Rating Rationale
January 14, 2019 | Mumbai
Nahar Spinning Mills Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1508.4 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.23.5 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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

The ratings continue to reflect Nahar's established position in the cotton yarn and knitted garments segments, its large scale and moderately integrated operations across the textile value chain, and healthy financial flexibility. These strengths are partially offset by susceptibility to volatile cotton and cotton yarn prices, and foreign exchange rates, the average financial risk profile, and working capital-intensive operations.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the cotton yarn and knitted garments segments: Nahar is one of India's largest cotton yarn manufacturers, and a leading manufacturer and exporter of knitted garments, with revenue of Rs 2,136 crore in fiscal 2018. Revenue has recorded modest compound annual growth rate of 2% over the five fiscals through March 2018. It is also one of the top ten spinners in the domestic market. It has an established position in several export markets in Bangladesh, China, Egypt, and Vietnam. Domestic clients include many large, reputed home textile and denim manufacturers. The company also has longstanding relationships with key international garment retailers in USA and Canada, and thus, benefits from the diversified geographical reach, lending stability to revenue.

* Large scale and moderately integrated operations across the textile value chain: Nahar consumes over 400,000 bales of cotton every year, and is therefore, one of the largest buyers of cotton in India. Large-scale procurement should keep bargaining power high over the medium term. Also, operations are partially forward integrated, with presence in knitted garments, supporting operating efficiencies.

* Healthy financial flexibility: Financial flexibility is healthy, as reflected in moderate bank limit utilisation of 78% over the 12 months ending October 31, 2018. Moreover, it derives need-based support from Nahar Capital, which had liquid investments of Rs 525 crore as of September 2018; these investments can be liquidated and infused into Nahar on a need basis.

Weaknesses
* Susceptibility to volatility in cotton and cotton yarn prices, and foreign exchange rates: The company derives over 90% of total revenue from the yarn segment, which remains susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin has fluctuated between 1% and 21% over the seven fiscals through 2018. Demand for cotton and yarn, to a large extent, is driven by international demand-supply dynamics. In the past decade, the industry has seen three cycles (fiscals 2012, 2015 and 2018), when demand spiralled and then fell rapidly. Additionally, as Nahar derives close to two-thirds of its revenue from overseas markets, and hence, remains exposed to any significant volatility in forex rates

* Average financial risk profile, with working capital-intensive operations: The financial risk profile is constrained by working capital-intensive operations (gross current assets of 204 as on March 31, 2018), driven by seasonal production of cotton, leading to high reliance on debt. Although the cotton procurement policy has been changed to maintain lower raw material inventory, working capital debt remains high, thus constraining debt protection metrics. Low profitability during fiscal 2018, weakened debt protection measures significantly, as reflected in adjusted interest coverage ratio of 1.8 times. However, during the half-year ended September 30, 2018, operating margin has bounced back to historical levels, due to moderate raw material prices, depreciation of rupee and lower power cost. Sustained improvement in operating performance should strengthen debt protection measures. Adequate liquidity and comfortable financial flexibility should continue to support debt repayments.
Outlook: Stable

CRISIL believes Nahar will maintain its established market position and continue to benefit from its integrated operations over the medium term. Debt protection metrics, which weakened sharply in fiscal 2018, are likely to gradually improve over the medium term.

Upside scenario
* Stable business risk profile with operating margin sustained over 10%
* Improvement in financial risk profile, with total outside liabilities to tangible networth not higher than 1.25 times
* Sustained growth in liquid surplus

Downside scenario
* Subdued revenue growth or sharp decline in operating profitability as witnessed in fiscal 2018
* Significant debt-funded capital expenditure likely to drive debt to EBIDTA ratio to rise above 4.5x times and weaken the financial risk profile
* Increase in working capital requirement

Liquidity
Liquidity is adequate, driven by expected cash accrual of over Rs.140 crore per annum in fiscals 2019 and 2020, against maturing debt of around Rs 110 crore and Rs 85 crore, respectively, and the incremental working capital requirement. The fund-based limit of Rs.1000 crore, was utilised at an average 78% over the 12 months ended October 31, 2018. Capex plans of around Rs 200 crore over the next three fiscals will be funded through long-term debt and internal accrual. Liquidity is further bolstered by strong group support especially from Nahar Capital, which has liquid Investments worth Rs 525 crore.

About the Company

Nahar 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 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.

Nahar has manufacturing units in Ludhiana, Jitwal Kalan, Jodhan, and Lalru, all in Punjab; and at Raisen, Mandideep in Madhya Pradesh. It undertakes spinning, mercerising-cum-dyeing, knitting, and garmenting activities. Besides, 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 1.5 MW solar power station at Mandideep.

For the six months ended September 30, 2018, net profit was Rs 39 crore on operating income of Rs 1123 crore, against net loss of Rs 45 crore on operating income of Rs 1037.

Key Financial Indicators
As on/for the period ended March 31 2018 2017
Revenue Rs crore 2,136 2,143
Profit After Tax (PAT) Rs crore (32) 46
PAT Margin % (1.5) 2.1
Adjusted debt/Adjusted networth Times 1.22 0.86
Interest coverage Times 1.80 4.41

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)
ISIN Name of instrument Date of allotment Coupon
rate (%)
Maturity date Issue
size
(Rs.Cr)
Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 23.5 CRISIL A1
NA Cash Credit* NA NA NA 1000.0 CRISIL A/Stable
NA Letter of Credit# NA NA NA 165.0 CRISIL A1
NA Proposed Term Loan NA NA NA 7.5 CRISIL A/Stable
NA Term Loan NA NA Mar -2020 23.67 CRISIL A/Stable
NA Term Loan NA NA Sep'2023 13.83 CRISIL A/Stable
NA Term Loan NA NA Sep-2020 35.62 CRISIL A/Stable
NA Term Loan NA NA Sep -2019 76.42 CRISIL A/Stable
NA Term Loan NA NA Jan- 2020 32.17 CRISIL A/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 154.19 CRISIL A/Stable
*Interchangeable with packing credit foreign currency/overdraft
#Interchangeable with bank guarantee/buyer's credit
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  23.50  CRISIL A1      26-06-18  CRISIL A1  22-08-17  CRISIL A1  07-10-16  CRISIL A1  CRISIL A1 
                    19-02-16  CRISIL A1   
Fund-based Bank Facilities  LT/ST  1343.40  CRISIL A/Stable      26-06-18  CRISIL A/Stable  22-08-17  CRISIL A/Stable  07-10-16  CRISIL A/Stable  CRISIL A/Stable 
                    19-02-16  CRISIL A/Stable   
Non Fund-based Bank Facilities  LT/ST  165.00  CRISIL A1      26-06-18  CRISIL A1  22-08-17  CRISIL A1  07-10-16  CRISIL A1  CRISIL A1 
                    19-02-16  CRISIL A1   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 1000 CRISIL A/Stable Cash Credit* 1000 CRISIL A/Stable
Letter of Credit# 165 CRISIL A1 Letter of Credit# 165 CRISIL A1
Proposed Long Term Bank Loan Facility 154.19 CRISIL A/Stable Proposed Long Term Bank Loan Facility 154.19 CRISIL A/Stable
Proposed Term Loan 7.5 CRISIL A/Stable Proposed Term Loan 7.5 CRISIL A/Stable
Term Loan 181.71 CRISIL A/Stable Term Loan 181.71 CRISIL A/Stable
Total 1508.4 -- Total 1508.4 --
*Interchangeable with packing credit foreign currency/overdraft
#Interchangeable with bank guarantee/buyer's credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for rating short term debt

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