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CRISIL has assigned its ‘B-/Negative/P4’ ratings to the bank facilities of Sara Textiles Ltd (STL), part of the Sara group. The ratings reflect the group’s high gearing, weak debt protection metrics, and STL’s small scale of operations. These rating weaknesses are partially offset by the steady growth in STL’s operating income and tax exemptions enjoyed by the company because of its location (Himachal Pradesh).
For arriving at the ratings, CRISIL has combined the business and financial risk profiles of STL and Sara International Ltd (SIL). This is because SIL and STL, together referred to as the Sara group, are under common directors and management. SIL has a 37 per cent stake in STL’s equity, and is likely to support STL in case of exigencies.
Outlook: Negative
CRISIL believes that the STL’s liquidity will remain stretched over the medium term, as the company’s net cash accruals are not expected to be sufficient for servicing its term loans. The ratings may be downgraded if the STL’s working capital cycle and liquidity deteriorate, or if the Sara group undertakes a larger-than-expected debt-funded capital expenditure programme, or writes off investments, thereby leading to further strain on its financial risk profile. Conversely, the outlook may be revised to ‘Stable’ if the STL’s liquidity improves, or if the Sara group achieves more-than-expected profitability and growth in operating income, thereby improving its capital structure.
About the Group
STL, incorporated in 2005, manufactures terry towels and trades in bath mats and bed sheets. The company has its manufacturing facility in Nalagarh (Himachal Pradesh). Exports, primarily to Europe, the US, Australia, and Middle East countries, account for more than 80 per cent of its sales.
SIL, incorporated in 1973 by Mr. D P Singh, is the flagship company of the Sara group. SIL trades in iron ore fines, hot-rolled steel coils, textiles, cement, steel, coal, and agricultural commodities. Iron ore sales account for more than 80 per cent of its revenues. Gopalpur Ports Ltd (GPL) is a joint venture between SIL and Orissa Stevedores Ltd (rated ‘BBB/Stable/P3+’ by CRISIL), which is developing the port in Gopalpur, Orissa, for Rs.12.5 billion. SIL has invested Rs.240 million in GPL in the form of equity capital.
The Sara group reported a profit after tax (PAT) of Rs.56 million on net sales of Rs.4817 million for 2008-09 (refers to financial year, April 1 to March 31), against a PAT of Rs.129 million on net sales of Rs.4667 million for 2007-08.
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Disclaimer: A CRISIL rating reflects CRISIL's current opinion on the likelihood of timely payment of the obligations under the rated instrument and does not constitute an audit of the rated entity by CRISIL. CRISIL ratings are based on information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the rating is based. A CRISIL rating is not a recommendation to buy, sell, or hold the rated instrument; it does not comment on the market price or suitability for a particular investor. All CRISIL ratings are under surveillance. Ratings are revised as and when circumstances so warrant. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this product. CRISIL Ratings’ rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For the latest rating information on any instrument of any company rated by CRISIL, please contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (+91 22) 3342 3000.
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