Rating Rationale
January 07, 2021 | Mumbai
SCM Garments Private Limited
Ratings reaffirmed at 'CRISIL A- / Stable / CRISIL A2+ '
 
Rating Action
Total Bank Loan Facilities RatedRs.422.8 Crore
Long Term RatingCRISIL A-/Stable (Reaffirmed)
Short Term RatingCRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL has reaffirmed its rating on the bank facilities of SCM Garments Private Limited (SCMGPL; part of the SCM group) at ‘CRISIL A-/Stable/CRISIL A2+’

 

The ratings continue to reflect extensive industry experience of the promoters and established market position, integrated nature of operations, sound operating efficiencies and established relationships with key customers. The ratings also factor in a moderate working capital cycle and a strong financial risk profile. These strengths are partially offset by intense competition in the readymade garment and retail industry and customer and geographic concentration in revenue profile.

Analytical Approach

CRISIL has revised its analytical approach and has combined the business and financial risk profiles of SCMGPL, SCM Clothes Pvt Ltd (SCMCPL) and SCM Creations (SCMC). This is because all these entities, together referred as the SCM group, have common management with operational and financial linkages.

 

Earlier, CRISIL had not combined the business and financial risk profiles of SCMGPL with its group entities.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

  • Extensive industry experience of the promoters and established market position: The group benefits from the promoters' experience of over the 3 decades in the ready-made garment (RMG) manufacturing and retailing, their strong understanding of market dynamics, and healthy relations with customers and suppliers. Moreover, the group’s brands ‘The Chennai Silks’ and ‘Sree Kumaran Thanagamalligi’, in the apparel and jewellery retail segment respectively, have strong recall in Tamil Nadu market.

 

  • Integrated nature of operations, sound operating efficiencies and established relationships with key customers: The RMG operations of the group is backward integrated, with facilities for knitting, dyeing, and fabric processing. Integrated nature of operation has resulted in healthy operating margin ranging from 7-10% during the last 3 years ended fiscal 2020. Moreover, longstanding association with overseas buyers spanning over two decades aids steady offtake of finished garments with negligible rejects.

 

  • Moderate working capital cycle and strong financial profile: The group’s capital structure has been comfortable supported by low reliance on external funds yielding gearing of about 1 time and low total outside liabilities to adjusted net worth (TOL/ANW) of 1.5 times as on 31st March 2020. The group’s debt protection measures have also been at healthy with interest coverage and net cash accrual to total debt (NCATD) ratio at 4.07  times and 0.23  time for fiscal 2020 .The group also has a moderate Gross current assets (GCA) of 106 days as on March 31, 2020 which stems from the operating efficiencies.

 

Weakness

  • Intense competition in the readymade garment industry and retail segment: The readymade garment industry and the garment and jewellery retail segments are intensely competitive, given the low entry barriers and capital requirement. The company also faces competition from other integrated players in Tiruppur, catering to markets such as US and Europe.

 

  • Customer and geographic concentration in revenue profile: With around 70% of garments sold to five customers in Europe and the US, there is significant exposure to customer and geographical concentration risk. Despite the healthy relationships with customers, the firm will remain vulnerable to changes in the customer's procurement strategy or payment terms.

 

Also group has been in the retail business for 2 decades, with presence only in two location (Villupuram and Pondicherry). Gold and apparel buying is a localized activity, and depends on the level of economic activity in the region. The geographical concentration in operations exposes to volatility in demand because of local factors.

Liquidity: Strong

Liquidity is strong for the group marked by moderate bank limit utilisation and healthy accruals. The group is estimated to generate accruals of over Rs 70 crores against repayment obligation of about Rs. 20 crores, annually. Surplus accruals are expected to be adequate to fund its capital expenditure and incremental working capital requirement. Bank limit of Rs 313 crores with SCMGPL have been utilised at an average of 76% during the last 12 months ended Oct – 2020 supporting liquidity.

Outlook Stable

CRISIL believes that the group will continue to benefit from the extensive experience of its promoter, and established relationships with clients.

Rating Sensitivity factors

Upward factor

  • Sustained improvement in scale of operation and operating profitability
  • Net cash accrual of over Rs 90 crs with sustenance of operating efficiencies and capital structure

 

Downward factor

  • Sharp decline in sales by over 25 per cent or weaker operating profitability leading to deterioration of financial risk profile
  • Stretch in working capital cycle or large capital expenditure constraining the liquidity.

About the Group

SCM group was part of the erstwhile Chennai Silks group till 2011 and was demerged from the group during FY 2011-12. The Chennai Silks group had a wide presence across textile manufacturing, apparel and jewelry retailing business. As part of the de-merger process businesses were segregated among 7 brothers. Mr. Paramasivan & his family owns SCMGPL, SCMC and SCMCPL post the settlement.

 

SCM Garment Pvt Ltd (SCMGPL) was originally set up as a partnership firm, in 1998, and was reconstituted as a private limited company with the current name in 2006. It is engaged in manufacturing & exporting of knitted and hosiery garments of men, women and children’s. It has manufacturing units in and around Tiruppur (Tamil Nadu) and promoted by Mr. Paramasivan & his family.

 

SCM Creations (SCMC) was established in 2008 as partnership firm. It is engaged in retailing of gold and silver jewelry under the name “Sree Kumaran Thangamalligai”. SCMC has one showroom each in Villupuram and Pondicherry.

 

SCM Clothes Pvt Ltd (SCMCPL) was incorporated in 2013. It engaged in trading and retailing of readymade garments under the name “The Chennai Silks”. SCMCPL also runs hotel and windmill in Tirupur- Tamil Nadu. SCMCPL has one showroom each in Pondicherry and Villupuram. 

Key Financial Indicators

As on / for the period ended March 31

 

2020

2019

Operating income

Rs crore

1,488.98

1,364.43

Reported profit after tax

Rs crore

33.90

45.98

PAT margins

%

2.28

3.37

Adjusted Debt/Adjusted Net worth

Times

1.0

1.18

Interest coverage

Times

3.96

5.17

 

Standalone (SCMGPL)

As on / for the period ended March 31

 

2020

2019

Operating income

Rs crore

1,351.17

1,218.27

Reported profit after tax

Rs crore

28.36

43.84

PAT margins

%

2.18

3.60

Adjusted Debt/Adjusted Net worth

Times

0.94

1.12

Interest coverage

Times

3.98

5.63

 

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)

Complexity
Levels

Rating Assigned
with Outlook

NA

Letter of Credit

NA

NA

NA

11.5

NA

CRISIL A2+

NA

Letter of credit & Bank Guarantee

NA

NA

NA

12.5

NA

CRISIL A2+

NA

Long Term Loan

NA

NA

31-Mar-24

12

NA

CRISIL A-/Stable

NA

Packing Credit

NA

NA

NA

288.85

NA

CRISIL A2+

NA

Proposed Long Term Bank Loan Facility

NA

NA

NA

51

NA

CRISIL A-/Stable

NA

Standby Export Packing Credit

NA

NA

NA

10

NA

CRISIL A2+

NA

Term Loan

NA

NA

31-Mar-26

36.95

NA

CRISIL A-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

SCM Garments Private Limited

100%

Common management with operational and financial fungibilities

Scm Creations

100%

Common management with financial fungibilities

SCM Clothes Private Limited

100%

Common management with operational and financial fungibilities

 

Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018 Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 398.8 CRISIL A2+ / CRISIL A-/Stable   -- 09-10-19 CRISIL A2+ / CRISIL A-/Stable 04-07-18 CRISIL A2+ / CRISIL A-/Stable CRISIL A2+ / CRISIL A-/Stable
Non-Fund Based Facilities ST 24.0 CRISIL A2+   -- 09-10-19 CRISIL A2+ 04-07-18 CRISIL A2+ --
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
Letter of Credit 11.5 CRISIL A2+ Letter of Credit 11.5 CRISIL A2+
Letter of credit & Bank Guarantee 12.5 CRISIL A2+ Letter of credit & Bank Guarantee 12.5 CRISIL A2+
Long Term Loan 12 CRISIL A-/Stable Long Term Loan 12 CRISIL A-/Stable
Packing Credit 288.85 CRISIL A2+ Packing Credit 288.85 CRISIL A2+
Proposed Long Term Bank Loan Facility 51 CRISIL A-/Stable Proposed Long Term Bank Loan Facility 51 CRISIL A-/Stable
Standby Export Packing Credit 10 CRISIL A2+ Standby Export Packing Credit 10 CRISIL A2+
Term Loan 36.95 CRISIL A-/Stable Term Loan 36.95 CRISIL A-/Stable
Total 422.8 - Total 422.8 -
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation
The Rating Process

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