Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Extensive Experience of the Promoters: Owing to the experience of over three decades in the textile business the promoters have developed a deep understanding of the industry and have established strong relationships with its customers and suppliers and better understanding of industry dynamics. The company is as established diversified geography profile and customer base. The company caters to wide customer base, both in India and Overseas, with revenue from the export market gradually increasing. Moderate scale of operations provides it an operating flexibility in an intensely competitive industry. CRISIL Ratings believes that the business risk profile of the company will continue to benefit the company’s business risk profile over the medium term.

Moderately efficient working capital management: The working capital is efficiently managed, as reflected in gross current assets (GCAs) of 92-130 days for the three fiscals through 2023 and at 124 days in fiscal 2023, driven by receivables of 41-52 days and inventory of 38-64 days. Receivables are expected to improve over the medium term, which remains a key rating sensitivity.

Weaknesses:

Susceptibility to volatility in raw material prices: The company remains exposed to risks related to fluctuations in raw material prices, as prices of cotton, the key raw material as well as polyester are volatile, and some are linked to crude oil prices which are crude oil derivatives. The volatility in raw material prices impacts the operating margin as reflected in the volatile operating margins ranging from 6.3-8.8% in the last three fiscals ended at fiscal 2023. The operating margin are still under pressure at 4.16% in H1 of fiscal 2024 due to lower demand and decline in prices of cotton. Volatile input prices also led to volatile realizations thereby affecting the overall revenue earned by the players. However, the risk of volatile input prices is partially mitigated by moderate inventory holding by the company. Improvement in the operating margins remains a key monitorable over medium term.

Average capital structure and debt protection metrics: Adjusted gearing and TOLTNW ratio were at 2.36 and 2.14 times, respectively, as on March 31, 2023. The leverage is expected to improve over the medium term with steady accretion to reserves given the expected increase in revenue. Debt protection metrics were average because of modest profit and sizeable interest outgo. Interest coverage and net cash accrual to total debt ratios were at 1.8 times and 0.06 time, respectively, in fiscal 2023, and are expected to improve significantly over the medium term.