Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Himatsingka Seide Ltd (HSL; part of the Himatsingka group) to ‘Stable’ from ‘Negative’ and has reaffirmed the rating at ‘CRISIL BBB+’. The short-term rating has been reaffirmed at ‘CRISIL A2'.

 

Revision in the outlook reflects the improved business risk profile and comfortable financial risk profile. Operating performance has picked up in the second half of fiscal 2023, with easing of supply chain challenges and drop in domestic cotton prices below international prices, making domestic home textile products competitive in the global market. With the expectation of a healthy cotton crop for the current cotton season, this trend should sustain in fiscal 2024. Also, demand in the second half of the current fiscal will be supported by festive demand from the US, which along with steady consumer discretionary spending, will ensure a constant order flow from big box retailers. In the first half of fiscal 2024, HSL recorded an operating profit (earnings before interest, depreciation, tax and amortisation or EBITDA) of Rs 308 crore and reported a higher margin of 21.5% compared to 3% in the same period last fiscal.

 

Revenue is likely to grow by 8-10% this fiscal year propped by strong export demand, while operating margin will stabilize at 18-22%, compared to 12.8% in fiscal 2023, aided by better capacity utilisation and easing of cotton prices. Further, net cash accrual is expected to increase to Rs 270-280 crore in fiscal 2024, from Rs 114 crore in fiscal 2023. HSL also intends to infuse equity in an electricity generating company (primarily renewable energy) as per group captive norms applicable for the state of Karnataka, to minimise its energy cost, reliance on coal for generation of steam and meet its targets under the environmental and social goals. HSL has launched its products under the Himeya brand in Indian market to boost its participation in local markets in the medium term.

 

The home textile industry is in the final leg of its capital expenditure (capex) cycle, which is scheduled for completion in fiscal 2024, and will thereafter, deleverage balance sheets in the medium term. HSL has been following a similar trend, wherein capex for spinning and terry towel capabilities were phased out over the three fiscals and completed in fiscal 2020. The company intends to limit its capex and focus on improving its financial risk profile. With plans to deleverage the balance sheet, interest coverage ratio and gross debt to EBITDA ratios are likely to be above 2.7 times and below 3.6 times, respectively, in the medium term, compared with around 1.19 times and 7.81 times, respectively, in fiscal 2023.

 

Liquidity should suffice to cover debt obligation for one year and subsequently, expected cash accrual and surplus of Rs 200-400 crore per fiscal should comfortably meet annual long term debt obligations of Rs 200-300 crore. The one-day cash conversion cycle for receivables under RoSCTL (Rebate of State and Central Taxes and Levies on Export of Garments and Made-ups) offers a liquidity cushion of Rs 60-70 crore, along with expected proceeds of Rs 40-50 crore under the NJN (Nuthana Javali Neeth) scheme. Bank limit utilisation averaged 86% through the 12-month period ending September 30, 2023, providing some additional cushion to liquidity. With timely reimbursements under the ROSCTL programme and scheduled term loan repayment, HSL could bring down its debt to Rs 2,695 crore as of March 31, 2023, from Rs 2,805 crore in the previous year.

 

The ratings continue to reflect the healthy market position of the Himatsingka group in the drapery, upholstery, terry and bedding segments. The rating also factors in strong operating efficiency arising from vertically integrated businesses (manufacturing and distribution) in the home textiles segment. These strengths are partially offset working capital-intensive operations and exposure to various risks posed by volatility in cotton prices and foreign exchange (forex) rates, susceptibility to slowdown in the end-user market and competition in the home textiles segment.

Analytical Approach

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. This is because these companies, collectively referred to as the Himatsingka group, are under a common management and have strong operational and financial linkages, with past instances of support.

 

Also, CRISIL Ratings has restated the increase in valuation of plant, property and equipment by around Rs 240 crore owing to Ind-AS. The acquisition cost of Tommy Hilfiger Home, Copper Fit and brands acquired in May 2018 has also been capitalised and will be amortised over 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:

• Healthy market position in the home textile segment: The Himatsingka group is among the top five home textile players in India. It has high-end manufacturing facilities for bedsheets (61 million meters per annum or mmpa), terry towels (25,000 tonne per annum), spinning (211,584 spindles) and drapery and upholstery fabric manufacturing (2 mmpa). Foray into the terry towels segment, improved customer diversity and capacity utilisation of terry towels improving to 57% in fiscal 2023 from 11% in fiscal 2020, have enhanced the overall business risk profile.

 

The group has licenses for brands such as Tommy Hilfiger Home, Calvin Klein Home and Kate Spade, and caters to the private labels of major retailers. Branded sales contribute more than 70% of overall revenue. Furthermore, the company has added clients in both verticals, which should help in moderating client concentration over the long term.

 

HSL has 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 the 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 on this platform. Such initiatives will help attract customers and should augur well for the business over the medium term.

 

• Strong operating efficiency: Manufacturing capability is complemented by vertical integration into distribution and retail. The distribution business provides significant market reach in the Americas, an efficient warehousing infrastructure, a global sourcing base and access to large customers such as CostCo, TJ Maxx and Walmart in the home textiles space. The manufacturing business yields a healthy operating margin of 18-20%, while the distribution business fetches a margin of 3-4%. This, along with backward integration into spinning, led to a rise in margin to 16.7% in fiscal 2019, from 10.4% in fiscal 2015. The margin was impacted by the Covid-19 pandemic in the first half of fiscal 2021 and by inflation in the second half of fiscal 2022. Strong headwinds in the textile industry, with differential in international and domestic pricing of cotton, coupled with supply chain challenges, impacted captive demand and led to the lowest margin of 12.8% in the second half of fiscal 2023. However, with correction in domestic cotton prices and restocking by big box retailers in key overseas markets, HSL recorded an operating profit (earnings before interest, depreciation, tax and amortisation or EBITDA) of Rs 308 crore in first half of fiscal 2024 and reported a higher margin of roughly 21.5% for this period as compared to 3% in the same period last fiscal.

 

Weaknesses:

• Modest financial risk profile: The group's balance sheet is leveraged owing to sizeable capex of Rs 1,950 crore undertaken over fiscals 2016-2020 (to expand sheeting capacity and install a high-count spinning unit and a terry towel unit), acquisition of brands and higher working capital requirement, resulting in substantial debt. This resulted in lower accretion to networth in the past three years.

 

Over the medium term, the company is unlikely to incur any major capex, with focus on ramping up capacity utilisation. Delay in realisation of benefits from capex, through growth in revenue and operating profitability, will be key rating sensitivity factors.

 

Furthermore, operations are working capital intensive, with higher reliance on short-term debt, owing to ramp up in utilisation in newly installed capacities, sizeable inventory and large credit offered to customers.

 

Interest coverage ratio and gross debt to EBITDA ratios are expected to be above 2.7 times and below 3.6 times, respectively, in the medium term, vis-à-vis around 1.19 times and 7.81 times, respectively, in fiscal 2023. Debt to Ebitda ratio is projected below 4 times in fiscal 2025. Any significant addition of debt, straining the debt protection metrics, will remain a key monitorable.

 

• Susceptibility to economic downturns: The US accounts for over 70% of the group's turnover, and hence, performance of the Himatsingka group will be susceptible to any major slowdown or increase in competition in this market. Also, as the top five customers account for bulk of textile revenue, the group's fortunes are susceptible to sourcing policies. HSL is enhancing its presence in Europe and India, and expects to increase its revenue from the region. Nevertheless, while prospects for home textile exports are healthy, competition is on the rise, with higher trade incentives offered by competing countries. Operating profitability is partially vulnerable to adverse movements in forex rates, with HSL being a net exporter.

 

• Exposure to volatility in cotton prices and forex rates: Operating margin remains susceptible to fluctuations in prices of key raw material, cotton (which forms 50% of the cost of yarn). Cotton prices are volatile as they are sensitive to international demand and supply factors, rainfall and pest attacks. This impacts profitability despite benefits derived from large procurement and adequate risk management systems. Furthermore, HSL is a net exporter and derives nearly 90% of its revenue from exports. While it hedges its forex exposure, volatility in the forex rates could impact profitability adversely. Therefore, movement in forex rates and cotton prices will be key monitorables.

Liquidity: Adequate

Cash surplus stood at Rs 113 crore as on March 31, 2023. The one-day cash conversion cycle for receivables under RoSCTL offers a liquidity cushion of Rs 60-70 crore, along with expected proceeds of Rs 40-50 crore under the NJN scheme. Bank limit utilisation averaged 86% through the 12-month period ending September 30, 2023, providing some additional cushion to liquidity. Expected cash accrual of more than Rs 260 crore and Rs 370 crore in fiscals 2024 and 2025, respectively, will sufficiently cover the annual long term debt obligations of Rs. 200-300 crore and maintenance capex of Rs 50-70 crore per fiscal.

Outlook: Stable

CRISIL Ratings believes better operating performance should help HSL enhance profitability and reduce its long-term debt. Better utilisation of the terry towel and bed linen capacities, higher operating margin, and benefits of backward integration from the spinning unit will further enhance the overall business risk profile of the Himatsingka group.

Rating Sensitivity factors

Upward factors:

• Stronger business performance, resulting in higher cash accrual and enhanced return on capital employed
• Sustained improvement in gross debt to EBIDTA ratio below 3.50 times

Downward factors:

• Weak business performance, and operating margins below 10-11%, impacting cash generation
• Lower-than-anticipated improvement in debt metrics, due to substantial debt, with larger capex or stretch in working capital cycle; for instance, net debt to EBIDTA remaining above 4.5 times on a sustained basis

About the Company

The Himatsingka group is a vertically integrated textile major with a global footprint. The group focuses on design, development, manufacture and distribution of home textile products. It operates one of the largest capacities in the world for bed and bath products, drape and upholstery fabrics, and fine count cotton yarn. Spread across North America, Europe and Asia, it owns or has licenses for the largest brand portfolios in the home textile space. With over 8,000 people, the group continues to build capacities and enhance reach in the global textile space.

 

The group reported profit after tax of Rs 58 crore (unadjusted for goodwill) and operating income of Rs 1,434 crore in the first half of fiscal 2024, as against loss after tax of (Rs 88 crore; unadjusted for goodwill) on operating income of Rs 1,251 crore in the first half of fiscal 2023.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Packing Credit*	NA	NA	NA	1159	NA	CRISIL A2
NA	Term Loan	NA	NA	Dec-29	1300.09	NA	CRISIL BBB+/Stable
NA	Proposed Fund Based Bank Limits	NA	NA	NA	393.91	NA	CRISIL A2
NA	Bank Guarantee	NA	NA	NA	5.5	NA	CRISIL A2
NA	Letter of Credit	NA	NA	NA	305	NA	CRISIL A2
NA	Proposed Non Fund Based  Limits	NA	NA	NA	219.5	NA	CRISIL A2

*Interchangeable with bills discounting