Rating Rationale
March 21, 2023 | Mumbai
DCM Nouvelle Limited
Ratings downgraded to 'CRISIL BBB / Stable / CRISIL A3+ '
 
Rating Action
Total Bank Loan Facilities RatedRs.210 Crore
Long Term RatingCRISIL BBB/Stable (Downgraded from 'CRISIL BBB+ / Stable')
Short Term RatingCRISIL A3+ (Downgraded from 'CRISIL A2 ')
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 downgraded its ratings on the bank facilities of DCM Nouvelle Limited (DNL) to CRISIL BBB/Stable/CRISIL A3+ from CRISIL BBB+/Stable/CRISIL A2.

 

The downgrade reflects weakening of business risk profile of the company as due to moderation in cotton-yarn spread, operating profitability during April-Dec in the ongoing fiscal declined to 3.5%. Though operating profitability is expected to improve in last quarter of the fiscal and thereafter, its steady improvement, amid volatility related to cotton-yarn spread, will remain a key monitorable. Nevertheless, the operating profitability for fy23 shall half to around 5-6%, as against 11-12% estimated previously, hence leading to moderation in debt protection indicators too. Business risk profile remains partly aided by companys established market position and healthy scalability, estimated at Rs 780-800 crore for fy23; around Rs 630 crore reported till Dec-22.

 

Financial risk profile, especially liquidity, remains supported by pre-payment of entire long-term debt during fy23, cushion available in bank lines and sizeable networth aiding the capital structure. Absence of sizeable debt funded capital expenditure over the medium term, and expected business revival, will further aid the financial risk profile over the medium term as well.

 

The ratings continue to reflect the extensive experience of the promoter in the cotton industry, advantageous location of the unit, and 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

CRISIL Ratings has combined the business and financial risk profiles of DNL and its subsidiary, DCM Nouvelle Specialty Chemicals Ltd (DNS), in which DNL holds 76% equity stake.

 

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:

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. The company has already achieved revenue of around Rs ~630 crores till third quarter of fiscal 2023, despite the lower demand from international market due to the Russia-Ukraine war and other geopolitical factors. The company has been able to compensate the lost sales with the domestic sales as it has well established customer base in India. In the current quarter, export sales are likely to contribute 50-55% (in line with previous fiscals) to total sales. Established market position and healthy clientele would continue to aid business risk profile over the medium term as well.

 

Advantageous location of the unit

Manufacturing facility 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.

 

Comfortable financial risk profile:

The financial risk profile of DNS is comfortable as indicated by low expected total outstanding liabilities to adjusted net worth of 0.9-1 time supported by a large networth of Rs 300-320 crores expected as on March 31, 2023. Debt protection metrics are also likely to be comfortable, with interest coverage ratio of 4.8-5.0 times in fiscal 2023; however, net cash accrual to adjusted debt (NCAAD) ratio is likely to be weak at 0.13 time on account of operating losses in the second and third quarters of fy23. However, the NCAAD ratio is expected to improve to 0.25-0.29 time over the medium term. Absence of sizeable debt funded capital expenditure over the medium term, and expected business revival, will further aid the financial risk profile over the medium term.

 

Weakness:

Vulnerability to fluctuations in raw material prices impacting operating margin

Since cotton is an agricultural commodity, its availability depends on 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. On account adverse market condition leading to moderation in cotton-yarn spread, operating profitability during April-Dec in the ongoing fiscal declined to 3.5%. Though operating profitability is expected to improve in last quarter of the fiscal and thereafter, its steady improvement, amid volatility related to cotton-yarn spread, will remain a key monitorable. Nevertheless, the operating profitability for fy23 shall half to around 5-6%, as against 11-12% estimated previously. Any further moderation in the same, leading to weakening to 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. In the current quarter, it is expected the company will be able to record export sales contribution of around 50-55% (in line with the previous years) with the upliftment of lockdown in China and situations getting stabilized in Europe resulting revived demand. Although, the lower demand from international market due to the Russia-Ukraine war and other geopolitical factors was compensated with the domestic sales as it has well established customer base in India, this resulted in lower profitability, hence, However, the sustainability of demand from overseas market will remain a key monitorable over the medium term.

Liquidity: Adequate

Bank limit utilisation was moderate at 49% on average for the 12 months through December 2022. Of the sanctioned term loan of Rs ~131 crore for the planned capex of Rs ~161 crore, only Rs ~68 crore has been availed till date and is running under moratorium. Cash accrual, expected at Rs 59-60 crore for fiscal 2024 and Rs 66-68 crore for fiscal 2025, will sufficiently cover yearly term debt obligation of Rs 25-28 crore over the medium term. The surplus will cushion liquidity. Current ratio is expected to remain healthy at 1.7-1.8 times as on March 31, 2023.

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

Significant and steady increase in volumetric sales and sustaining operating margin at over 10-12%

* Timely completion of capex and its stabilisation thereafter

Efficient working capital management leading to lower dependence on external debt and improvement in return on capital employed

 

Downward factors

* Decline in revenue and profitability leading to net cash accrual under Rs 25-30 crore

* Stretched working capital cycle or more than expected debt funded capex weakening financial risk profile and liquidity

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.

Key Financial Indicators

As on / for the period ended March 31

 

2022

2021

Operating income

Rs crore

822.15

520.15

Reported profit after tax (PAT)

Rs crore

122.79

30.51

PAT margin

%

13.49

5.42

Adjusted debt/adjusted networth

Times

0.51

0.90

Interest coverage

Times

29.55

7.69

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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) Complexity level Rating assigned with outlook 
 NA Cash credit NA NA NA 30 NA CRISIL BBB/Stable
 NA Pre-shipment credit NA NA NA 52 NA CRISIL A3+
NA Post shipment credit  NA NA NA 70 NA CRISIL A3+
NA Long-term loan NA NA Jan-28 48 NA CRISIL BBB/Stable
NA Inland/Import Letter of Credit NA NA NA 8 NA CRISIL A3+
NA Letter Of Guarantee NA NA NA 2 NA CRISIL A3+

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

DCM Nouvelle Specialty Chemicals Ltd

Full consolidation

Majority stake held by DNL

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 200.0 CRISIL A3+ / CRISIL BBB/Stable   -- 26-08-22 CRISIL BBB+/Stable / CRISIL A2 19-08-21 CRISIL A3+ / CRISIL BBB/Positive 27-03-20 CRISIL A3+ / CRISIL BBB/Stable --
      --   --   -- 03-03-21 CRISIL A3+ / CRISIL BBB/Stable   -- --
Non-Fund Based Facilities ST 10.0 CRISIL A3+   -- 26-08-22 CRISIL A2 19-08-21 CRISIL A3+ 27-03-20 CRISIL A3+ --
      --   --   -- 03-03-21 CRISIL A3+   -- --
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 A3+
Letter Of Guarantee 2 Punjab National Bank CRISIL A3+
Long Term Loan 48 Punjab National Bank CRISIL BBB/Stable
Post Shipment Credit 70 Punjab National Bank CRISIL A3+
Pre Shipment Credit 52 Punjab National Bank CRISIL A3+

This Annexure has been updated on 21-Mar-2023 in line with the lender-wise facility details as on 23-Feb-2023 received from the rated entity

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Cotton Textile Industry
CRISILs Approach to Recognising Default
CRISILs Criteria for Consolidation

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