Rating Rationale
March 06, 2020 | Mumbai
Aarnav Industries Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.90 Crore (Enhanced from Rs.50 Crore)
Long Term Rating CRISIL BBB/Stable (Reaffirmed)
Short Term Rating CRISIL A3+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the long term bank facilities of Aarnav Industries Private Limited (AIPL; part of the Aarnav group) at 'CRISIL BBB/Stable' and has assigned 'CRISIL A3+' rating to the short term bank facility.
 
The rating reflects the extensive experience of the promoters in the textile industry, an established market position, and locational benefit due to proximity to the textile processing hub at Ahmedabad, Gujarat. These strengths are partially offset by, moderate operating profitability, modest debt protection metrics, working capital-intensive operations, and exposure to regulatory risk related to compliance with stringent pollution control norms.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of AIPL, Gopi Synthetics Pvt Ltd (GSPL), and Alpine Spinweave Pvt Ltd (ASPL) due to their operational and managerial linkages.

Unsecured loans from the promoters and their family members have been treated as neither debt nor equity as these loans are subordinate to bank debt, and expected to remain in the business over the medium term.

Unsecured loans from the promoters and their family members have been treated as neither debt nor equity as these loans are subordinate to bank debt, and expected to remain in the business over the medium term.

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:
* Extensive industry experience of the promoters and their funding support: The promoter, Mr Champalal G Agarwal, is the founder chairman of the entire group. He has more than four decades of all round experience in the textile business. Another director, Mr Sumit Agarwal, has around 20 years of experience in marketing, finance, and general administration. The extensive industry experience and strong marketing network have led to healthy growth in revenue. Revenue growth is likely to be sustained over the medium term, supported by the experience of the promoters.
 
* Locational advantage: The manufacturing facilities are in Ahmedabad, which is one of the major textile processing hubs in India. This provides competitive advantage in terms of proximity to raw material, trained work force, and marketing.
 
* Healthy business risk profile: There has been a compound annual growth rate of about 27% in revenue during for three fiscals through 2019, driven by enhanced capacities and a new manufacturing setup for weaving in ASPL. Offtake of the production is support by a well-established distribution network and strong credit of the group in the industry. Driven by high quality printing and finishing of cloth, revenue has steadily improved over the years. Revenue as well as profitability are likely to be sustained over the medium term supported by an established market position in the processing segment of the textile industry.
 
Weaknesses:
* Working capital-intensive operations: Gross current asses were high at around 200 days, driven by inventory and debtors of around 70 days and 120 days, respectively, as on March 31, 2019. This was supported by creditors of 60-70 days. Operations are likely to remain working capital intensive over the medium term. A fire incident in a warehouse of AIPL in August 2019 led to inventory loss and collapse of the entire building. The group has been able to recover thereafter by availing extended credit from suppliers and support from the promoters, and controlling inventory. However, continued support from suppliers would remain a key monitorable.
 
Working capital intensity of operations and moderate credit from suppliers have led to a moderately leveraged capital structure as reflected in the total outside liabilities to tangible networth (TOLTNW) ratio of about 2.50 times as on March 31, 2019.
 
* Exposure to intense competition: The textile industry is largely unorganised, marked by the presence of several players with small capacities. The entry barrier is low because of limited capital and technology requirements and small differentiation in end products of different players. This has led to a highly fragmented industry structure, with intense competition. Also, players have limited pricing and bargaining power in case of fluctuation in raw material prices. Hence, the operating margin is moderate at 6-6.5%.
 
* Modest debt protection metrics: The interest coverage and net cash accrual to total debt ratios were 1.99 times and 0.10 times, respectively, for fiscal 2019.
Liquidity Adequate

There is sufficient cushion in cash accrual to meet repayment obligation, thus providing support for any incremental working capital requirement. Bank limit utilisation was moderate at an average of 89% during the 12 months through December 2019 (cash credit limit is Rs 159 crore). Liquidity is supported by unsecured loans from the promoters and their relatives and friends (Rs 60 crore as on March 31, 2019) and other short-term loans and advances from business associates (Rs 19.7 crore).

Outlook: Stable

CRISIL believes the Aarnav group will continue to benefit from the extensive industry experience of the promoters.

Rating Sensitivity factors
Upward factors
* Improvement in the interest coverage ratio to above 2.7 times
* A better capital structure.

Downward factors
* Decline in cash accrual to below Rs 22 crore per fiscal and a stretch in the working capital cycle
* Larger-than-expected, debt-funded capital expenditure, weakening the financial risk profile.
About the Group

Incorporated in 1984, GSPL is the flagship company of the Aarnav group. It is engaged in processing (bleaching, dyeing, printing, and finishing) of fabrics such as suiting, shirting, dress material, and dupattas, and trading in grey fabrics. For processing, it also undertakes job work of other companies.

AIPL processes fabrics such as bedsheets and heavy suiting. The company can process cotton as well as polyester and blended fabrics, and wider width cloth having maximum width up to 120 inches. This company has been taken over by Mr Champalal Agarwal from his elder brother under a demerger scheme, and renamed. The demerger was effective from April 2013.

ASPL incorporated in February 2016, was formed with the objective of sizing and weaving of cotton yarn. The setting up of the unit was in two phases, where the first phase was operationalised from October 2017 and second in September 2018. The company is promoted by Mr Champalal Agrawal and Mr Sandeep Agrawal.

Key Financial Indicators
As on / for the period ended March 31 Unit 2019 2018
Operating income Rs crore 300.3 261.4
Reported profit after tax (PAT) Rs crore 2.64 1.82
PAT margin % 0.88 0.70
Adjusted debt/adjusted networth Times 1.24 1.85
Interest coverage Times 1.92 2.03

Status of non cooperation with previous CRA
AIPL has not cooperated with Credit Analysis & Research Ltd. (CARE) which has published its ratings as issuer not co-operating on April 05, 2019. The reason provided by CARE was non-furnishing of information for monitoring of rating.

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)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity date Issue size
(Rs Cr)		 Rating assigned
with outlook
NA Cash Credit NA NA NA 51 CRISIL BBB/Stable
NA Term Loan NA NA Sep-2026 27 CRISIL BBB/Stable
NA Letter of Credit NA NA NA 6 CRISIL  A3+
NA Bank Guarantee NA NA NA 6 CRISIL  A3+
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Gopi Synthetics Pvt Ltd Full Consolidation Operational and Financial linkages.
Aarnav Industries Pvt Ltd Full Consolidation
Alpine Spinweave Pvt Ltd Full Consolidation
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  78.00  CRISIL BBB/Stable  28-02-20  CRISIL BBB/Stable              Suspended 
Non Fund-based Bank Facilities  LT/ST  12.00  CRISIL A3+    --    --    --    --  Suspended 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 6 CRISIL A3+ Cash Credit 50 CRISIL BBB/Stable
Term Loan 27 CRISIL BBB/Stable -- 0 --
Letter of Credit 6 CRISIL A3+ -- 0 --
Cash Credit 51 CRISIL BBB/Stable -- 0 --
Total 90 -- Total 50 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for rating entities belonging to homogenous groups
Understanding CRISILs Ratings and Rating Scales

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