| Himatsingka Seide Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A-/Negative/CRISIL A2+’ ratings on bank facilities of Himatsingka Seide Limited (HSL; part of the Himatsingka group).
The rating action takes into account delayed deleveraging and moderation in liquidity for HSL, vis-a-vis CRISIL rating’s earlier expectation, owing to impact of pandemic. The operating performance for fiscal 2021 was impacted with revenue de-growth expected at ~7-8% while operating profitability margin is expected at 13-15% as manufacturing operations were impacted severely in first half of the fiscal due to lockdown measures as well as the end user demand (mainly from US/Europe based home textile retailers) fell significantly due to non-operation of the stores. However, since the second half of fiscal 2021, revenue and profitability has recovered substantially supported by healthy export demand from its overseas customers in US and European markets (90% of HSL’s revenues), owing to increase focus on health and hygiene. The second wave of Covid-19 in India is unlikely to have major impact as manufacturing operations continue and capacity utilization remains healthy as well as the retailers in USA and Europe continue to operate normally.
However, owing to the pandemic impact in first half, debt metrics such as interest cover, and the ratio of net debt to earnings before interest, depreciation, taxes and amortization (net debt / EBITDA) are estimated at ~1.6-1.8 times and ~6-7 times respectively in fiscal 2021, as against CRISIL Ratings’ earlier expectation of ~3 times and ~4 times, respectively. Liquidity of HSL has moderated with cash surpluses, which stood at ~Rs 218 crore as on March 31, 2020 are estimated to have reduced below ~Rs 150 crore at the end of fiscal 2021, partially also due to delays in receipt of subsidies, GST refunds and government incentives. Besides, working capital bank limit utilization has also remained high at close to ~90% during fiscal 2021 due to higher capacity utilizations and increase in raw material prices. The company has recently tied up an additional loan of ~Rs 200 crore to support incremental working capital needs arising out of rapidly building order book, and to enhance liquidity buffer.
Overall, the company is expected to post healthy revenue growth in fiscal 2022 on a lower base of fiscal 2021 while operating profitability is also expected to improve to ~18-20%. The terry towel plant, commissioned in October 2019 ramped up significantly from the second quarter of fiscal 2021 and achieved a capacity utilization of ~50% by end of March 2021. The capacity utilization is expected to improve further in fiscal 2022 ~55-65%, which will add to overall revenues as well as profitability. Besides, the capacity utilization of the sheeting plant increased to ~75% at the end of March, 2021, which is better than pre-COVID levels.
Net debt is estimated to have reduced to almost Rs.2300 crore at March 31, 2021, from Rs. 2600 crore at March 31, 2020, due to better working capital management and term loan repayments. With improvement expected in business performance in fiscal 2022, interest cover, and net debt / EBITDA are expected to recover to ~3.1-3.3 times and ~3.6-3.8 times respectively in fiscal 2022, from ~1.6-1.8 times and 6-7 times estimated for fiscal 2021. Recovery in debt metrics envisaged in fiscal 2021, has been delayed due to pandemic impact. Nevertheless, debt levels are expected to correct in fiscal 2022, supported by cash accruals of Rs.325-350 crores, limited capital spending, and annual term loan repayments of ~Rs.250 crore.
The rating continues to reflect the group's established market position in the bedding and terry verticals of the home textile segment. The ratings also factor in strong operating efficiency, aided by the vertically integrated businesses (manufacturing and distribution) in the home textiles segment. These strengths are partially offset by modest financial risk profile, susceptibility of performance to economic downturns in end-user markets and to volatility in raw material prices. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HSL and its subsidiaries (owned directly or indirectly): Himatsingka Wovens Pvt. Ltd, Himatsingka Holdings North America, Inc. and Himatsingka America, Inc.. The companies, collectively referred to as the Himatsingka group, have a common management, and strong operational and financial linkages, with past instances of support.
CRISIL Ratings has also restated the increase in valuation of plant, property, and equipment by about Rs 240 crore owing to Ind-AS, to earlier historical levels. The acquisition cost of Tommy Hilfiger Home, Copper Fit and other brands acquired in May 2018, has also been capitalised, and is to be amortised over next five years from fiscal 2019.
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 group is among the top five home textile players in India, with a presence in manufacturing as well as distribution. It has a high-end bed sheet manufacturing capacity of 61 million meters per annum (mmpa), terry towel manufacturing capacity of 25000 tonnes per annum, spinning capacity of 211,584 spindles a and drapery and upholstery fabrics manufacturing capacity of 1.8 mmpa. The group holds licenses to brands such as Tommy Hilfiger Home, Calvin Klein Home, Disney and Barbara Barry, and caters to private label programmes of major retailers. Branded sales contribute over 75% to the overall revenues, and have witnessed strong growth in the pre-pandemic period.
During fiscal 2021, the company secured marketing rights for Disney home textile products in the EMEA region. This will help the company increase its presence outside the US. Furthermore, the company added several new clients in both verticals, which should help in moderating client concentration over medium to long term.
HSL has also tied up with Applied DNA Sciences (ADNAS), a leading authentication and supply chain security company, to ensure tagging of all kinds of cotton, including PIMA cotton that is grown in US. This will ensure that purity of the product can be verified at each point, along the supply chain. The group has registered three brands, PimaCott, HomeGrown and Organiccott in this platform. Such initiatives will help drive customer preferences and augur well for business performance over the medium term.
Manufacturing capability is complemented by vertical integration into distribution and retail. The distribution business provides a significant market reach in the Americas, efficient warehousing infrastructure, a global sourcing base, and access to large customers such as CostCo, Bed, Bath and Beyond, TJ Maxx, Walmart in the home textiles space. The manufacturing business yields an operating margin of 25-30%, while the distribution business fetches a lower margin of 3-4%. Share of manufacturing is increasing, with over 75% of bedsheet requirement now being procured internally (up from 50% in fiscal 2017). This, coupled with backward integration into spinning, has helped the margin increase to 21.8% in fiscal 2019, from 10.4% in fiscal 2015. In fiscal 2020, the operating margin dropped to 19.9% owing to retrospective withdrawal of MEIS incentives by Government of India in January 2020, revision in product mix, in favour of products with lower realisations, to enhance capacity utilisation as well as pandemic impact in the last quarter of fiscal 2020. Lower-than-expected operating margins could delay the envisaged improvement in debt protection metrics, and hence, any adverse impact on operating margins owing to changes in RoDTEP rates or adverse forex movement, remains a key rating sensitivity factor.
Weaknesses:
The group's balance sheet is leveraged due to sizeable capex of Rs.1950 crore undertaken between fiscal 2016-2020, including for acquisition of brands, and higher working capital requirement, resulting in substantial debt addition. This involved expansion of the sheeting capacity, and installation of a high-count spinning unit and a terry towel unit. Doubling of sheeting capacity to 46 mmpa was completed in October 2016. Additionally the sheeting capacity was increased to 61 MMPA in third quarter of fiscal 2019, though de-bottlenecking. This capacity expansion has helped enhance contribution of the high-margin domestic manufacturing business. The spinning unit was commissioned in February 2018, to improve backward integration and reduce dependence on external yarn sourcing. The terry towel facility started commercial operations in October 2019. Over the medium term, capex intensity is expected to be low, and focus will be on ramping up capacity utilisation. Any delay in realisation of benefits from the capex, in the form of growth in revenues and operating profitability, will remain key rating sensitivity factors.
Operations are also highly working capital intensive, with short term borrowings remaining high due to utilisation levels of newly installed capacities being ramped up, inventory comprising finished products and high credit extended to global retailers. Delay in receipt of subsidies, GST refunds, and government incentives amounting to almost Rs. 120 crores has also stretched the working capital cycle in recent years.
Debt metrics were adversely impacted in fiscal 2021, owing to losses in the initial quarter of the fiscal arising out of lockdown and pandemic impact. The financial risk profile is expected to improve over medium term, with healthy recovery in revenues, as well as ramping up of terry towel capacity, resulting in cash generation of at least Rs.300 crore annually. With no major capital spending and progressive debt repayments of Rs.250 crore annually in the next two fiscals, debt levels are expected to gradually reduce, benefitting debt metrics. Besides, timely receipt of dues from governments can also help lower working capital borrowings in the near term.
The US accounts for over 70% of the Himatsingka group's turnover, and hence, performance will be susceptible to any major slowdown and increase in competition in that market. Also, as top five leading customers account for bulk of textile revenue, the group's fortunes are susceptible to their sourcing policies. HSL is enhancing its presence in Europe, and expects a significant increase in revenue from the region in fiscal 2020. Nevertheless, while prospects for home textile exports are healthy, competition is on the rise, with higher trade incentives offered by competing countries. Operating profitability remains partially vulnerable to adverse movements in foreign exchange rates, with HSL being a net exporter. |
Liquidity: Adequate Liquidity remains adequate, supported by the company’ healthy cash generating ability and policy of maintaining surplus cash as a buffer. The company has reduced working capital by over Rs 175 crores in FY21. Cash surpluses stood at ~Rs 150 crore at March 31, 2021. Working capital bank line utilisation averaged at ~90% due to ramp up of capacity utilization, delay in release of incentives and subsidies by the government, and increasing raw material prices. The company has tied up an additional long term loan of ~Rs 200 crore to boost liquidity, and free up some of the working capital limits. Annual cash accrual of Rs 325-350 crore per fiscal over next couple of fiscals, will suffice to meet maturing debt of Rs 250 crore per annum. Capex spend is expected to be low at less than Rs.100 crore annually, over the next 2 fiscals. |
Outlook: Negative CRISIL believes favourable demand outlook, better utilization of the terry towel and bed linen capacities, benefits of backward integration from the spinning unit will help HSL materially improve its business performance over the medium term. HSL's debt levels peaked in fiscal 2020, and CRISIL Ratings expects the company to continue debt reduction over the medium term improving debt metrics. |
Rating Sensitivity factors Upward Factors
Downward Factors
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About the Group The Himatsingka group is a vertically integrated textile major with a global footprint. The group focuses on manufacture, retail and distribution of home textile products. On the manufacturing front, the group operates one of the largest capacities in the world, for bedding and bath products, drapery and upholstery fabrics, and fine count cotton yarn. Spread across North America, Europe and Asia, the group's retail and wholesale distribution divisions own and/or licenses among the largest brand portfolios in the home textile space. With a team of over 8,000 people, the group continues to build capacities and enhance reach in the global textile space.
The group reported a loss after tax of Rs 91 crore (unadjusted for goodwill) on operating income of Rs 1524 crore in the first nine months of fiscal 2021, against Rs 82 crore (unadjusted for goodwill) and Rs 1974 crore, respectively, in the corresponding period of previous fiscal. |
Key Financial Indicators (Consolidated; CRISIL-adjusted financials)
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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)
#Interchangeable with bills discounting |
Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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