Non cooperation by Issuer

Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Nahar Spinning Mills Limited (Nahar Spinning) at 'CRISIL A/Stable/CRISIL A1'.

 

The ratings reflect sustenance of business and financial risk profile despite expected moderation in performance in fiscal 2023. Revenue is expected to fall in the first half of this fiscal due to slowdown in exports despite some support from higher realization and domestic demand. However, demand is expected to pick up in the second half of the fiscal, with recovery in export sales due to upcoming festive season and expected fall in cotton prices on commencement of cotton season. As a results, revenue is expected to decline by ~10% this fiscal. Operating margins are expected to drop to 12-14% in fiscal 2023 given the expected compression in cotton yarn spreads from Rs. 128/kg in fiscal 2022 to Rs. 90-95/kg this fiscal and reduction in capacity utilization. This performance is on the backdrop of decadal high operating margin of 22.6% and revenue growth of 70% in fiscal 2022 due to healthy demand for cotton yarn from domestic & export markets, very high cotton-yarn spreads and better capacity utilisation.

 

With expected moderation, NCA will reduce to Rs. ~250 crore this fiscal from Rs. 568 crore in fiscal 2022. Despite impact on profitability, debt protection metrics are expected to remain healthy, as indicated by interest coverage and net cash accrual to adjusted debt (NCAAD) ratios expected at 5-8 times and 20-40%, respectively, in fiscal 2023 and 2024, compared with 11.4 times and 56%, respectively, in fiscal 2022. Long-term debt is expected to increase over the medium term to finance the planned capex of ~Rs 150 crore in fiscal 2023. Adjusted gearing is expected to remain less than 1 time in the medium term despite capital expenditure (capex) over the medium term. Interest coverage and NCAAD are estimated to sustain in the range of 5-8 times and 20-45% over the medium term.

 

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

 

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 3,597 crore in fiscal 2022. 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.

 

In the first half of the fiscal 2023, export demand from Bangladesh, China, Europe, South Korea have reduced due to deferred purchase on account of decadal high cotton yarn prices and expectation of prices to fall post commencement of cotton season. Therefore, buyers are buying just for immediate consumption. In the second half of fiscal 2023, export demand is expected to pick up due to reduced inventory at the end of textile players along with the benefit of the China Plus One strategy and ban on Xinjiang cotton for exports to the US market.

 

• 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 fiscals 2023 and 2024, compared with 0.73 times in fiscal 2022 (1.20 times in fiscal 2021). Similarly, TOL/TNW is also expected to be below 1 time in fiscals 2023 and 2024 compared to 0.97 in fiscal 2022. Adjusted interest coverage ratio was robust at 11.2 times in fiscal 2022 and is expected to remain above 5 times in the medium term, supported by increasing 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 150 crore per annum over the medium term. Adequate liquidity and comfortable financial flexibility with annual net cash accruals of Rs 250-300 crore in the medium term will be more than suffice to meet debt obligations.

 

Weaknesses:

• Susceptibility to volatility in raw material prices and forex rates: The company derives ~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 1% and 23% over the 10 fiscals through 2022. 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 two-thirds of its revenue 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, which ranged from 1% to 23% in the past decade.

 

The company has also undertaken efficiency improvement measures to remove production bottlenecks, including modernisation of plants in fiscals 2021 and 2022, which will help maintain reasonable operating profitability of close to ~11%, even if there are down cycles in the industry. Moreover, the company is not stocking up inventory during these times of high cotton prices and is only procuring for any immediate demand, thereby reducing its inventory risk.

 

Operations are working capital intensive (gross current assets estimated at 179 days as on March 31, 2022), 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 to remain at moderate levels over the medium term.

Liquidity: Adequate

Unutilised bank lines stood at around Rs 500 crore in 11 months ending June 2022. Expected net cash accrual of Rs 250-275 crore this fiscal will be more than sufficient to cover the debt obligations of Rs. 50-80 crore p.a. over the medium term. The company has capex plans of Rs 150 crore per annum over the medium term and is focusing on increasing capacity utilisation and modernisation of its unit. Furthermore, Nahar Capital, which has liquid investments amounting to Rs.1653 crore (as on March 31,2022) on a consolidated basis, will extend need-based support.

Outlook: Stable

Nahar Spinning will maintain its strong market position and continue to benefit from its integrated operations despite some tough times in the cotton yarn industry. Company is expected to generate sufficient cash accruals in medium term to meet LT debt obligations and reduce dependence on short term borrowings.

Rating Sensitivity factors

Upward factors

• Stable operating performance resulting net cash accrual over Rs 250crore on a sustained basis. 
• Steady cash generation and prudent working capital management and capital spending resulting in sustenance of total outside liabilities to tangible networth (TOL/TNW) ratio.

 

Downward factors

• Deterioration in operating performance leading operating margin below 6-8%.
• Fall in cash generation, stretch in the working capital cycle and increased 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 company 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 and 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, 2022, revenue stood at Rs 862 crore and profit after tax (PAT) at Rs 71 crore against sales of Rs 738 crore and profit of Rs 100 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31		2022	2021
Revenue	Rs crore	3597	2,112
PAT	Rs crore	503	41
PAT margin	%	14.0	1.9
Adjusted debt / adjusted networth	Times	0.73	1.20
Interest coverage	Times	11.24	2.87

 

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	437	NA	CRISIL A/Stable
NA	Cash Credit*	NA	NA	NA	18	NA	CRISIL A/Stable
NA	Cash Credit*	NA	NA	NA	323.82	NA	CRISIL A/Stable
NA	Letter of Credit#	NA	NA	NA	1.86	NA	CRISIL A1
NA	Letter of Credit#	NA	NA	NA	79.3	NA	CRISIL A1
NA	Letter of Credit#	NA	NA	NA	83.25	NA	CRISIL A1
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	134.07	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	222	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Mar-2027	42.41	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Mar-2025	81.75	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Jun-2024	7.39	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Mar-27	77.55	NA	CRISIL A/Stable
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