modest market position in the steel business The group is a relatively small player in the steel business through VSSL, with large revenue concentration in the automotive sector (over 85%). This leads to susceptibility to cyclicality in the automotive segment. The steel business witnessed steady improvement in the recent past, due to better utilisation and focus on cost optimisation, resulting in operating margin rising to 6.1% in fiscal 2019 from 2.4% in fiscal 2015. However, presence of several unorganised players limits the pricing power of VSSL. |
| Liquidity Strong |
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VTXL has robust liquidity driven by cash & equivalents of over Rs 1300 crore in March 2020 at consolidated level and unutilized limits of Rs 1250 crore backed by drawing power. The company has long term repayment obligations around Rs 200 - 300 crore per annum. Capex is expected to be low in fiscal 2020 at around Rs 50-100 crore which is expected to be funded out of internal accrual and existing liquidity. |
| Outlook: Stable |
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CRISIL believes, despite challenging business environment due to COVID-19, Vardhman group will sustain its healthy credit risk profile, backed by its strong market position in the textiles business, diversified product portfolio, and strong liquidity position. |
| About the Group |
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The Vardhman group, headed by Mr S P Oswal, is one of India's leading textile groups, with operations across the yarn, fabric, sewing threads, fibre, special alloys, and garment sectors. In fiscal 2018, revenue from the yarn business accounted for 58% of the consolidated operating income, while fabric and steel alloy accounted for 28% and 9%, respectively; the rest of the revenue came from the acrylic fibres and garments business. The group has 18 production plants, in Punjab, Madhya Pradesh, Gujarat and Himachal Pradesh. |
| Key Financial Indicators for Vardhman Group (CRISIL Adjusted numbers) | ||||||||||||||||||||||||
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| Key Financial Indicators for Vardhman Textiles Limited (CRISIL Adjusted numbers) | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*includes Rs. 200 sublimit for foreign bill purchase #Interchangeable with other non-fund based limits ^Includes Rs. 60 Crs as a sub-limit of WCDL/EPC @ Letter of Credit & Bank Guarantee limits are interchangeable | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#Interchangeable with other non-fund based limits ^Includes Rs. 60 Crs as a sub-limit of WCDL/EPC @Letter of Credit & Bank Guarantee limits are interchangeable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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