Rating Rationale

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB/Stable/CRISIL A3+’ ratings on the bank facilities of S.S. Spinning Mills (SSPM; part of the SV group).

The ratings continue to reflect the extensive experience of the promoters in the textile industry, the group’s strong market position, and the above-average financial risk profile. These strengths are partially offset by working capital-intensive operations and susceptibility of operating performance to volatility in cotton prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of SSPM, Sri Vignesh Yarns Pvt Ltd (SVYPL), and Shri Siddhivinayaga Tex India Pvt Ltd (SSVTIPL). This is because all three entities, collectively referred to as the SV group, are in a similar line of business, under a common management, with significant operational and financial linkages. Unsecured loans have been reckoned as 75% equity and 25% debt, as loans are expected to remain in business over the medium term.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths

Extensive experience of the promoters in the textile industry, and strong market position of the SV group: SV Group benefits from its established market position, supported by extensive experience of the promoters of more than 3 decades, long-standing supplier and customer relationships, and established track record in the cotton yarn industry which is reflected in revenue of Rs.436.67 crore in Fiscal 2021. Strong market presence and relationships with customers will help to sustain the business risk profile.

Comfortable financial risk profile: The financial risk profile is driven by a comfortable capital structure and debt protection metrics. Capital structure is marked by gearing at 1.25 times as on March 31, 2021, supported by strong networth at Rs 196.16 crore as on same date. The group has planned a capital expenditure of Rs 80 crore in the current fiscal, which will be funded by Rs 65 crore of bank debt. Despite this, the capital structure is likely to be at about 1.3-1.5 times by end of this fiscal supported by strong accretions to reserves. Debt protection metrics, marked by net cash accrual to total debt ratio and interest coverage was at 11% and 2.68 times, respectively, for fiscal 2021 and are expected to remain at these levels over the medium term.

Weaknesses

Working capital-intensive operations: The group has working capital intensive nature of operations, reflected in gross current asset (GCA) days of 286 as on 31 March, 2021. GCA is high mainly due to higher inventory holding and long collection cycle. Cotton, the key raw material, is available only during the crop season, from October to March, and players have to procure majority of their requirement during this period. As a result, the inventory holding remains high and it was at 109 days as on 31 March, 2021. Debtors’ days outstanding was at 108 days as on same date, mainly on account of large credit period provided to its customers. Improvement in working capital will be a key monitorable for the group.

Susceptibility of operating performance to volatility in cotton prices: Operating performance remains susceptible to volatility in raw material prices. Intense competition limits the group’s ability to pass on any steep increase in raw material price to its customers. Any change in customer preference will also affect performance adversely.

Liquidity: Adequate

Cash accrual of over Rs 30 crore per annum expected over the medium term will be sufficient for debt obligation for around Rs.20 crore per annum. The group is in the process of taking debt of Rs.65 crore in fiscal 2022 towards setting up Solar plant of 15 MW. Debt obligation for this loan is expected to commence from May 2023 and the debt payouts will increase thereafter. Hence, timely stabilizations of operations in the solar plant will be key monitorable. Bank limit of Rs 113 crore was utilised at an average 66% over the 8 months through November 2021. Cash and balance of around Rs.22 crore also provide support to liquidity.

Outlook: Stable

CRISIL Ratings believes the SV group will continue to benefit from the strong market position of the group, and their established relationship with the customers and suppliers.

Rating Sensitivity Factors

Upward factors:

Improvement in revenue and profitability leading to higher accruals
Sustained improvement in financial risk profile leading to improvement in gearing to less than 1 time

Downward factors:

Decline in revenue or decline in profitability to less than 6% leading to lower-than-expected accruals
Further stretch in working capital management or large debt funded capex plans leading to deterioration in financial risk profile especially liquidity

About the Group

SSVTIPL, incorporated in 2006 at Tiruppur (Tamil Nadu), manufactures hosiery yarn and compact yarn, in counts of 10s to 60s and grey fabric through jobwork. SVYPL and SSSM are also in similar businesses. The daily operations are managed by managing director Mr R T Sivakumar and his son Mr S Saravana Sudan.