Rating Rationale
May 20, 2020 | Mumbai
Grasim Premium Fabric Private Limited
Ratings continues on 'Watch Positive'
 
Rating Action
Total Bank Loan Facilities Rated Rs.57.39 Crore
Long Term Rating CRISIL AA+ (Continues on 'Rating Watch with Positive Implications')
Short Term Rating CRISIL A1+ (Continues on 'Rating Watch with Positive Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of Grasim Premium Fabric Private Limited (GPFPL) continue to be on 'Rating Watch with Positive Implications'.
 
The ratings were placed on watch on May 30, 2019, following the announcement of the proposed merger of GPFPL with Grasim Industries Ltd (Grasim; rated 'CRISIL AAA/Stable/CRISIL A1+') on May 24, 2019. The merger and eventual transfer of liabilities are subject to the shareholders' and regulatory approvals. CRISIL will remove the ratings from watch and take a final rating action post-conclusion of the merger.

The ratings continue to reflect the operational and financial benefits that GPFPL derives from its strong parent, Grasim; established customer relationships; and above-average financial risk profile. These strengths are partially offset by modest scale of operations in an intensely competitive industry and moderate working capital requirement.
 
The company's plants were temporarily shut down from March-end till April 2020 due to restrictions to contain the spread of Covid-19. However, the plants are operational now, post-receipt of necessary approvals from concerned authorities, albeit at a lower-than-normal capacity utilisation due to weak demand. Timely normalisation of operations, supported by increase in demand, will be a key monitorable.

Analytical Approach

The ratings of GPFPL factor in the support expected from its parent. CRISIL believes GPFPL will, in case of exigencies, receive timely need based support from Grasim for debt repayment, considering its strategic importance to the parent. Besides, Grasim has 100% shareholding, provides operational and managerial support, and both entities have a shared name.

Key Rating Drivers & Detailed Description
Strengths: -
* Benefits derived from strong parent and its expected support
GPFPL is likely to receive strong operational and management support from Grasim, which is the largest producer of viscose staple fibre (VSF) and has a 9% share in the global man-made fibre market. Parent's operations are highly integrated, with a diversified product profile within the VSF segment and a robust market position, making it one of the world's lowest-cost VSF producers. The synergies will thus help turnaround operations.
 
* Established and diversified customer base
GPFPL has a strong and diversified clientele comprising premium shirt brands, along with a large network of distributors spread across India, Europe, and the US. Longstanding relationships with customers, wide product offerings, high quality, and marketing focus from parent augurs well for the company's business risk profile.
 
* Integrated operations providing operating efficiency
Operations are forward integrated from yarn to garment, which supports operating efficiency and enhances profitability. Operating margin improved to 13.8% in fiscal 2020 from 13.3% in the previous fiscal.
 
* Above-average financial risk profile:
Adjusted networth was Rs 73 crore as on March 31, 2020, against Rs 61 crore in the previous fiscal. Also, gearing and total outside liabilities to adjusted networth ratio remained healthy and improved to 0.26 time and 0.87 time, respectively, from 0.61 time and 1.36 times, respectively, in the previous fiscal. Debt protection metrics were adequate, with improvement in interest coverage ratio to 8.0 times for fiscal 2020 from 3.0 times in the previous fiscal because of significant reduction in debt and hence reduced finance cost.

Weaknesses:
* Modest scale of operations in intensely competitive industry
Business risk profile remains constrained by the company's modest scale of operations, as reflected in operating income of Rs 165 crore in fiscal 2020 (similar to 2019 level). Revenue growth was robust for the first nine months to Rs 138 crore, but slowed down due to the pandemic in the fourth quarter of fiscal 2020, leading to overall flat sales. Furthermore, intense competition in the textiles industry because of many unorganised players restricts pricing flexibility and bargaining power with customers and suppliers. 

* Moderate working capital requirement:
Gross current assets have been 125-132 days over the past two fiscals because of a large inventory. However, working capital requirement is supported by long credit from suppliers, leading to moderate bank limit utilisation.
Liquidity Strong

Liquidity is driven by parent support. Cash accrual is expected to be around Rs 14 crore against debt obligation of Rs 5.5 crore in fiscal 2021 and no capital expenditure. Cash and cash equivalents stood at about Rs 0.01 crore as on March 31, 2020. Fund-based limit of Rs 22.5 crore was utilised by 42% on average over the 6 months through April 2020. Internal accrual, cash and cash equivalents, and unutilised bank limit are likely to be sufficient to meet debt obligation as well as incremental working capital requirement. Also, Grasim is expected to provide need-based support.
 
Rating sensitivity factors
Upward factors
* Upward change in rating by 1 notch post-completion of merger with Grasim
* Sustained improvement in business risk profile translating into healthy cash accrual

Downward factors
* Downward change in the credit risk profile of Grasim by 1 notch or more
* Any change in the support philosophy of Grasim that may lead to a downward revision in the quantum and timing of support and, hence, the ratings of GPFPL.

About the Company

GPFPL, incorporated in 2007, is a 100% subsidiary of Grasim and manufactures and processes cotton fabric used in shirting. Unit is in Kolhapur, Maharashtra, and operations are managed by Mr Sachin Kumar.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Crore 165 165
Profit After Tax (PAT) Rs.Crore 10 (5)
PAT Margins % 6.1 (2.8)
Adjusted debt/adjusted networth Times 0.26 0.61
Interest coverage Times 8.00 3.00

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)		 Rating assigned
with outlook
NA Cash Credit NA NA NA 22.50  CRISIL AA+/Watch Positive
NA Proposed Long Term Bank Loan Facility NA NA NA 22.79  CRISIL AA+/Watch Positive
NA Rupee Term Loan NA NA Jan-21 0.26  CRISIL AA+/Watch Positive
NA Rupee Term Loan NA NA Dec-21 4.34  CRISIL AA+/Watch Positive
NA Short Term Bank Facility NA NA NA 7.50  CRISIL A1+/Watch Positive
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  57.39  CRISIL AA+/(Watch) Positive/ CRISIL A1+/(Watch) Positive  21-02-20  CRISIL AA+/Watch Positive/ CRISIL A1+/Watch Positive  28-08-19  CRISIL AA+/Watch Positive/ CRISIL A1+/Watch Positive  11-12-18  CRISIL BBB/Stable/ CRISIL A3+    --  -- 
            30-05-19  CRISIL AA+/Watch Positive/ CRISIL A1+/Watch Positive  30-11-18  CRISIL BBB/Stable/ CRISIL A3+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 22.5 CRISIL AA+/Watch Positive Cash Credit 22.5 CRISIL AA+/Watch Positive
Proposed Long Term Bank Loan Facility 22.79 CRISIL AA+/Watch Positive Proposed Long Term Bank Loan Facility 18.52 CRISIL AA+/Watch Positive
Rupee Term Loan 4.6 CRISIL AA+/Watch Positive Rupee Term Loan 6.37 CRISIL AA+/Watch Positive
Short Term Bank Facility 7.5 CRISIL A1+/Watch Positive Short Term Bank Facility 10 CRISIL A1+/Watch Positive
Total 57.39 -- Total 57.39 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Bank Loan Ratings
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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