Rating Rationale
April 04, 2017 | Mumbai
Ambika Cotton Mills Limited
Ratings upgraded to 'CRISIL A/Stable/CRISIL A1'
Rating Action
Total Bank Loan Facilities Rated Rs.455.55 Crore
Long Term Rating CRISIL A/Stable (Upgraded from 'CRISIL A-/Positive')
Short Term Rating CRISIL A1 (Upgraded from 'CRISIL A2+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of Ambika Cotton Mills Ltd (ACML) to 'CRISIL A/Stable/CRISIL A1' from 'CRISIL A-/Positive/CRISIL A2+'.
The rating upgrade reflects steady improvement in ACML's business risk profile supported by better profitability and sustained diversification in revenue. While revenue remained stable at Rs 386 Crores for the nine months ended December 31, 2016 (Rs 390 Crores for the previous corresponding period), operating margin improved to 20.3 per cent from 17.6 per cent during this same period, supported primarily by lower power costs. Growth, expected to be tapered down on account of anticipated stabilisation in spinning capacities, will be driven by increasing contribution of fabric sales to the revenue mix. Strong pricing flexibility, aided by its premium positioning in the cotton yarn market, its adequate captive power facilities and ramp-up in the relatively higher margin fabric segment will ensure healthy and sustained profitability at 20-22 per cent over the medium term. Furthermore, over the years, revenue contribution from ACML's largest customer has steadily reduced backed by continuous addition of customers and increased order flow from other existing customers. Sustained customer and revenue diversification will remain a key monitorable.
ACML continues to have a robust financial risk profile; gearing is expected to be at 0-0.1 time over the medium term. Healthy profitability metrics, prudent working capital management, and absence large, debt-funded capital expenditure plans is likely to support the key financial metrics over the medium term.
The ratings reflect the extensive experience of ACML's promoter, established market position in the finer cotton yarn segment, healthy operating efficiency, and established relationships with its key customers. These strengths are partially offset by moderate scale of operations and susceptibility to volatility in raw material prices.

Key Rating Drivers & Detailed Description
* Established market position in the finer count yarn segment: ACML benefits from its established market position and global repute as manufacturer of premium cotton yarn, supported by extensive experience of the promoters, longstanding supplier and customer relationships, and strong in-house operational capabilities. ACML specialises 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 leading to better price realisation, flexibility to pass on increases in raw material prices and adequate captive power facilities resulting in reduced power costs. This is also reflected in its healthy operating profitability of 17-22 per cent over the four years ended fiscal 2016. Further prudent working capital management has resulted in healthy returns on capital employed of 16-20 per cent during the same period. CRISIL believes that the company's credit risk profile will continue to benefit over the medium term from its healthy operating efficiencies.
* Moderate customer and segmental diversity in revenue: Business prospects are largely linked to the performance of the cotton-yarn segment from which it derives significant portion of revenues. Further, 26 per cent of its revenue (net sales) in fiscal 2016 was derived from its largest customer leading to moderate concentration in revenue profile. Though the customer concentration has steadily declined over the three years ended fiscal 2017, CRISIL believes that product and customer concentration in revenue will continue to constrain the business risk profile over the medium term.
* Moderate scale of operations and flattish growth in revenue: With operating income of Rs 524 crore for fiscal 2016, the scale remains moderate. Revenue grew at a compound annual growth rate of 2 per cent over the past three years and is expected to register modest growth over the medium term as there are no significant expansion plans, thereby constraining the business risk profile.

Outlook: Stable

CRISIL believes ACML will maintain its business performance over the medium term, supported by its established market position and longstanding customer relationships. Steady cash accrual and efficient working capital management are expected to keep the financial risk profile comfortable over this period. The outlook may be revised to 'Positive' if higher-than-expected cash accrual while sustaining its customer diversity, leads to improved business risk profile. Conversely, the outlook may be revised to 'Negative' if lower-than-expected revenue or profitability or sizeable debt-funded capital expenditure results in material deterioration in the financial risk profile.

About the Company

ACML, incorporated as a private limited company in 1988, was reconstituted as a public company in 1994; it manufactures cotton yarn, primarily in the finer count range of 60s-100s. Operations are managed by Mr PV Chandran.

Operating income stood at Rs 386 crore and profit after tax (PAT) at Rs 42 crore for the nine months through December 2016. For fiscal 2016, ACML, reported a PAT of Rs 44.5 crore on an operating income of Rs 524 crore, against a PAT of Rs 51.2 crore on an operating income of Rs 519 crore for fiscal 2015.

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 Composite Working Capital Limit NA NA NA 423.0 CRISIL A1
NA Proposed Working Capital Facility NA NA NA 32.55 CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  455.55  CRISIL A/Stable/ CRISIL A1    No Rating Change  22-03-16  CRISIL A-/Positive/ CRISIL A2+    No Rating Change  29-09-14  CRISIL A-/Stable/ CRISIL A2+  CRISIL BBB+/Positive/ CRISIL A2 
            28-01-16  CRISIL A-/Positive           
Non Fund-based Bank Facilities  LT/ST    -   No Rating Change    No Rating Change    No Rating Change  29-09-14  CRISIL A2+  CRISIL A2 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Composite Working Capital Limit 423 CRISIL A1 Cash Credit* 80 CRISIL A-/Positive
Proposed Working Capital Facility 32.55 CRISIL A/Stable Cash Credit# 80 CRISIL A-/Positive
-- 0 -- Composite Working Capital Limit 90 CRISIL A2+
-- 0 -- Letter of Credit 90 CRISIL A2+
-- 0 -- Long Term Loan 5.82 CRISIL A-/Positive
-- 0 -- Proposed Working Capital Facility 9.73 CRISIL A-/Positive
-- 0 -- Working Capital Facility$ 75 CRISIL A-/Positive
-- 0 -- Working Capital Facility 25 CRISIL A-/Positive
Total 455.55 -- Total 455.55 --
*Fully interchangeable with Packing Credit and 50% sublimit of Working Capital Demand Loan
# Fully interchangeable with Working Capital Demand Loan and pre and post shipment export credit facilities
$ Fully interchangeable with Cash Credit, Packing Credit, Letter of Credit and Bill Discounting
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
Criteria for rating Short-Term Debt (including Commercial Paper)

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