Rating Rationale
July 18, 2018 | Mumbai
Ambika Cotton Mills Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.455.55 Crore
Long Term Rating CRISIL A/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale
CRISIL has revised its rating outlook on the long-term bank facilities of Ambika Cotton Mills Limited (ACML) to 'Positive' from 'Stable', and reaffirmed the rating at 'CRISIL A'; the short-term rating has been reaffirmed at 'CRISIL A1'.

The outlook revision factors in steady improvement in the business risk profile, supported by better profitability and sustained diversification in revenue. Revenues are expected to further grow, over the medium term, supported by stable yarn sales and ramp up in capacity utilization of knitting facility. Revenue grew by 9.4% to Rs 584.4 crore for fiscal 2018, due to setting up of fabric capacity of about 40 metric tonne per day (MTPD) during the same fiscal. Fabric revenue increased to Rs 99.37 crore in fiscal 2018, from about Rs 18.1 crore in the previous fiscal. This growth in fabric revenues is likely to continue over the medium term, supported by steady addition in new clients and growth in orders from existing customers.
ACML enjoys strong pricing flexibility, aided by its premium positioning in the cotton yarn market and its adequate captive power facilities. This had resulted in stable operating margin at 17.7-19.6%, over the four years through fiscal 2018. Going forward, continued focus on operating efficiency, coupled with ramp up utilization of fabric manufacturing facility is likely to result in strong operating margin of 19-20% and cash accrual of over Rs 82 crore.
ACML continues to have a robust financial risk profile; total outside liability to tangible net worth (TOLTNW) is expected to be at 0.2 time over the medium term. Although the company is expected to execute capital expenditure (capex) project to increase its spindle capacity over the next two years, but major part of the funding is expected to be through internal accrual. Additionally, healthy profitability and prudent working capital management should support the key financial metrics over the medium term.

The ratings reflect extensive experience of the promoter, established market position in the finer 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
* Established market position in the finer count yarn segment: ACML benefits from its established market position and the global repute as a manufacturer of premium cotton yarn, supported by extensive experience of the promoters, long-standing 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. This has led to better price realisation, 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 returns on capital employed of 15-18% over the four years through fiscal 2018.
* Healthy financial risk profile: Financial risk profile remains healthy, backed by strong capital structure and healthy debt protection metrics. Networth and TOLTNW were comfortable at Rs 428.8 crore and 0.32 time, respectively, as on March 31, 2018. Debt protection metrics are strong, with interest coverage and net cash accrual to total debt ratios of 22.7 times and 2.79 times, respectively, for fiscal 2018. ACML's strong liquidity is marked by sparsely utilised bank lines and healthy cash accrual generation against no major debt obligation.
* 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 around 60% of the ACML's turnover, thereby exposing the company to considerable volatility in forex rates.
Outlook: Positive

CRISIL believes ACML will maintain its business performance over the medium term, supported by its operational efficiency and ramp up in fabric manufacturing. The ratings may be upgraded if the company reported better-than-expected operating performance, while ensuring stability in financial risk profile. The outlook may be revised to 'Stable' if lower-than-expected revenue and operating profitability or large debt-funded capex, weakens the financial risk profile.

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 about 60% of the revenue is derived from exports, the rest is from domestic market. ACML has 4 manufacturing units with a total spindle capacity of 108,288 nos. of compacting system. Additionally, the company has about 40 MTPD of knitting capacity. ACML also has an installed wind mill generation capacity of 27.4 megawatt located in Tamil Nadu. 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
Particulars Unit 2018 2017
Revenue Rs. Cr. 584.47 534.79
Profit After Tax Rs. Cr. 56.3 55.65
Profit After Tax Margin % 9.6 10.4
Adjusted Debt/Adjusted Net worth Times 0.07 0.07
Interest coverage Times 9.6 10.4

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 Crore) Rating Assigned with Outlook
NA Composite Working Capital Limit NA NA NA 423 CRISIL A1
NA Proposed Working Capital Facility NA NA NA 32.55 CRISIL A/Positive
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  455.55  CRISIL A/Positive/ CRISIL A1      04-04-17  CRISIL A/Stable/ CRISIL A1  22-03-16  CRISIL A-/Positive/ CRISIL A2+      CRISIL A-/Stable/ CRISIL A2+ 
                28-01-16  CRISIL A-/Positive       
Non Fund-based Bank Facilities  LT/ST    --    --    --  22-03-16  CRISIL A2+      CRISIL A2+ 
                28-01-16  CRISIL A2+       
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
Composite Working Capital Limit 423 CRISIL A1 Composite Working Capital Limit 423 CRISIL A1
Proposed Working Capital Facility 32.55 CRISIL A/Positive Proposed Working Capital Facility 32.55 CRISIL A/Stable
Total 455.55 -- Total 455.55 --
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 rating short term debt

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