Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Nahar Spinning Mills Ltd (NSML) to ‘Negative’ from ‘Stable’ while reaffirming the rating at 'CRISIL A'. The rating on the short term bank facilities and commercial paper has been reaffirmed at 'CRISIL A1'.

 

The revision in outlook reflects moderation in performance over the near to medium term, marked by expected decline in profitability and credit metrics. Operating profitability is expected to moderate to 5-6% in FY2024, as compared to around 9% for FY2023. In Q1 FY2024, EBIDTA margin has sharply declined to 1.4% due to moderation in cotton yarn prices resulting in lower realisations and inventory losses. The prices of domestic raw cotton have declined from Nov’22 peak levels of ~Rs. 1 lakh per candy and reached ~Rs. 55-60,000 per candy in Aug’23. The impact of higher cost cotton inventory is expected to impact company’s operating margins for H1 FY2024. However, with the expected stabilization of cotton prices, coupled with sustaining domestic demand, the margins are expected to gradually recover from H2 FY2024 onwards.

 

Operating income in FY2024 is expected to be higher than FY2023 backed by likely 15-20% increase y-o-y in sales volumes driven primarily by buoyant domestic demand.

 

NSML also has capex plans of around Rs 150 crore in FY2024, around 50% of which is expected to be debt-funded. The capex will be towards capacity augmentation which is expected to contribute incremental revenues of around 8-10% in the medium term. While this will lead to increase in long term debt of the company in FY2024, long term debt is not expected to increase to more than 30% of total debt for the company. Further, adjusted gearing is expected to remain less than 1 time in the medium term despite capital expenditure (capex) over the medium term.

 

With expected moderation in profitability, debt protection metrics are also expected to moderate in FY2024, with interest coverage expected in vicinity of 2 times and net cash accruals to adjusted debt (NCAAD) ratio of around 8% respectively vis-à-vis 8.5 times and 24% in FY2023. Debt protection metrics are subsequently expected to gradually recover with improvement in profitability over the medium term.

 

Furthermore, need-based support is available from Nahar Capital and Financial Services Ltd (Nahar Capital).

 

NSML had achieved revenues of Rs 2841 crore in FY2023 post extraordinary year of FY2022 which had seen decadal highs in revenues and operating margins. Sales volume had also declined on account of weak export demand which was partially compensated by higher domestic demand. Operating margin had also moderated to 8.9% in FY2023. Despite impact on profitability, debt protection metrics remained healthy in FY2023, as indicated by interest coverage and net cash accrual to adjusted debt (NCAAD) ratios of around 8.5 times and 24%, respectively, in FY2023, compared with 11.3 times and 56%, respectively, in FY2022.

 

The ratings continue to reflect the company’s strong position in the cotton yarn and knitted garments segments, large scale of operations with moderate integration, moderate though improving financial risk profile, and healthy financial flexibility. These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates, subdued operating efficiency and large working capital requirement.

Analytical Approach

The Nahar group comprises Nahar Spinning, Nahar Industrial Enterprises Ltd, Oswal Woollen Mills Ltd, Nahar Polyfilms Ltd and Monte Carlo Fashions Ltd. These companies are under the same management, with Mr Jawaharlal Oswal as the group's chairman.

 

CRISIL Ratings has considered the standalone business and financial risk profiles of Nahar Spinning, as there are no material linkages between the companies. CRISIL Ratings has factored in expected financial support from the Nahar group in case of any exigency.

Key Rating Drivers & Detailed Description

Strengths:

Strong position in the cotton yarn and knitted garment segments: Nahar Spinning is one of the largest cotton yarn manufacturers in India and a leading manufacturer and exporter of knitted garments, with revenue at Rs 2,841 crore in FY2023. The company is also one of the top 10 spinners in the domestic market. It has a strong position in several export markets, such as Bangladesh, China, Egypt and Vietnam. Domestic clients include many large, reputed home textile and denim manufacturers. The company also has longstanding relationships with international garment retailers in the US and Canada and, thus, benefits from the diversified geographic reach.

 

Large scale of operations and moderate integration: The company consumes over 800,000 bales of cotton every year and is, therefore, one of the largest buyers of cotton in India. Large-scale procurement will keep the bargaining power high over the medium term. Operations are partially forward integrated, with presence in the knitted garment segment supporting operating efficiency. The company is focusing on de-risking its exposure to cotton yarn products and emphasising on value-added yarns, such as cotton melange, organic yarn and multi-twist yarn, which fetch higher margin.

 

Stable financial risk profile and healthy financial flexibility

Gearing is expected to continue be below 0.8 time in the medium term, compared with around 0.47 times in FY2023. Similarly, TOL/TNW is also expected to be below 1 time in the medium term compared to 0.62 times in FY2023. Adjusted interest coverage ratio was healthy at around 8.5 times in FY2023. Though it is expected to moderate to above 2 times in FY2024 due to moderation in profitability, it is expected to subsequently improve to above 3 times in the medium term, supported by expected increase in capacity utilisation and improved realisations. The company has also undertaken efficiency improvement measures to remove production bottlenecks along with higher share of value-added products in the overall product mix. Financial flexibility was healthy, as reflected in moderate bank limit utilisation.

 

The company has planned total capex of Rs 200 crore per annum over the medium term. Healthy liquidity and comfortable financial flexibility with annual net cash accruals of Rs 80-150 crore in the medium term will be sufficient to meet debt repayment obligations.

 

Weaknesses:

Susceptibility to volatility in raw material prices and forex rates

The company derives around 90% of its total revenue from the yarn segment, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin has fluctuated between 3% and 23% over the past 10 fiscals through FY2023. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021), wherein demand spiralled and then fell rapidly. Additionally, as Nahar Spinning derives close to half of its revenues from the overseas markets, it is susceptible to significant volatility in forex rates.

 

Modest operating efficiency and large working capital requirement

Operating efficiency of Nahar Spinning is lower than that of other players because of the product mix and higher export-oriented products. This has resulted in high volatility in the operating margin. The company has also undertaken efficiency improvement measures to remove production bottlenecks, including modernisation of plants in fiscals 2021 and 2022.

 

Operations are working capital intensive (gross current assets estimated at 168 days as on March 31, 2023), driven by seasonal production of cotton, leading to high reliance on debt. Although change in the cotton procurement policy to maintain higher inventory until November will lead to increased utilisation of the working capital limit, this is mitigated by proportionate increase in cash accrual. Working capital loans are expected to constitute around 70% of overall debt levels over the medium term.

Liquidity: Strong

Unutilised bank lines stood at above Rs 400 crore as of May 2023. Expected net cash accrual of Rs 80-150 crore per year will be sufficient to cover the debt repayment obligations of Rs. 40-80 crore per year over the medium term. The company has capex plans of Rs 200 crore over the medium term and is focusing on increasing capacity utilisation and modernisation of its unit. Furthermore, Nahar Capital, which has book investments amounting to Rs.797 crore (as on March 31, 2023) on a consolidated basis, will extend need-based support.

Outlook: Negative

CRISIL Ratings believes credit risk profile of Nahar Spinning Mills Limited may weaken in the medium term due to expected moderation in operating performance, though financial risk profile is expected to sustain.

Rating Sensitivity factors

Upward factors

• Steady and sustained improvement in operating performance with EBITDA margins improving to 7-9% on a sustained basis. 
• Steady cash generation and prudent working capital management and capital spending resulting in sustenance of capital structure at healthy level

 

Downward factors

• Sustained deterioration in operating performance with EBITDA margins remaining below 4-5%
• Moderation in cash accruals, stretch in the working capital cycle and higher than expected debt funded capex impacting the credit metrics, for instance, TOL/TNW increasing to 2.5 times.

About the Company

Nahar Spinning is the flagship company of the Nahar group, a business conglomerate that operates in the spinning, garments and hosiery segments. After the group was restructured in fiscal 2007, Nahar Spinning acquired the entire textile business of the erstwhile Nahar Exports Ltd, while the group Holdings and other investments were transferred to a new company, Nahar Capital.

 

The company has manufacturing units at Ludhiana, Jitwal Kalan, Jodhan and Lalru in Punjab and at Raisen Mandideep in Madhya Pradesh. It undertakes spinning, mercerising-cum-dyeing, knitting and garmenting activities. Moreover, it has two co-generation power plants in Ludhiana and Lalru, with capacities of 3.8 megawatt (MW) and 4.8 MW, respectively. The company also has solar power stations of 0.81 MW, 0.78 MW and 1.3-MW at Jodhan, Lalru and Mandideep respectively.

 

For the three months ended June 30, 2023, revenue stood at Rs 749 crore and profit after tax (PAT) at negative Rs 18 crore against revenue of Rs 862 crore and profit after tax (PAT) of Rs 72 crore in the corresponding period of the previous fiscal.

As on/for the period ended March 31		2023	2022
Revenue	Rs crore	2,841	3597
Profit after tax	Rs crore	111	503
PAT margins	%	3.9	14
Adjusted Debt / Adjusted Net Worth	Times	0.47	0.74
Interest Coverage	Times	8.5	11.2

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	545	NA	CRISIL A/Negative
NA	Cash Credit*	NA	NA	NA	50	NA	CRISIL A/Negative
NA	Cash Credit*	NA	NA	NA	355	NA	CRISIL A/Negative
NA	Cash Credit*	NA	NA	NA	50	NA	CRISIL A/Negative
NA	Letter of Credit#	NA	NA	NA	194	NA	CRISIL A1
NA	Letter of Credit#	NA	NA	NA	14	NA	CRISIL A1
NA	Letter of Credit#	NA	NA	NA	4	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	44.4	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Mar-25	50	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Jun-24	26	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Mar-27	176	NA	CRISIL A/Negative
NA	Commercial Paper	NA	NA	7 to 365 days	23.5	Simple	CRISIL A1

*Interchangeable with packing credit foreign currency/overdraft

#Interchangeable with bank guarantee/buyer's credit