| Sportking India Limited | ||||||
| Ratings upgraded to 'CRISIL A/Stable/CRISIL A1 ' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on the bank facilities of Sportking India Limited (Sportking) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.
The upgrade reflects better than expected operating performance driven by higher demand from export as well as domestic market/ customers resulting in revenue growth of around 75% in the first nine months of fiscal 2022 over the corresponding period of the previous fiscal 2021. Operating margins too improved significantly to 28% over nine months through fiscal 2022 from 12% in the corresponding period of the previous fiscal driven by favorable spread between prices of raw cotton and cotton/ synthetic yarn given the improved demand scenario and benefit of higher utilization. However, operating margins though expected to moderate from current peak levels, however are expected to remain higher than the historical levels because of structural change in export market and will remain a key rating sensitivity factor.
On account of significant improvement in operating performance, debt protection metrics has improved as indicated by interest coverage ratio of 24 times over nine months through fiscal 2022. Working capital requirement will remain high due to increased raw material prices, however higher accruals will reduce dependence on external working capital debt.
Company is undergoing capacity expansion of 40,800 spindles at capital cost of Rs 175 crore funded by debt of Rs 125 crore. The capacity is expected to be commissioned by Sep’2022 and will further strengthen the business profile of the company. Also, Company is also setting up 10 MW capacity Rooftop Solar Power Project costing about Rs. 30 crs for captive power consumption expected to be commissioned by May 2022. Timely execution of the capex within budgeted cost and achieving expected ramp up will be key monitorable.
The ratings continue to reflect the company’s strong position in the compact cotton yarn industry, large scale of operations and healthy financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices & foreign exchange (forex) rates and large working capital requirements. |
Analytical Approach Preference capital has been treated as an equity due to low coupon rate and no redemption in the medium term. |
Key Rating Drivers & Detailed Description Strengths:
Sportking has a strong market position in the compact cotton yarn industry, with total spindle capacity of 2.75 lakh and revenue estimated at over Rs 2,000 crore in fiscal 2022. The company has established a strong position in several export markets, such as Bangladesh, China, Egypt and USA. The company also has longstanding relationships with international garment retailers in the USA and Europe and, thus, benefits from its diversified geographic reach. In fiscal 2022, export demand improved with increased competitiveness of Indian spinners in the global market on account of lower domestic cotton prices compared with global prices and supply disruptions amid Covid-19 pandemic. Performance is likely to remain at higher level than historical trends on account of structural changes in export market.
The company consumes about 4 lakhs bales of cotton every year and is, therefore, one of the largest buyers of cotton in India. Large-scale procurement will keep the bargaining power high over the medium term. The company is focusing on de-risking its exposure to basic cotton yarn products and emphasizing on value-added yarns, such as contamination-free cotton yarn, sustainable cotton yarn and multi-twist cotton yarn, which fetch higher margin.
Sportking had a healthy capacity utilisation of over 95% in the last three years, and has, therefore, planned additional capacity expansion of 40,800 spindles expected to be commissioned by September’2022. This should further strengthen the business profile of the company.
Improved spreads between prices of raw cotton and cotton/ synthetic yarn and benefit of operating leverage should help sustain the operating margin at above 15% over the medium term.
TOL/TNW is expected to improve to less than 1 times in medium term despite additional term debt to be availed for capex plans. Adjusted interest coverage ratio expected to be over 15 times in fiscal 2022 because of increase in profitability and is expected at above 8 times in fiscal 2023, driven by better spreads between prices of raw cotton and cotton/ synthetic yarn and healthy capacity utilisation.
Financial flexibility is healthy, as reflected in moderate bank limit utilisation. Adequate liquidity and comfortable financial flexibility will continue to support the debt obligation. Any larger than expected debt funded capex or higher dividend payout resulting in weakening of capital structure will remain key monitorable.
Weaknesses:
The company derives over 90% of its total revenue from the yarn sales, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin fluctuated between 10% - 28% over the last 10 fiscals through 2022. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021) wherein demand spiralled and then fell rapidly. Additionally, as Sportking derives close to half of its revenue from the overseas markets, it is susceptible to any significant volatility in forex rates, which is mitigated through foreign exchange forward contracts/ availment of working capital limits in foreign currency.
Operations are working capital intensive, as reflected in gross current assets estimated at around 165 days as on March 31, 2022, driven by stocking of raw cotton bales being a seasonal product leading to high reliance on debt. On account of high investment in inventory and debtors, working capital loan remains sizeable |
Liquidity: Strong Unutilised bank lines stood at Rs 169 crore as of Feb 2022 (bank limit utilisation averaged 65% over the 12 months ended Feb 2022). Net cash accrual, expected over Rs 400 crore in fiscal 2022 and over Rs 200 crores in next 2 fiscal years which will be sufficient to cover debt obligation of Rs 30-40 crores in next 2 years. The company has well spread capex plans over the next three years. |
Outlook: Stable Sportking will, over the medium term, maintain its strong market position and continue to benefit from the favourable outlook on the cotton yarn industry. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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About the Company Sportking, incorporated in February 1989, is a part of the Sportking Group. The company manufactures cotton, synthetic and blended yarn in counts ranging from 20s to 46s. It has manufacturing units in Ludhiana and Bathinda, both in Punjab. The company has large size capacity of 2.75 lakh spindles and dyeing capacity of 20 tonne per day. It manufactures value-added yarns, such as compact, sustainable and contamination-free cotton yarn, which provide higher realisations than normal cotton yarn.
For the nine months ended 31st December, 2021 relating to fiscal 2022, the company reported profit after tax of Rs 305 crore on the operating income of Rs 1561 crore compared to Rs 40 crore and Rs 893 crore respectively for the corresponding period in the previous fiscal 2021. |
Key Financial Indicators
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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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
^Interchangeable with packing credit/packing credit in foreign currency %forward derivative limit |
| 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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Criteria Details
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