| DCM Nouvelle Limited | ||||||
| Ratings upgraded to 'CRISIL BBB+/Stable/CRISIL A2' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the bank facilities of DCM Nouvelle Limited (DNL) to ‘CRISIL BBB+/Positive/CRISIL A2’ from ‘CRISIL BBB/Positive/CRISIL A3+’.
The upgrade factors in improved business risk profile marked by improvement in both revenue and operating profitability. On account of favorable market situation, revenue improved by 58% during fy22 (on-year basis) backed by improved volumes and better realization. Further, improvement in cotton-yarn spread also resulted in healthy operating profitability of 20% during fy22 (11.5% during previous year). CRISIL believes that on account of moderation in cotton yarn spread witnessed till date and further moderation expected over the medium term, the operating profitability will moderate too but will remain comfortable at around 11-12%. The same is also supported by 13.3% of operating margin reported during April-June in fy23 amid moderation in spread.
The rating also factors in company’s healthy financial risk profile backed by low leverage and healthy debt protection indicators. Further, despite debt funded capital expenditure for expanding spindle capacities, the overall financial risk profile will remain comfortable supported by expected accretion to reserves and no dividend pay-out. Also, liquidity remains supported by healthy net cash accruals and cushion in bank.
The rating continues to reflect the extensive experience of the promoters in the cotton industry, the advantageous location of the unit, and its comfortable financial risk profile. These strengths are partially offset by vulnerability to fluctuations in raw material prices and exposure to demand risks in key operating countries. |
Analytical Approach For arriving at the ratings of DNL, CRISIL Ratings has combined the business and financial risk profiles of DNL and its subsidiary, DCM Nouvelle Specialty Chemicals Ltd (DNS), since DNL holds the majority stake of 76% equity in the said subsidiary. CRISIL Ratings had earlier taken a standalone view on DNL as DNS has been recently incorporated.
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:
The textile unit is being operated by the promoter family members since inception in 1991. The company’s long track record in the cotton textile industry has enabled the promoters to understand market dynamics (both domestic and export) and establish healthy relationships with customers and suppliers, which will continue to support the business. The company has been exporting to various countries including China, Bangladesh, Portugal, Mauritius, Singapore, etc. The company has already achieved revenue of Rs 257.1 crores in first quarter of fiscal 2023, after witnessing on-year growth in revenue of 58% during fy22 driven by both better volumes and improved realization. Going forward, established market position and healthy clientele would continue to aid the business risk profile, especially amid expected moderation of cotton-yarn spread..
The manufacturing unit is in Hissar, Haryana, which is a major cotton-growing belt. DNL procures majority of its raw material requirement from local traders and ginners, reducing logistics cost and ensuring timely availability of raw materials. Proximity to the customer and suppliers, assuring regular order flow, will continue to aid the business risk profile of DNL over the medium term too.
The financial risk profile of DNS is comfortable as indicated by low Total outstanding liabilities to adjusted net worth of 0.67 times supported by comfortable net worth of Rs 307 crores as on March 31, 2022. Debt protection metrics is also comfortable with interest coverage of 29.61 times and net cash accruals to total debt of 0.87 times as on March 31, 2022. DNL is expanding its spindle capacity by 44,000 (~40% of existing capacity) which is expected to cost Rs 160 crore funded by term loan of Rs ~131 crore. Despite large, debt-funded planned capital expenditure (capex), the financial risk profile will remain comfortable.
Weaknesses:
The operating margin is susceptible to volatility in cotton prices. Cotton is an agricultural commodity and hence its availability is highly dependent on monsoons. Furthermore, government interventions and fluctuations in global cotton output may result in sharp movement in cotton prices, impacting the profitability of spinning mills. Although fiscal 2022 has been an extraordinary for the cotton industry players in terms of strong revenue growth and decadal high operating profitability, the said industry performance is not expected to sustain over the medium term. CRISIL believes that on account of moderation in cotton yarn spread witnessed till date and further moderation expected over the medium term, the operating profitability will moderate too but will remain comfortable at around 11-12% (20% during fy22). However, any further weakening leading to deterioration of debt protection indicators will be closely monitored.
Export sales of the company accounts for 50-60% of total sales with majority of the export being made to China and Bangladesh. Bangladesh is one of the largest exporters of Textiles in the world and any economic disturbance on the said geography could potentially impact the order flow to DNL and hence its business risk profile. Further, the company is also expanding its spindle capacity, and timely installation of the same and healthy demand off take thereafter will be closely monitored. |
Liquidity: Adequate Bank limit utilization was moderate at 56% on average for the 12 months through May 2022. The company has already sanctioned a term loan of Rs ~131 crores for the planned CAPEX of Rs ~161 crores out of which only Rs ~30 crores has been availed by the company till date. The company has already incurred Rs ~15 crores of CAPEX which was funded through internal accruals. Cash accrual, expected at Rs 70-80 crore per annum, will sufficiently cover yearly term debt obligation of Rs 25-28 crore expected over the medium term. The surplus will cushion the liquidity.
The company reported cashflow from operations of Rs 82.12 crore and free operating cash flow of Rs 25.57 crore in fiscal 2022. Current ratio was healthy at 2.07 times as on March 31, 2022. |
Outlook: Stable CRISIL Ratings believes DNL will continue to benefit from the established market position of the company in the cotton industry, strong relationship with the customers and strategic advantage of the plant location over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group DNL is a Hissar-based cotton yarn manufacturer with spindle capacity of 115,000. Its textile unit has been operational since 1991. Till March 31, 2019, the unit was part of DCM Ltd, post which it was demerged into DNL through a National Company Law Tribunal order. DNL is listed on National Stock Exchange and Bombay Stock Exchange. Mr Hemant Bharat Ram is looking after daily operations.
DCM Nouvelle Specialty Chemicals Ltd has been recently incorporated with 76% stake of DNL and 24% of Mr Hemant Bharat Ram. The company is incorporated with the intention of vertical expansion of business. Since the company is currently in the Research and Development phase where the product range/specification of the company is yet to be decided, no external debt funding has been availed by the company.
DNL has already recorded revenue of Rs 257 crores in Q-1 of fiscal 2023 and operating margin of 13.31% vis-à-vis Rs 189 crores of revenue and operating margin of 23.25% in Q-1 of fiscal 2022. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Cash Credit | 30 | Punjab National Bank | CRISIL BBB+/Stable |
| Inland/Import Letter of Credit | 8 | Punjab National Bank | CRISIL A2 |
| Letter Of Guarantee | 2 | Punjab National Bank | CRISIL A2 |
| Long Term Loan | 48 | Punjab National Bank | CRISIL BBB+/Stable |
| Post Shipment Credit | 70 | Punjab National Bank | CRISIL A2 |
| Pre Shipment Credit | 52 | Punjab National Bank | CRISIL A2 |
This Annexure has been updated on 08-Mar-2023 in line with the lender-wise facility details as on 23-Feb-2023 received from the rated entity.
Criteria Details
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