Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities and commercial paper of Nahar Spinning Mills Ltd (Nahar Spinning) to 'CRISIL A/Stable/CRISIL A1' from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The upgrade reflects expectations of better than anticipated improvement in Nahar Spinning’s  operating performance in fiscal 2022. This is driven by healthy demand for cotton yarn from domestic and export markets and recovery in operating profitability amid high cotton-yarn spreads with better capacity utilisation. The operating performance recovered in the second half of fiscal 2021, driven by increasing export demand of yarn from China and Bangladesh, resulting in revenue growing by 54% over the first half. Furthermore, higher surge in yarn realisations against cotton prices has led to increase in cotton-yarn spreads to Rs 130-140/kg in the ongoing fiscal from Rs 95-100/kg in fiscal 2021. Revenue is expected to grow 30-40% year-on-year in fiscal 2022, while the operating margin is expected to sustain at 20-21% given the sustenance of healthy demand and high cotton-yarn spreads. Thereafter, revenue growth is expected to normalise, while operating profitability is expected to stabilise at mid-double digits.

 

With improving profitability, debt protection metrics are expected to recover, as indicated by interest coverage and net cash accrual to adjusted debt (NCAAD) ratios expected at 8-10 times and 50-60%, respectively, in fiscal 2022 and 2023, compared with 2.7 times and 11%, respectively, in fiscal 2021. Short-term debt is estimated to reduce in proportion with increased cash accrual, with bank limit utilisation estimated at 60-70% in fiscal 2022. Long-term debt is expected to increase over the medium term to finance the planned capex of ~Rs 50 crore in fiscal 2022 and Rs 100 crore in fiscal 2023.

 

Adjusted gearing is expected to decline to less than 1 time as on March 31, 2022, from an estimated 1.20 times as on March 31, 2021, despite capital expenditure (capex) over the medium term. Interest coverage and NCAAD are estimated to sustain in the range of 8-10 times and 40-60% over the medium term.

 

Furthermore, need-based support is available from Nahar Capital and Financial Services Ltd (Nahar Capital), which had investments of over Rs 1,013 crore as on March 31, 2021.

 

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 estimated at Rs 2,800 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. Since the second half of fiscal 2021, export demand has substantially increased because of the benefit of the China Plus One strategy, ban on Xinjiang cotton for exports to the US market and subsequent international consumption, along with economic recovery across the globe. Improved competitiveness of Indian spinners in the global market on account of lower domestic cotton prices compared with global prices and supply disruptions amid the Covid-19 pandemic have also contributed to the increase in export demand. Cost of cotton is expected to remain comparatively lower than global prices, with improving demand and the cotton output this season seen at earlier levels.

 

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. The share of value-added products has improved over the past year and stood at ~47% in fiscal 2021.

 

Improving financial risk profile and healthy financial flexibility

Gearing is expected below 1 time in fiscals 2022 and 2023, compared with 1.20 times in fiscal 2021. Similarly, TOL/TNW is also expected to be below 1 time in fiscals 2022 and 2023, compared with 1.45 times in fiscal 2021. Adjusted interest coverage ratio was moderate at 2.87 times in fiscal 2021 and is expected to substantially improve to ~9 times in fiscal 2022, driven by healthy cotton-yarn spreads, 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 200-250 crore over the medium term with capex of ~Rs 50-100 crore per annum. Adequate liquidity and comfortable financial flexibility with annual net cash accruals of Rs 350-420 crore in the medium term will be more than suffice to meet debt obligations of Rs 76 crore and Rs 49 crore in fiscal 2022 and 2023. Moreover, Nahar Capital had investments of over Rs 1,013 crore (including investments in group companies) as of March 2021, which can be liquidated and infused into Nahar Spinning, if required.

 

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 21% over the 10 fiscals through 2021. 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 21% in the past decade. The return on capital employed was weak at negative 0.1% to 14%.

 

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 ~10%, even if there are down cycles in the industry. Moreover, there is an important shift in company’s inventory hedging policy, as it now covers cotton until November against its earlier practice of covering it until September – this led to increased dependence on imports and has impacted profitability in the past. 

 

Operations are working capital intensive (gross current assets estimated at 232 days as on March 31, 2021), 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 Rs 320 crore in July 2021 (bank limit utilisation averaged 75% over the 12 months through July 2021). Expected increase in net cash accrual by Rs 300-350 crore this fiscal will be more than sufficient to cover the debt obligations over the medium term; debt obligation is expected at Rs 76 crore in fiscal 2022 on account of Covid-19 loans taken in fiscal 2021 and capex of ~Rs 50 crore incurred; and further capex of Rs 100 crore in fiscal 2023.The company has capex plans and is focusing on increasing capacity utilisation and modernisation of its unit. Furthermore, Nahar Capital, which had investments of over Rs 1,013 crore (including investments in group companies) as on March 31, 2021, will extend need-based support.

Outlook: Stable

Nahar Spinning will maintain its strong market position and continue to benefit from its integrated operations given the favourable outlook for 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 in cash accrual of over Rs 250-300 crore per annum 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

• Weak operating performance resulting in steep decline in annual cash accrual.
• Fall in cash generation, stretch in the working capital cycle and increased capex impacting the credit metrics, for instance, TOL/TNW increasing to 2.5-2.75 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 and 0.78 MW at Jodhan and Lalru, respectively, and is in the process of installing a 1.3-MW solar power station at Mandideep.

 

For the three months ended June 30, 2021, revenue stood at Rs 730 crore and profit after tax (PAT) at Rs 100 crore against sales of Rs 210 crore and loss of Rs 17 crore in the corresponding period of the previous fiscal.

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	860	NA	CRISIL A/Stable
NA	Letter of Credit#	NA	NA	NA	141	NA	CRISIL A1
NA	Proposed Long-Term Bank Loan Facility	NA	NA	NA	322.47	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Mar-2027	55	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Mar-2025	109	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Jun-2024	20.93	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