| DCM Nouvelle Limited | ||||||
| Ratings reaffirmed at 'CRISIL BBB / CRISIL A3+ '; outlook revised to 'Positive' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the rating of bank facilities of DCM Nouvelle Limited (DNL) to ‘Positive’ from ‘Stable’ while reaffirming rating at ‘CRISIL BBB/CRISIL A3+’.
The revision in outlook reflects significant improvement in business risk profile esp. profitability. Despite decline in revenue to Rs 563 crore in fiscal 2021 from Rs 586 crore in fiscal 2020, DNL reported profit after tax (PAT) of Rs 31 crore in fiscal 2021 compared to Rs 4 crore in fiscal 2020. This increase in PAT was on account of significant improvement in operating margin esp. second half of fiscal 2021 which stood at 16.86% compared to a meagre 0.88% in the first half of the same fiscal. The improvement in operating margin in second half of the fiscal was on account of increase in cotton yarn price parity i.e. the difference between the price at which the final product was sold by the company and the price at which the raw material was bought. Since the price parity has continued to remain elevated even in first quarter of fiscal 2022, so the operating margin was at its highest at 23.2% compared to 19.6% and 13.5% in fourth and third quarter of fiscal 2021, respectively. CRISIL Ratings expects operating margin to remain high for fiscal 2022 and will be a key monitorable over the medium term.
Further, DNL is expanding its spindle capacities by 44000 (~40% of existing capacity). The entire project is expected to cost Rs 195 crore and is expected to be funded by 75% debt and 25% equity. The enhanced capacities are expected to operationalize from third quarter of fiscal 2023. Despite a large debt funded capital expenditure, the financial risk profile is expected to remain comfortable on account of significant improvement in networth anticipated over the medium term because of the healthy profitability. Any significant delay in operationalization and its impact on financial risk profile, esp. liquidity will be a key monitorable over the medium term.
The ratings continue to reflect promoter’s extensive experience in cotton industry, proximity of manufacturing facilities to raw material location and comfortable financial risk profile. These strengths are partially offset by the vulnerability to fluctuation in raw material prices. The ratings also continue to factor in the understanding that there is no financial support expected to be extended to DCM Limited (rated ‘CRISIL D/CRISIL D’) from DNL in the long term. |
Key Rating Drivers & Detailed Description Strengths: * Company’s established presence in cotton industry and established relations with customers The textile unit has continued to be operated by the same family members since its inception in 1991. Long track record of presence in the cotton textile industry has helped promoters to not only understand the dynamics of various markets (both domestic and export) but also establish relations with its customers and suppliers. This is reflected in length of relationship with few customers ranging beyond 2 decades. CRISIL Ratings believes such an extensive experience of promoters will continue to support business risk profile of DNL over the medium term.
* Strategic location of manufacturing unit DNL’s manufacturing unit is located in Hissar which is a major cotton-growing belt. DNL procures majority of its raw material requirements from various traders and ginners situated locally which help it reduce the logistics cost and also ensure timely availability of raw materials for continuous business operations.
* Comfortable financial risk profile Financial risk profile is comfortable as reflected in adjusted networth and total outside liabilities to tangible networth (TOLTNW) of Rs 184 crore and 1.09 times as on March 31, 2021. Further debt protection metrics are also expected to remain comfortable with interest coverage and net cash accrual to adjusted debt (NCAAD) of around 7.7 times and 0.28 times respectively for fiscal 2021.
Weakness: * Vulnerability to fluctuation in raw material prices DNL's operating margins are susceptible to the volatility in the cotton prices. Moreover, cotton is an agricultural commodity and hence its availability is highly dependent on monsoon. Furthermore, government interventions and fluctuations in global cotton output have resulted in sharp fluctuations in cotton prices. Such sharp fluctuations in cotton prices are likely to impact the margins of spinning mills. |
Liquidity: Adequate Overall liquidity profile of DCM is adequate as reflected by working capital limit utilization at an average of 76% in last 7 months ending July 2021. Further the entire cash accrual generation, estimated around Rs 70 crore in fiscal 2022 will be available entirely for capital expenditure and working capital requirements as DNL had pre-paid its principal obligations due for fiscal 2022 in fiscal 2021 itself. Current ratio at 1.58 times as on March 31, 2021 was also healthy. |
Outlook: Positive CRISIL Rating believes DNL’s operating profitability will continue to remain healthy in the near to medium term. |
Rating Sensitivity factors Upward Factors * Revenue of Rs 700 crore and operating margin of at least 12-13% for fiscal 2022 * Completion of capacity expansion capex without any major cost or time overruns
Downside Factors * Significant delays in completion of capacity expansion plans impacting financial risk profile, esp. liquidity * NCA/repayment reducing to less than 1.8 times |
About the Company DNL is a Hissar based cotton yarn manufacturer with spindle capacity of 1,15,000. This textile unit has been operational since 1991. Till March 31, 2019 the unit was part of DCM Limited (rated CRISIL D/CRISIL D) post which it was demerged into DCM Nouvelle Limited via NCLT order.
DNL is listed on both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Mr. Hemant Bharat Ram is looking after day to day operations of DNL. |
Key Financial Indicators
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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)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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