| DCM Nouvelle Limited | ||||||
| Ratings Reaffirmed | ||||||
| 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 reaffirmed its 'CRISIL BBB/Stable/CRISIL A3+’ ratings on the bank loan facilities of DCM Nouvelle Limited (DNL).
The ratings continue to reflect the extensive experience of the promoters in the cotton industry and the comfortable financial risk profile of the company. These strengths are partially offset by vulnerability of operating margin to fluctuations in raw material prices and exposure to demand risks in key operating countries. |
Key Rating Drivers & Detailed Description Strengths: Established position in the cotton industry and strong relationships with customers: The promoter family has been operating the textiles unit since 1991, which has enabled them to understand market dynamics and establish healthy relationships with customers and suppliers. The company exports to China, Bangladesh, Portugal, Mauritius and Singapore, resulting in strong revenue of ~Rs 294 crore in the second quarter of fiscal 2024. Revival of demand from the international market will help the company clock revenue of more than Rs 1,000 crore for the full fiscal. Established market position and healthy clientele will continue to aid the business risk profile over the medium term as well.
Comfortable financial risk profile The financial risk profile is supported by healthy capital structure reflected in low total outstanding liabilities to adjusted networth ratio of 0.99 time supported by a large networth of Rs 321 crore as on March 31, 2023. Debt protection metrics were comfortable, too, with interest coverage of 5.6 times in fiscal 2023, though net cash accrual to adjusted debt (NCAAD) ratio was a modest 0.09 time on account of operating losses in the second and third quarters of fiscal 2023. The NCAAD ratio is expected to improve to 0.1 time over the medium term. Absence of sizeable debt-funded capital expenditure over the medium term and expected business revival will enhance the financial risk profile over the medium term.
Weaknesses: Vulnerability of operating margin to fluctuations in raw material prices As cotton is an agricultural commodity, its availability depends on the monsoon. Furthermore, government interventions and fluctuations in global cotton output may result in sharp movement in cotton prices, thereby impacting the profitability of spinning mills. With adverse market conditions leading to moderation in cotton-yarn spread, the operating profitability of DNL declined to around 3.9% for fiscal 2023 from 19.3% in the previous fiscal. The operating profitability was 3.8% in the first quarter of fiscal 2024, and declined to around 1% in the second quarter. While the operating profitability for fiscal 2024 is expected to remain in line with that in fiscal 2023, it will be lower than the previous expectation of CRISIL Ratings. Any further moderation in the profitability, leading to weakening of debt protection metrics, will remain a key rating sensitivity factor.
Exposure to demand risks Exports account for 50-60% of total sales, majority of which are to Europe, China and Bangladesh. Bangladesh is one of the largest exporters of textiles in the world, and any economic disturbance there could adversely affect the business risk profile of DNL. Export contribution to revenue will improve for the company in the third quarter of fiscal 2024, as the lockdown in China is lifted and the situation in Europe stabilises, thereby reviving demand. Although the lower international demand due to the Russia-Ukraine war and other geopolitical factors was offset by domestic sales because of the company’s established customer base in India, profitability has declined. Sustenance of demand from overseas markets will remain monitorable over the medium term. |
Liquidity: Adequate Bank limit utilisation was moderate at 44%, on average, for the 12 months through October 2023. Cash accrual is expected above Rs 25 crore for fiscal 2024 and above Rs 30 crore for fiscal 2025 against yearly term debt obligation of Rs 7-15 crore over the medium term. The surplus will cushion liquidity. The current ratio is expected to remain healthy at 1.5 times as on March 31, 2024. |
Outlook: Stable DNL will continue to benefit from its established market position in the cotton industry, strong relationships with customers and strategic location of the plant. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Company DNL is a Hissar-based cotton yarn manufacturer with capacity of 115,000 spindles. 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 the National Stock Exchange and the Bombay Stock Exchange. Mr Hemant Bharat Ram manages daily operations. |
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 - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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