Detailed Rationale

Crisil Ratings has downgraded its rating on the bank facilities of Rajapalayam Textile Limited (RTL) to ‘Crisil BBB-/Negative’ from ‘Crisil BBB/Stable’.

 

The rating downgrade factors in weakening of the business and financial risk profile of the company on account of sluggish operating performance, following tepid demand for the company’s products. With operating profitability expected to remain modest over the medium term, and continuing high debt levels, the company is expected to continue incurring net losses constraining material improvement in financial risk profile. Support from the Ramco group, though, is expected to be forthcoming in the event of financial exigencies.

 

RTL’s revenue de-grew by ~10% to Rs. 46 crore during the first nine months of fiscal 2025 due to demand moderation from the Open Ended (OE) and ring spinning segments. This de-growth is expected to continue in the last quarter as well, resulting in RTL registering revenues of Rs.65-70 crores (72crores in fiscal 2024). For the current fiscal, revenue growth is expected to marginally improve as the company has decided to focus on value added yarns to enhance profitability. Operating margins moderately declined to ~1.9% during the first nine months of fiscal 2025 from 2.1% during the prior corresponding period on account of the group experimenting with the launch of new product i.e. blended yarn; higher R&D and initial gestation losses impacted profitability.. For the full fiscal operating margins shall moderate to ~1% impacted by higher power costs in second half of fiscal 2025. Over the medium term, the operating margins are expected to moderately improve to ~2.5-3% as the company further optimizes costs and focuses on increasing the revenue share of higher margin value-added yarn.

 

RTL’s financial risk profile continues to moderate due to weak profitability and continuing high debt levels (Rs.60-65 crores), impacting debt metrics. Operating profits are expected to be short of interest costs, resulting in net losses. With operating profitability witnessing only modest improvement, the debt protection metrics will remain under pressure over the medium term, unless any sizeable monetization of non-core assets or equity raise happens, and proceeds are used to pare debt. Support from the Ramco group, is expected to be forthcoming, as seen in the past.

 

RTL’s liquidity continues to be moderately stretched due to weak accruals. Debt obligations of Rs.3.4 crore in fiscal 2026 are expected to be partly refinanced and partly met through undrawn bank limits. Working capital bank limits of Rs. 30 crore was utilized at 57% of drawing power limits during 12 months ended February 2025. Timely completion of refinancing activity or support from group entities/promoters for meeting term debt obligations will remain critical. RTL has receiveds strong support from its promoter directors and group companies. For instance, majority of RTL’s loan is in the form of promoter loan to the tune of ~Rs. 39 crores where there is flexibility for repayment.

 

The ratings reflect the benefit to RTL of extensive experience of promoters in the textile sector and benefits derived by synergies with Ramco group’s textile entities, extensive experience of the promoters in the textile sector, and support derived from being part of the Ramco group. These positives are offset by modest scale of operations, and weak financial risk profile constrained by sub-par debt protection metrics and large working capital requirement.

Analytical Approach

Crisil ratings has analysed the standalone credit profile of RTL, and further applied its group notch-up framework to factor in the extent of financial and managerial support expected from Ramco Group. Crisil Ratings expects that RTL 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, common brand name and demonstrated financial support extended in case of exigencies, in the form of unsecured loans or corporate guarantees from stronger entities in the group.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of promoters in the textile industry and synergies in raw material procurement:  Promoters have extensive experience in the textile industry, specifically cotton yarn. The group has six companies in the textile business with combined capacity of 4,24,256 spindles and 7,824 rotors, whose operations are managed with guidance from the promoters. The rich experience of the promoters in the textile industry has helped textile companies in the group to garner more business through strengthening marketing initiatives as well as improve internal efficiencies through centralized raw material procurement, better processes and higher plant integration for enhanced order book management.

 

• Financial flexibility derived from being part of Ramco group: RTL benefits significantly from being part of the Ramco group, which enjoys a strong relationship with lending community and has a demonstrated track record of supporting entities in the group during exigencies by extending inter corporate deposits on arms-length basis and through corporate guarantees for debt raise by weaker group entities. The group has a track record of timely repayment across its group companies, for several decades. The bankers are common across most of the companies in group to facilitate debt raise at attractive coupon rates. Crisil Ratings expects the demonstrated support extended by the stronger entities in the group, including RTL, in case of exigencies. RTL’s liquidity will improve over the medium term supported by improving accruals and continued support from the Ramco group.

 

Weaknesses:

• Modest scale of operations and weak operating efficiency: RTL has very modest scale of operations and low economies of scale. Besides, RTL does not have captive power ability resulting in inefficient cost structure. Recently, it has spent ~Rs.2.15 crore for availing group captive power to an extent of 3.15 MW, this came onstream from fiscal 2025 and will help lower power costs over the near to medium term. However, given its scale and with no sizeable capex plans, operating profitability though marginally improving to ~3% will remain sub-par, limiting material improvement in operating profits.

 

• Large working capital requirement and susceptibility to volatility in cotton and yarn prices: The key raw material, cotton, constituting about 95% of the raw material prices, is a highly seasonal commodity and good quality cotton is available only during the peak cotton season from October to March. Bulk procurement of cotton leads to a high peak inventory holding period of four-six months, thereby exposing the company’s margin to any steep decline in cotton prices after procurement. However, company had made changes in inventory policy to move to an order backed procurement model.

 

• Sub-part financial risk profile: RTL’s financial risk profile has weakened with net losses eroding net worth. Total debt has remained stagnant at around Rs.60 crores between fiscals 2021-2025, and this included Rs.39 crore of loans from promoters. External term debt is expected at ~Rs.9 crore in fiscal 2025, while short term borrowings are expected at ~Rs.16 crore. Interest coverage ratio is expected to moderate in fiscal 2025 to less than 1 times from under 0.8 times in fiscal 2024, net losses will completely erode the net worth, resulting in adverse leverage metrics. No material improvement is anticipated over the near to medium term, unless operating profitability materially improves and debt is significantly reduced.

Liquidity: Stretched

The company is expected to make cash losses in fiscal 2025, and over the medium term, due to weak operating profitability, and continuing high interest outgo. Capex for next 2 fiscals is expected to be very minimal at ~Rs.1 crore. Company has repayment obligations of Rs. 2.9 crore in fiscal 2026, which will be met by way of refinancing and undrawn bank limits. RTL also has access to bank limits of Rs. 30 crore which has been utilized to an extent of ~57% for the past 12 months ended February 2025. Also,  timely support by way of direct fund infusion or arrangement of funds through guarantees from stronger companies in the group or from promoters is expected to be forthcoming to support RTL in case of financial exigencies.

Outlook: Negative

Crisil Ratings believes RTL’s business risk profile will remain at moderate levels over the near term, due to sluggish revenue growth and only gradual improvement in operating margins, driven by focus on more profitable value-added yarn orders. However, the financial risk profile will remain sub-par for the rating category due to large debt levels, and continuing net losses, which will result in weak debt protection metrics. That said, timely support from Ramco group is expected to be forthcoming in the event of financial stress

Rating sensitivity factors

Upward factors

• Substantial improvement in operating performance, marked by operating profit before depreciation, interest and tax (OPBDIT) margins above 6-7%.
• Sustained improvement in financial risk profile, due to lowering of debt through equity raise or sale of non-core investments, benefitting key debt protection ratios.
• Upward revision in credit profile of Ramco group.

 

Downward factors

• Continuing sluggish business performance and perating margins sustaining below 3%, also impacting cash accruals .
• Continued erosion of net worth due to losses and higher debt levels to fund capex, or stretch in working capital, impacting financial risk profile.
• Any significant deterioration in credit profile of key Ramco group entities impacting the overall group's credit profile or change in stance of support

About the Company

Incorporated in 2014, RTL is promoted by Smt. R. Sudarsanam, of the Ramco group. Currently, RTL manufactures cotton yarn with value added counts and has a capacity of 19,200 spindles and 1344 rotors in Rajapalayam, Tamil Nadu.

About the Group

The Ramco group includes The Ramco Cements Limited (‘Crisil A1+’), Ramco Systems Ltd and Ramco Industries Ltd (‘Crisil A1+’), and the textile companies of the group include Rajapalayam Mills Ltd ('Crisil A /Negative/Crisil A2+'), The Ramaraju Surgical Cotton Mills Ltd ('Crisil BBB/Negative/Crisil A3+'), Sri Vishnu Shankar Mill Ltd ('Crisil BB+/Negative/Crisil A4+'), Sandhya Spinning Mill Ltd ('Crisil BB-/Stable/Crisil A4+') and RTL.

Any other information: Not Applicable