CRISIL has upgraded its ratings on the bank facilities of Sri Saravana Spinning Mills Pvt Ltd (Sri Saravana) to ‘BBB-/Stable/P3’ from ‘BB+/Stable/P4+’. The upgrade reflects significant improvement in Sri Saravana’s financial risk profile, driven by increased profitability and cash accruals. Sri Saravana’s gearing reduced to around 2.6 times as on December 31, 2010 from around 3.8 times as on March 31, 2010. Its net cash accruals to total debt (NCATD) and interest coverage ratios improved to 0.17 times and 3.26 times, respectively, for the nine months ended December 31, 2010, from 0.12 times and 2.79 times, respectively, for 2009-10 (refers to financial year, April 1 to March 31), supported by strong operating performance in 2010-11. For the nine months ended December 31, 2010, Sri Saravana reported revenue of Rs.3.05 billion and an operating margin of around 20 per cent (Rs.3.31 billion and 15.6 per cent, respectively, for 2009-10). The company’s healthy business performance has been driven largely by favourable movement in cotton yarn prices. The upgrade also factors in CRISIL’s belief that Sri Saravana’s financial risk profile will improve further over the medium term on the back of healthy cash accruals and steady repayment of debt.

The ratings reflect Sri Saravana’s below-average financial risk profile, customer and geographical concentration in revenue profile, and vulnerability to intense market competition and volatility in raw material prices. These rating weaknesses are partially offset by Sri Saravana’s established market position supported by the industry experience of its promoters, diversified product profile resulting in steady revenues, and healthy operating efficiencies.

Outlook: Stable
CRISIL believes that Sri Saravana will continue to benefit over the medium term from its healthy operating efficiencies and established market position. The outlook may be revised to ‘Positive’ if the company reduces the customer and geographic concentration in its revenue profile, and sustains the increase in its revenue and operating margin while improving its capital structure significantly. Conversely, the outlook may be revised to ‘Negative’ if the company undertakes large, debt-funded capital expenditure or acquisition, if its realisations and margins decline steeply, or if it extends financial support to associate companies with weaker credit risk profiles.

About the Company
Incorporated in 1984 by Mr. Krishnasamy, the Dindigul-based Sri Saravana manufactures cotton yarn and knitted garments, and processing of fabrics. The company’s operations are fully integrated, from cotton yarn manufacturing to knitted garments. The company has a spinning capacity of around 92,000 spindles, garment manufacturing capacity of 4 million pieces per annum, and processing capacity of 12 tonnes of fabric per day and 7 tonnes of yarn per day; the units are in Pithalaipatty, Batlagundu, and Palladam, in Tamil Nadu. It derives around 60 per cent of its revenues from the sale of yarn and fabric, around 35 per cent from the sale of garments, and around 5 per cent from processing activities. In December 2008, associate companies SSM Fine Yarns Pvt Ltd and Sumeru Knits Pvt Ltd, engaged in dyeing and knitting respectively, were merged into Sri Saravana as per the order of the High Court of Madras, with the effect from April 1, 2007.

For 2009-10, Sri Saravana reported a PAT of Rs.42 million on net sales of Rs.3.07 billion; it had reported a PAT of Rs.40 million on net sales of Rs.2.44 billion for the previous year.