Detailed Rationale

CRISIL Ratings has downgraded its rating on the bank facilities of Rajapalayam Textile Limited (RTL) to ‘CRISIL BBB/Stable‘ from ‘CRISIL BBB+/Stable’

 

The rating revision follows continuing moderation in RTL’s operating performance in fiscal 2024, driven by modest cotton to yarn spreads due to lower realisations, and higher power costs. The performance is in contrary to CRISIL Ratings’ expectations. Stagnant revenue due to moderation in realisations, and modest cotton-yarn spreads are expected to result in continuing low operating margins of ~5%, also leading to losses at net level. Debt metrics will continue to remain sub-par.

 

While operating performance is expected to recover over the medium term supported by better domestic demand for fine count orders, and higher cotton-yarn spreads, high debt levels will limit material improvement in key debt protection metrics. Support from Ramco group, nevertheless, is expected to be forthcoming, if required, as has been demonstrated in the past.

 

Also, contrary to CRISIL Ratings’ expectations, revenues remained flat at Rs. 77 crore in fiscal 2023 as well, due to lower realisations. RTL’s operating margins dipped sharply to 0.25% in fiscal 2023, from 17.5% in fiscal 2022, due to the moderation in spreads between raw cotton and yarn and increase in power costs. RTL’s financial profile also moderated in fiscal 2023, due to steep decline in operating profitability, impacting key debt metrics. For instance, interest cover declined to 0.46 time in fiscal 2023, from 3.37 times in fiscal 2022. Gradual improvement in debt metrics is expected over the near to medium term.

 

The rating continues to benefit from the managerial, operational and financial support from the Ramco group. The promoters have been regularly supporting RTL by infusing funds in the form of unsecured loans. As of September 30,2023, unsecured loans were at Rs.39.2 crores (out of Rs.66 crores total debt), and interest on these loans too has been waived temporarily, due to weak profitability.

 

The ratings continue to factor in extensive experience of RTL’s promoters in the textile industry, operating efficiency benefits driven by synergies with other textile units of the Ramco group and operational, managerial and financial support, being extended by established Ramco group. These rating strengths are partially offset by RTL’s weak financial risk profile, high working capital intensity of operations and susceptibility of operating margins to inherent volatility in cotton and yarn prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered support from the Ramco group, due to operational synergies between textile companies in the group, common promoters, and demonstrated financial support extended in case of exigencies, in the form of unsecured loans or corporate guarantees by stronger entities in the group.

Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of promoters in the textile industry: Promoters have extensive experience in the textile industry, specifically cotton yarn. The group has six companies in the textile business with combined capacity of 4,39,376 spindles and 10,862 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.

 

Operating efficiency benefits driven by synergies with other textile units of the Ramco group: Cotton purchase is centralized for all the textile entities of Ramco group resulting in cost effective purchase and lower logistics cost. Since RTL does not have captive power ability it has spent ~Rs.2.15 crore for availing group captive power to an extent of 3.15 MW, this is come onstream from early fiscal 2025, and will help lower power costs.

 

Adequate 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 nil default in any of its companies over the past 80 years. The bankers are kept 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. During the first half of fiscal 2024, RTL availed unsecured loans of Rs 1.11 crore from the promoters to manage the repayment obligations. In fiscal 2023, RTL did not avail any loans from promoters as the accruals were sufficient to meet repayment obligations. RTL’s liquidity will improve over the medium term supported by improving accruals and continued support from the Ramco group.

 

Weakness:

Volatility in operating profitability due to varying cotton-yarn spreads: RTL’s operating profitability declined to 0.3% in fiscal 2023 from 17.5% in fiscal 2022 primarily on account of increase in cotton prices, fall in realizations, resulting in moderation in cotton-yarn spreads, and increased power costs. Operating margins are expected to recover to ~5% in fiscal 2024, and to ~7-9% over the medium term, but still remain lower than 10% registered in fiscal 2021; volatile margins impact cash generation materially, necessitating additional support from promoters/lenders.

 

Weak financial risk profile: RTL’s financial risk profile has weakened with net losses eroding net worth (~Rs.0.4 crore at March 31, 2023). Total debt has remained stagnant at around Rs.66 crores between fiscals 2021-2023, and this included Rs.38 crore of loans from promoters. External term debt stood at Rs.8 crore in fiscal 2023, while short term borrowings were ~Rs.19 crore. While interest coverage ratio will improve in fiscal 2024 to over 1.7 times from under 0.5 times in fiscal 2023, net losses will completely erode the net worth, resulting in adverse leverage metrics. While reliance on debt is not expected to increase materially due to only modest capex plans, gradual improvement is likely in interest cover ratio over the medium term.

 

Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: RTL’s key raw material, cotton, which 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. RTL as a policy procures cotton in bulk and maintains an inventory of three to four months, leading to large working capital requirements. Additionally, it also exposes the company’s margin to any steep decline in cotton prices subsequent to procurement. In case of large corporate orders, high quality cotton needs to be imported from other countries, leading to higher working capital requirements.

Liquidity: Adequate

RTL has adequate liquidity driven by expected forthcoming funding support from the group in case of exigencies. Own cash accruals are expected to be tightly matched against repayment obligations of Rs.3 crore in fiscal 2024; however, buffer also exists in form of unutilized bank lines, which were utilized to extent of 80% through the 12 months ended July 2023. Improvement in cash accruals should help largely meet  modest capex needs (Rs.2.5 crore) and repayment obligations of Rs.2.7 crore in fiscal 2025. Timely support from promoters is also expected to be forthcoming.

Outlook: Stable

CRISIL Ratings believes RTL’s business risk profile will remain at moderate levels over the near term, due to sluggish revenue growth and operating margins, and improve over the medium term driven by focus on more profitable orders and better cotton-yarn spreads. 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 8-10%
• Continued improved in accruals partly from investments along with prudent working capital management, benefiting key debt protection ratios.

 

Downward Factors

 

• 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.

 

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

Any other information: Not applicable