Detailed Rationale

Crisil Ratings has downgraded its ratings on the bank loan facilities of Rajapalayam Mills Ltd (RML, part of Ramco group) to ‘Crisil A/Negative/Crisil A2+’ from ‘Crisil A+/Negative/Crisil A1’.

 

The rating action factors in steep moderation in the business performance of RML as expected by Crisil Ratings in fiscal 2025 on account of challenging conditions impacting the revenue growth and operating margin, and leading to low cash accrual. This is also likely to add further pressure on the financial risk profile with debt remaining elevated as the company is expected to continue partly refinancing its debt obligation, and despite modest capital expenditure (capex) plans remaining minimal for the next two fiscals.

 

During the nine-month period (April-December 2024), RML’s revenue grew by 6.5% to Rs 676 crore from Rs 635 crore in the corresponding period of the previous fiscal, supported by better utilisation at the recently commissioned fabric segment, which helped partially offset impact of low sales from the spinning segment, following sluggish domestic demand. RML’s revenue is estimated to register growth of 8-10% in fiscal 2025 at Rs 925-950 crore and in double digits over the medium term on expectations of revival of domestic demand, high exports and improved orders for the fabric segment.

 

The operating margin fell to 8.0% in the April-December 2024 period from 10.8% in the corresponding period of fiscal 2024, lagging Crisil Ratings estimates of over 10%, impacted by continuing adverse cotton-yarn spreads, increase in share of higher cost imported cotton, decline in high-margin exports and drop in captive power procurement from its windmills, which impacted power cost. RML is estimated to report the operating margin of 8-9% in fiscal 2025, and over 10% over the medium term, driven by increased utilisation from the fabric capacity (currently utilised at 70% of installed capacity), full benefit from the recently commissioned solar group captive power facility, better cotton–yarn spreads, high share of revenue from value-added yarn and lower losses in the fabric segment. Yet, the operating margin is unlikely to recover to steady level of 13-15% achieved during fiscals 2018, 2019 and 2023.

 

The financial risk profile remains moderate and is expected to further weaken, as indicated by lower-than-expected operating profits and slight elongation in the working capital cycle, leading to high reliance on debt. Also, the company purchased 3.9% stake in group company, Ramco Industries Ltd (RIL, rated ‘Crisil A1+) for Rs 78 crore, which was funded by debt of Rs 60 crore. Ergo, debt, including corporate guarantees of Rs 140 crore given to weaker textile entities in the Ramco group, stood at Rs 1,250 crore as on December 31, 2024, and same is estimated as Rs 1,250 crore by March 31, 2025. The company is estimated to have posted net losses of Rs 40-50 crore in fiscal 2025, affecting the networth and leading to increase in adjusted gearing (debt including guarantees provided) to ~3 times as on March 31, 2025, compared with 2.53 times a year earlier, while interest coverage is estimated to be just over 1 time in fiscal 2025. Gearing is expected to further deteriorate over the medium term while interest coverage will remain below 2 times owing to possible continuing cash losses and refinancing of debt obligation, which will keep debt elevated. Debt had risen between fiscals 2019 and 2024 with RML undertaking partly debt funded capex of over Rs 1,000 crore, towards mercerisation and fabric capacity expansion, besides other capacity expansion and modernisation. Also, Corporate guarantees provided to Banks on behalf of group companies stood at Rs.135 crores as on December 31, 2024.

 

RML has debt obligation of ~Rs 115 crore each for fiscal 2026 and fiscal 2027. Repayment obligations will increase in case of further debt raising during the fiscal 2026. The company is in the process of disposing some of its non-core assets, however, majority of its repayment is expected to be met by way of refinancing as accrual is not expected to suffice. To address the shortfall, the company has taken approval from its Board of Directors for selling part of its liquid investments in Ramco Cements Ltd (RCL, rated ‘Crisil A1+’), the flagship company of the Ramco group to the extent of Rs 120 crore in multiple tranches, which will be utilised towards retiring the debt availed for purchase of shares of RIL  and partly for debt reduction.

 

The investment in RIL is part of consolidation in shareholding being made by the management to rationalise and simplify the group structure. Any material debt raising as part of this process to further consolidate holdings in group companies will be monitorable.

 

The ratings continue to draw support from material liquid investments held by RML in RCL and in other group entities. The market value of these investments was around ~Rs 3,000 crore as on March 24, 2025. RML has encumbered ~59% of its investments in RCL to raise project term debt and corporate loans for general corporate purposes to cover its working capital requirement and debt obligation. However, part of these investments could be diluted in case of exigencies as done in the past. Besides, the ratings also reflect flexibility to refinance debt and ability to procure additional funding at attractive rates. The promoters too have demonstrated the track record to infuse funds to cover the capex and operational expenses.

 

The ratings reflect the established position of RML in the domestic spinning segment, monetisation of the recent capacity expansion in the fabric division and high demand from domestic and overseas markets. The ratings continue to factor in RML’s market presence in the finer count yarn segment, driven by extensive experience of the promoters and average operating efficiency, backed by synergies with other textile units of the Ramco group, and financial flexibility supported by investments in group companies. These strengths are offset by the modest financial risk profile, working capital-intensive operations and susceptibility to sharp volatility in cotton and yarn prices.

Analytical Approach

Crisil Ratings has arrived at the standalone ratings of RML, based on the credit profile of RML and has notched up the overall ratings, based on the strength and support of the Ramco group. Crisil Ratings believes that RML will, in case of exigencies, receive operational and financial support from the Ramco Group, given operational synergies between textile companies in the group, the common promoters, shared brand name, and given that it is the leading textile company of the Ramco group. Outstanding amount against corporate guarantees provided to other Ramco group companies has been included under RML’s debt.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in finer count yarn segment driven by the extensive experience of the promoters: RML was established in 1936 as the first venture of the Ramco group, which also has five other companies in the textile business. RML specialises in manufacturing yarn of finer counts ranging from 4s to 300s (single/double yarn), besides other value-added products such as mercerised, melange, slub and gassed yarn. It enjoys an established market position, driven by long standing relationships with customers. Forward integration into fabric manufacturing has helped in diversification of the revenue profile and will also insulate RML from volatility in demand as demand for fabric does not fluctuate much. RML has further enhanced the fabric capacity by adding 174 looms, operational since September 2023.

 

• Average operating efficiency, driven by synergies with other textile units of the Ramco group: Traditionally, RML enjoys healthy realisation, given its presence in higher count yarns. It also benefits from economies of scale via large capacities and operational synergies with other textile units of the Ramco group. For instance, centralised purchase of cotton for all textile entities of the group brings in cost efficiency and reduces the logistic cost. Availability of power from the captive windmills, having capacity of 35.15 megawatt (MW), also lowers the cost of power and fuel considerably. About 55% of power requirement of the spinning and fabric units in Tamil Nadu is met via captive windmills. Besides, procurement of solar power from Green infra (9.5 MW) and Cleanmax (7.5 MW), through the group captive power scheme, should provide the full benefit from fiscal 2026 as against anticipated from fiscal 2025 earlier. For this fiscal, RML will be able to meet more than 85% of its power requirement through renewable sources, resulting in considerable cost saving of Rs 7-8 crore per annum. This, along with anticipated improvement in cotton-yarn spreads and improved utilisation in the fabric capacity is expected to gradually improve the operating margin to 11-12% over the medium term, from 8% estimated in fiscal 2025.

 

• Financial flexibility supported by investments in group companies and being part of Ramco group: The large market value of investments, held by RML in group companies — RCL, RIL, Ramco Systems Ltd — amounted to around ~Rs 3,000 crore as on March 24, 2025. Though these are strategic investments, they can be pledged or sold in case of exigencies. Shares of RCL, amounting to Rs 55 crore, were sold in the first quarter of fiscal 2024 to fund the expansion in the fabric unit. RML has also availed a term loan of Rs 592 crore by providing non-disposal undertaking/pledge against 59% of its stake in RCL. Besides, a portion of its holding in RCL has been encumbered as security in the capacity of corporate guarantor for term loan of Rs 40 crore availed by group entity, Sandhya Spinning Mills Ltd (SSML). RML has also taken approval from its Board of Directors during November 2024 to dispose shares of RCL up to Rs 120 crore as part of the change in group’s holding structure pattern.

 

RML benefits significantly from being part of the Ramco group and having common bankers with larger entities such as RCL and RIL, which also facilitate the company to raise debt to fund its working capital requirement and refinance its sizeable debt obligation, as witnessed in previous fiscals. Besides, the promoters have also supported group companies via fund infusion as well as temporary loans.

 

Weaknesses:

• Modest financial risk profile: The financial risk profile has been moderate owing to sizeable debt availed to fund capex of around Rs 1,000 crore over the past 5-6 fiscals. In fiscal 2022, RML invested Rs 155 crore in order towards addition of spindles, expansion of fabric capacity and technological upgradation for processing value-added yarn such as mercerised yarn. RML further invested Rs 400 crore in fiscal 2023 for undertaking Phase II of fabric capacity expansion, and it was majorly debt-funded. In fiscal 2024, RML incurred capex of Rs 98 crore for purchase of back process machinery, improvement in electrical infrastructure and maintenance purposes. On account of industry scenario and the company’s plan to monetise on the capex done earlier, it limited its capex plans to Rs 10 crore during fiscal 2025. With completion of almost all the planned capex programmes capex for fiscals 2026 and 2027 will be limited towards maintenance and likely to be Rs 10-15 crore. Stable non-operating income from investments in Ramco group companies provides some stability to the cash flow.

 

With high debt, the company will need to seek refinance as cash accrual will be inadequate to service the debt obligation. Therefore, debt protection metrics may remain modest over the medium term.

 

• Working capital-intensive operations and susceptibility to cotton and yarn prices: The key raw material, cotton, constitutes about 95% of the raw material cost and yarn (the output product) is a highly seasonal commodity. Also, good quality Indian cotton is available only during the peak cotton season (October to March). Bulk procurement of cotton leads to high peak inventory holding period of 4-6 months, thereby exposing the operating margin to any steep decline in cotton prices post procurement. However, this would be partly offset by back-to-back medium-to-long-term sales contracts with yarn customers.

Liquidity: Adequate

Liquidity is supported by RML’s sizeable holdings in Ramco group companies valued around Rs 3000 crore as on March 24, 2025, in addition to funding support expected from the group and promoters. In case of financial exigencies, RML could raise additional debt by utilising its stake in RCL and RIL. The company has already availed Rs 592 crore as term debt through non-disposal undertaking of shares of RCL. RML has also created encumbrance of 8 lakh shares of RCL in its capacity as a corporate guarantor for the loan availed by SSML. Strong refinancing capabilities and established relationships with lenders will enable the company to tide over cash flow mismatches.

 

RML’s cash accrual was insufficient  to cover its term debt obligation of Rs 110 crore in fiscal 2025, and the company hence resorted to mainly refinancing of debt obligation, ahead of the repayment schedule. Sanctioned working capital limit stood at Rs 900 crore; however, drawing power against the same was only Rs 200-220 crore, and utilisation stood at 94% of drawing power, over the 12 months ended February 28, 2025.

 

RML has debt obligation of ~Rs 115 crore each in fiscal 2026 and in fiscal 2027. Repayment obligations will increase of further debt raised during fiscal 2026. The company is in the process of disposing some of its non-core assets, however majority of its repayment is expected to be met by way of refinancing as accrual is not expected to suffice. To address the shortfall, the company may sell shares of RCL up to Rs 120 crore in multiple tranches, which will be utilised towards retiring the debt availed for purchase of shares of RIL and partly for debt reduction. Any sizeable monetisation of assets or investments, equity raising and utilisation of proceeds for reduction in debt can help ease liquidity.

Outlook: Negative

Crisil Ratings believes RML’s business performance will be under pressure in the near term owing to volatile business conditions, while its operating profitability is also expected to recover only gradually because of modest pickup in cotton yarn realisation and modest contribution from the fabric business. The financial risk profile, which is constrained by high debt and net losses, is not expected to witness material improvement in the near term. Support from Ramco group, though, is expected to be forthcoming in the event of financial exigencies.

Rating sensitivity factors

Upward factors:

• Improvement in the credit profile of key Ramco group entities and Ramco group
• Sustainable revenue growth and increase in operating margin to 12-13% through better realisations on orders and monetisation of recent capacity expansion, leading to marked increase in accrual
• Better-than-expected cash generation and prudent working capital management, which along with progressive debt obligation, will lead to continued improvement in debt protection metrics

 

Downward factors:

• Sluggish business growth and stagnation in operating profitability to 8-9%, impacting cash generation
• Higher-than-expected debt owing to capex, stretch in the working capital cycle or increase in guarantees to group companies, further impacting debt protection metrics
• Increase in encumbrance level on its investments in listed group entities crossing more than 75% of the current holding level by way of pledge or non-disposal undertaking
• Any significant deterioration in the credit profile of key Ramco group entities, impacting the group's overall credit profile.

About the Company

Incorporated in 1936, RML was founded by PAC Ramasamy Raja, founder of the South India-based Ramco group. RML manufactures cotton yarn of counts ranging from 4s to 300s (single/double yarn), besides other value-added products; The company, which is based in Rajapalayam, Tamil Nadu, has four manufacturing facilities in and around the region. It has a combined capacity of 1,51,808 spindles, 328 looms and 2,960 rotors. RML also has wind power facilities aggregating 35.15 MW and captive solar power of 17.0 MW commissioned from this fiscal.

 

The company reported operating revenue of Rs 676 crore and net loss after tax of Rs (37) crore in the April-December 2024 period vis-à-vis revenue of Rs 635 crore and profit after tax of Rs 41 crore in the corresponding period of the previous fiscal.

About the Group

The Ramco group includes The Ramco Cements Ltd (‘Crisil A1+’), Ramco Industries Ltd (‘Crisil A1+’), Ramco Systems, besides textile entities such as RML, The Ramaraju Surgical Cotton Mills Ltd (‘Crisil BBB/Negative/Crisil A3+’), Sri Vishnu Shankar Mills (‘Crisil BB+/Negative/Crisil A4+’), Sandhya Spinning Mill Ltd (‘Crisil BB-/Stable/Crisil A4+’) and Rajapalayam Textile Ltd (‘Crisil BBB-/Negative).

Key Financial Indicators

As on/for the period ended March 31*	Unit	2024	2023
Revenue	Rs.Crore	860	864
Profit after tax (PAT)	Rs.Crore	28	42
PAT margin	%	3.3	4.9
Adjusted debt/adjusted networth	Times	2.53	2.57
Interest coverage	Times	1.45	2.76

 *Crisil Ratings-adjusted numbers

Any other information: Not Applicable