Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Rajapalayam Mills Limited (RML) at 'CRISIL A/Negative/CRISIL A1'.

 

During fiscal 2021, revenues increased by 15% compared to fiscal 2020, driven by improvement in end market demand (especially exports) during second half of the year. However operating profitability declined further to 8.8% compared to 10.7% due to lower capacity utilization in the first half of the year following lockdown as well as adverse movement in cotton and cotton yarn prices. Additionally, the new fabric capacity (completed in March 2020) could not be monetized favorably due to the pandemic driven decline in end-use demand, thus impacting profitability and return metrics. However, end market demand has picked up from Q3 fiscal 2021, especially export demand with almost doubling of average realizations along with healthy order backlog.

 

To capitalize on the strong end market demand, RML will be investing Rs 180 crore over fiscals 2022 and 2023 towards expanding spindle and fabric capacity, including technology upgrades for processing of value added yarn like mercerized yarn. This will be funded through the right issue proceeds of Rs 70 Crore completed during March 2021, term loans of Rs 90 crore and the remaining through accruals. During fiscal 2022, the spindle capacity expansion and mercerization upgrades, will be operational by third quarter of fiscal 2022, while the fabric capacity expansion (addition of 30 looms including 8 looms with Jacquard) will be completed by end of fiscal 2022 and will be available from fiscal 2023.

 

Financial risk profile remains moderate as the weaker than expected accruals as well as debt funded capex will keep debt at elevated levels and will impact debt metrics; however, the rights issue proceeds and the anticipated improvement in accruals from fiscal 2022 partially mitigates the overall impact. Negative outlook reflects that any delay in monetization of the expanded capacities leading to lower than anticipated improvement in accruals - thus adversely impacting the financial risk profile over the medium term.

 

The rating also continues to draw support from material liquid investments held by RML in Ramco group flagship, The Ramco Cements Ltd (Ramco Cements, rated ‘CRISIL A1+’), as well as in other group companies; the market value of these investments was about Rs. 3,663 crore at June 30, 2021.

 

The ratings continue to factor in RML’s established market position in finer count yarn segment driven by extensive experience of promoters, healthy operating efficiency driven by synergies with other textile units of the Ramco group and availability of low cost power. Besides, the company benefits from financial flexibility in form of investments in Ramco group companies. These strengths are offset by a modest financial risk profile, working-capital-intensive operations and susceptibility of operating profitability to volatility in cotton and yarn prices.

Analytical Approach

The ratings of RML factor in the support expected from Ramco Group. CRISIL believes that RML will, in case of exigencies, receive distress support from the Ramco Group for timely repayment of debt obligations, due to operational synergies between textile companies in the group, common promoters, shared name and demonstrated financial support extended in case of exigencies in the form of unsecured loans by stronger entities in the group. Further, outstanding amounts against corporate guarantees provided to weaker Ramco group companies has been included as debt of RML.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in finer count yarn segment driven by extensive experience of promoters: RML, which was established in 1938, and was Ramco group’s first venture in textiles business, and the group has five other companies in the textile business. The company specializes in manufacturing yarn of finer counts ranging from 4s to 300s (single/double yarn), besides other value-added products like mercerised, melange, slub and gassed yarn and enjoys an established market position in the same driven by long-standing relationship with its customers. The forward integration into fabric manufacturing (installed capacity of 90 Airjet/ Rapier looms and 32 looms with Jacquard), on steady monetization from fiscal 2022, will further strengthen RML’s market position over the medium term.

 

• Healthy operating efficiency driven by synergies with other textile units of the Ramco group and availability of low cost power: RML enjoys healthy realisations due to its presence in higher count yarns and also supported by benefits of economies of scale. The company also benefits from operational synergies with other textile units of the Ramco group. For instance, cotton purchase is centralized for all of the group’s textile entities resulting in cost effective purchase and lower logistics cost. Operating efficiencies also benefit from captive availability of power from its windmills with capacity of 35.15 MW, which effectively lowers the power and fuel costs. About 65% of power requirement of spinning Units in Tamil Nadu is met through captive power generation by windmills. Operating profitability has declined over the past two years (8.8% in fiscal 2021, compared to 14.3% in fiscal 2018) due to adverse movement in yarn prices and partly due to the lower capacity utilization in fabric segment. This is expected to improve from fiscal 2022 with commercial production of the installed fabric capacity and modernization of units.

 

• Financial flexibility supported by investments in Ramco group companies: RML’s large market value of investments, completely unpledged, held in group companies amounted to about Rs 3,663 crore as on June 30, 2021. Though these are strategic investments, these are available for pledging or sale to promoter group, in case of exigencies. Furthermore, RML benefits significantly from being part of the Ramco group and having common bankers with some of the larger entities such as Ramco Cements and RIL, allowing it to raise low-cost debt to fund its working capital requirements, as well as refinance its sizeable debt obligations, as witnessed over the previous two years.

 

Weakness:

• Modest financial risk profile: RML’s financial risk profile is constrained by the sizeable debt availed for the ongoing capacity expansion as well as working capital requirements. RML’s adjusted gearing stands at 2.45 times as on March 31, 2021; Debt protection metrics as on March 31, 2021 remain below par for the rating category; net cash accruals to total debt and interest coverage ratios stood at 0.03 times and 1.21 times, respectively, in fiscal 2021. However, the company also generates stable non-operating income from investments in Ramco group companies, which provides some stability to its cash flows. Additionally, potential sale of non-core land assets is expected to support cash flows over the medium term. CRISIL expects improving cash generation, progressive debt repayment will result in credit metrics gradually improving from fiscal 2022 onwards.

 

• Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: RML’s key raw material, cotton, constitutes about 95% of its raw material cost, is a highly seasonal commodity and good quality cotton is available only during the peak cotton season i.e. October to March. Bulk procurement of cotton leads to high peak inventory holding period of four to six months, thereby exposing the company’s margin to any steep decline in cotton prices subsequent to procurement. RML as a policy procures cotton in bulk and maintains an inventory of four to six months, leading to large working capital requirements.

Liquidity: Adequate

RML has adequate liquidity, largely supported by its sizeable unpledged holdings in Ramco group companies of about Rs.3,663 crores as on June 30, 2021 as well as expected forthcoming funding support from the group in case of exigencies. It is the largest textile entity of the Ramco group, and enjoys healthy relationships with lenders, which aid in refinancing of existing term debt obligations as well, for project funding.

 

RML generated net cash accruals of Rs. 21 crores in fiscal 2021; albeit expected to improve over the medium term driven by better business performance. RML’s working bank lines of Rs 520 crore, are highly utilised at about 92% (of drawing power) over the 12 months period ended May 2021. CRISIL believes that RML's strong refinancing capabilities and established relationship with lenders, will enable it to tide over any cash flow mismatches. RML’s long term repayment obligations remain high at around Rs. 75 crore and Rs 85 crore in fiscal 2022 and fiscal 2023. RML is expected to refinance part of the repayment obligations with longer term loans, thereby improving liquidity.

Outlook Negative

CRISIL Ratings believes RML's business risk profile will continue to benefit from its long-standing relationships with clients, focus on more profitable corporate orders, geographical diversity into export markets and forward integration into fabric manufacturing. Timely implementation of the planned capacity expansion, and stabilisation thereafter, will be critical. Any steeper impact on order book or price realization leading to further delay in monetizing of the expanded capacity will remain key rating monitorable.

 

Higher debt levels will temporarily impact credit metrics, which will gradually recover from fiscal 2022, as project benefits are available, resulting in better cash generation. The financial risk profile is expected to gradually improve driven by steady monetization of new expanded capacity leading to higher accruals and progressive repayment of debt obligations over the medium term.

Rating Sensitivity factors

Upward factors

• Steady growth in revenues and sustained improvement in operating margins to above 14% through successful monetisation of expanded capacitates and better realizations on orders, leading to marked increase in accruals.
• Greater than expected decline in gearing (below 1.5 times) and improvement in debt protection metrics over the medium term due to higher cash accruals and tighter working capital management.

 

Downward factors

• Sustained decline in operating profitability below 10% despite the cost optimization measures and support from fabric manufacturing.

• Higher than expected debt-funded capital spending, or a stretch in the working capital cycle
• Any significant deterioration in the credit profile of key Ramco group entities impacting the overall group's credit profile.

About the Company

Incorporated in 1936, RML was founded by Mr. P A C 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 is based in Rajapalayam, Tamil Nadu. It has four manufacturing facilities in and around Rajapalayam. It has a combined capacity of 133,664 spindles and 2,960 rotors. RML also has wind power facilities aggregating to 35.15 megawatts (MW), which helps it control power costs.

 

The Ramco group includes Ramco Cements (rated ‘CRISIL A1+’), Ramco Industries Limited (rated ‘CRISIL A1+’), Ramco Systems Ltd, besides textile entities such as RML, The Ramaraju Surgical Cotton Mills Ltd (rated ‘CRISIL A-/Stable/ CRISIL A2+’), Sri Vishnu Shankar Mills (‘CRISIL BBB/Stable/A3+’), Sandhya Spinning Mill Ltd (rated ‘CRISIL BB+/Positive/CRISIL A4+’), Rajapalayam Textile Limited (‘CRISIL BBB-/Stable) and Sri Harini Textiles Ltd.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	275.0	NA	CRISIL A/Negative
NA	Foreign Exchange Forward@	NA	NA	NA	4.0	NA	CRISIL A1
NA	Letter of Credit & Bank Guarantee#	NA	NA	NA	8.59	NA	CRISIL A1
NA	Working Capital Demand Loan**	NA	NA	NA	125.0	NA	CRISIL A/Negative
NA	Long-Term Loan	NA	NA	Jun-2028	220.09	NA	CRISIL A/Negative
NA	Long-Term Loan	NA	NA	May-2022	0.89	NA	CRISIL A/Negative
NA	Long-Term Loan	NA	NA	Jun-2024	31.41	NA	CRISIL A/Negative
NA	Long-Term Loan	NA	NA	Mar-2024	16.92	NA	CRISIL A/Negative
NA	Long-Term Loan	NA	NA	Jun-2026	90.0	NA	CRISIL A/Negative
NA	Working Capital Term Loan	NA	NA	Mar-2023	43.06	NA	CRISIL A/Negative
NA	Working Capital Term Loan	NA	NA	Sep-2026	30.0	NA	CRISIL A/Negative
NA	Working Capital Term Loan	NA	NA	Jun-2026	50.0	NA	CRISIL A/Negative
NA	Proposed long term bank loan facility	NA	NA	NA	57.5	NA	CRISIL A/Negative