Rating Rationale
June 30, 2022 | Mumbai
Ambika Cotton Mills Limited
Rating outlook revised to 'Positive'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.455.55 Crore
Long Term RatingCRISIL A+/Positive (Outlook revised from 'Stable'; Rating Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Ambika Cotton Mills Limited (ACML) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A+’.  The short term rating has been reaffirmed at ‘CRISIL A1’.

 

The outlook revision reflects significant improvement in business risk profile marked by healthy revenue growth of 39% in FY22 leading to revenue of Rs.925.5 crore while margin increased from 19% to 29.5% during the same period. This improvement in business risk is backed by ACML’s strong pricing flexibility, aided by its premium positioning in the cotton yarn market, increased revenue contribution from higher margin fabric sales and its adequate captive power facilities. The margins are expected to remain at over 25 per cent given synergies from forward integration, additional of renewable power capacities and premium commanded by ACML’s products. Increase of topline and sustenance of profitability would remain key rating sensitivity factors.

 

Also, with healthy accretion to reserves and absence of any debt funded capex plans capital structure continues to remain healthy with net worth and gearing of Rs. Rs.723 crore and 0.07 times respectively as on March 31, 2022. Moreover, the bank limit utilization was negligible during the last 12 months and larger accrual has resulted in build-up of healthy cash and cash equivalents of more than Rs.280 crore as on March 31, 2022 which provides additional support to liquidity.

 

The rating continues to reflect extensive experience of the promoter, established market position in the premium cotton yarn segment, long-standing relationships with its key customers, healthy operating efficiency and strong financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive experience of the promoter and established market position in the finer count yarn segment: ACML benefits from its promoter’s extensive industry experience of more than three decades. The same has helped in building established market position and the global repute as a manufacturer of premium cotton yarn leading to long-standing supplier and customer relationships and strong in-house operational capabilities. ACML specializes in manufacturing premium quality compact yarn by optimal blending of imported and indigenous cotton, primarily used for finer shirting requirements.

 

  • Healthy operating efficiencies: ACML has healthy operating efficiencies, supported by premium quality yarn. This has led to better price realization, flexibility to pass on increases in raw material prices and adequate captive power facilities resulting in reduced power costs. Additionally, prudent working capital management has resulted in healthy operating margin over the four years through fiscal 2022.

 

  • Healthy financial risk profile: Financial risk profile remains healthy, backed by strong capital structure and healthy debt protection metrics. Net worth and total outside liability to tangible net worth (TOLTNW) were comfortable at Rs.723 crore and 0.2 time, respectively, as on March 31, 2022. Debt protection metrics are strong, with interest coverage and net cash accrual to total debt ratios of 210.5 times and 3.79 times, respectively for FY2022. ACML's strong liquidity is marked by sparsely utilized bank lines and healthy cash accrual generation against no major debt obligation.

 

Weakness:

  • Susceptibility to volatility in raw material prices and forex rates: Cotton is a key raw material, accounting for most of the company's turnover. Cotton prices are volatile because they are dependent on the monsoon. Furthermore, the prices are largely affected by international demand. Volatility in availability and prices of cotton affects operating margin as reflected in the decline in margin in fiscals 2012, due to volatile raw material price movements. Exports account for more than 60% of the ACML’s turnover, thereby exposing the company to considerable volatility in forex rates.

Liquidity: Strong

Average month-end bank limit utilization for the last 12 months through May 2022 has remained moderate at less than 5%. Estimated net cash accruals of more than Rs.150 crore is expected to remain sufficient against no repayment obligations in FY23. Healthy cash and cash equivalents of around Rs.280 crore as on March 31, 2022 provides additional support to liquidity. Current ratio was moderate at around 5.13 times as on March 31, 2022.

Outlook Positive

CRISIL Rating believes ACML will maintain its business performance over the medium term, supported by its established market position in the textile segment and strong operating efficiencies.

Rating Sensitivity factors

Upward Factors

  • Healthy revenue growth rate while sustaining moderate revenue share from fabric sales and healthy operating margin, leading to net cash accruals of Rs.190 crore or above
  • Sustenance of financial risk profile and liquidity

 

Downside Factors

  • Large debt funded capex or stretch in working capital resulting in TOLTNW of more than 1.5 times
  • Decline in revenue or operating profitability, impacting cash accrual

About the Company

ACML, incorporated as a private limited company in 1988, was reconstituted as a public company in 1994. The company spins cotton yarn primarily in the finer count range of 60s-100s and manufacturing fabric. While more than 60% of the revenue is derived from exports, the rest is from domestic market. Mr PV Chandran is the Chairman and Managing Director of the company. ACML is listed on the National Stock Exchange and the Bombay Stock Exchange.

Key Financial Indicators

As on / for the period ended March 31

 

*2022

2021

Operating income

Rs crore

925.5

665.36

Reported profit after tax

Rs crore

179.9

64.34

PAT margins

%

19.2

10.21

Adjusted Debt/Adjusted Net worth

Times

0.07

0.09

Interest coverage

Times

210.47

18.20

*Provisional

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)

ISIN

Name of Instrument

Date of Allotment

Coupon Rate (%)

Maturity Date

Issue Size (Rs cr.)

Complexity Level

Rating Assigned with Outlook

NA

Composite Working Capital Limit

NA

NA

NA

395

NA

CRISIL A1

NA

Proposed Working Capital Facility

NA

NA

NA

60.55

NA

CRISIL A+/Positive
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 455.55 CRISIL A+/Positive / CRISIL A1   -- 05-04-21 CRISIL A+/Stable / CRISIL A1 01-09-20 CRISIL A+/Stable / CRISIL A1 22-10-19 CRISIL A+/Stable / CRISIL A1 CRISIL A/Positive / CRISIL A1
      --   --   --   -- 01-10-19 CRISIL A+/Stable / CRISIL A1 CRISIL A/Positive
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Composite Working Capital Limit 75 ICICI Bank Limited CRISIL A1
Composite Working Capital Limit 110 Axis Bank Limited CRISIL A1
Composite Working Capital Limit 35 IDBI Bank Limited CRISIL A1
Composite Working Capital Limit 125 HDFC Bank Limited CRISIL A1
Composite Working Capital Limit 50 Kotak Mahindra Bank Limited CRISIL A1
Proposed Working Capital Facility 60.55 Not Applicable CRISIL A+/Positive

This Annexure has been updated on 30-Jun-2022 in line with the lender-wise facility details as on 24-Aug-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for rating short term debt

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