Rating Rationale
July 05, 2022 | Mumbai
Sandhya Spinning Mill Limited
Ratings Upgraded ‘CRISIL BBB/Stable/CRISIL A3+’
 
Rating Action
Total Bank Loan Facilities RatedRs.273.93 Crore
Long Term RatingCRISIL BBB/Stable (Upgraded from 'CRISIL BB+/Positive')
Short Term RatingCRISIL A3+ (Upgraded from 'CRISIL A4+')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Sandhya Spinning Mill Limited (SSML) to CRISIL BBB/Stable/CRISIL A3+’ from CRISIL BB+/Positive/CRISIL A4+.

 

The upgrade reflects the improvement in business performance in fiscal 2022 and expected sustenance of the same over the medium term. The financial risk profile and liquidity also improved with higher cash accruals as well as equity infusion.

 

Performance in fiscal 2022 was better than expectations driven by 72% growth in revenues following recovery in demand from both domestic as well as export markets, and higher realizations following pass on of input price increase. Profitability improved to 19% in fiscal 2022 compared to 12% in fiscal 2021 due to better capacity utilisation especially in Open End(OE) spinning segment, better cotton vs cotton yarn spreads and improved efficiencies due to benefit of modernisation project undertaken in fiscals 2020 and 2021.

 

Over the medium term, the revenue growth be supported by steady offtake from textile customers in domestic market and China+1 policy of overseas customers. The addition of 19584 spindles(~38% increase in capacity which was completed in December 2021 will continue to support the revenue trajectory to >Rs.250 crores on a sustained basis over the medium term. Profitability is expected to remain range bound at 16-17% over the medium term driven higher capacity utilization, favourable product mix and improving operating efficiencies.

 

To cater to the healthy end market demand, SSML will invest Rs 26 crore towards Two for One (TFO) project in fiscal 2023, which is done to increase the strength of yarns by doubling and twisting.

 

The project will be funded through term loans of Rs 21 crore and the remaining through accruals.

 

Financial risk profile has improved due to equity infusion of Rs.23 crores by the promoters and improvement in networth due to better accretion to reserves. Liquidity has also improved and the accruals are expected to be sufficient to meet the repayment obligations unlike in the past when SSML has to rely on part refinancing to meet debt obligations.

 

The ratings reflect the extensive experience of promoters in the textile industry and SSML’s improving operating efficiencies. The ratings also factor in SSML’s adequate financial flexibility and support derived from being part of the established Ramco group. These rating strengths are partially offset by SSML’s weak financial risk profile marked by moderate networth, modest debt protection metrics and high working capital intensity because of large inventory requirements. Additionally, SSML’s operating margins are also susceptible to inherent volatility in cotton prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied its group notch-up framework to factor in the extent of financial and managerial support expected from Ramco Group. CRISIL ratings believes that SSML 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 or corporate guarantees by stronger entities in the group.

 

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 promoters in the textile industry: Promoters have extensive experience in the textile industry, specifically cotton yarn, through RML established nearly 86 years back in 1936. The group has six companies in the textile business with combined capacity of 4,19,776 spindles and 9,512 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.

 

  • Healthy operating efficiency driven by synergies with other textile units of the Ramco group and availability of low cost power: SSML enjoys healthy realisations due to its presence largely in higher count yarns from 80s to 140s, and also benefits from economies of scale due to operational synergies with other textile units of the Ramco group. Operating efficiencies also benefit from captive availability of power from its windmills with capacity of 10.95 MW which caters to ~60% of its power requirements. SSML’s operating profitability has improved to 19% in fiscal 2022 (compared to 12% in fiscal 2021). Besides the favourable yarn vs cotton spreads, the company’s initiative to modernize machines and increase share of value-added products such as linen based yarn has contributed to the profitability growth.

 

  • Adequate financial flexibility and support from Ramco group: SSML 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. The group has a track record of nil default instance in any of its companies over the past 86 years. The bankers are kept common with most of the companies in group to facilitate any individual company raise debt when required and at lower rates as seen during the past when SSML could raise debt to plug gap between repayments and cash accruals. CRISIL Ratings also takes comfort from the demonstrated support rendered by the Ramco group, to support weaker entities in the group, including SSML, in case of exigencies.

 

Weaknesses:

  • Weak, but improving, financial risk profile: SSML’s financial risk profile is constrained by the sizeable debt of Rs.258 crore and modest networth of Rs 44 crore as of March 31, 2022. SSML’s gearing stands at 5.85 times as on March 31, 2022 while the net cash accruals to total debt (NCATD) and interest coverage ratios at 0.12 times and 3.4 times, respectively for fiscal 2022. With the promoter equity infusion for Rs 23 crore over the past two fiscals, capital structure has improved. Improving cash generation, scheduled debt repayments and moderate capex plans will gradually improve the financial risk profile over the medium term.

 

  • Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: SSML’s key raw material, cotton, is a highly seasonal commodity, and good quality cotton is available only during the peak cotton season i.e. October to March. SSML as a policy procures cotton in bulk and maintains an inventory of four to six months, leading to large working capital requirements. Company’s margin remains exposed to any steep decline in cotton prices subsequent to procurement. Additionally, the company also faces pressure on yarn prices due to increased availability of cheaper fabric imports.

Liquidity: Adequate

SSML has adequate liquidity. The company’s liquidity benefits from financial flexibility by being part of the established Ramco group. SSML’s cash accruals improved to Rs 30 crore in fiscal 2022 (from Rs 5 crore in fiscal 2021) due to improved scale and operating profitability. Accruals are expected to be above Rs.40 crores per annum over the medium. Repayment obligation for fiscal 2023 remains high at ~Rs.35 crore which might need part refinancing. However, the repayment obligations in fiscals 2024 and 2025 are expected to be lower at Rs.20-22 crores in which will be comfortably met through accruals.

 

SSML’s operations are also working-capital-intensive, as reflected in the high gross current assets of 233 days as of March 31, 2022, driven by large inventory requirements because of seasonal availability of its key raw material, cotton. The working capital requirements are expected to be met from its existing bank lines of Rs 141 crore, which has been partly utilized at an average of over 75% (over drawing power) through the 12 months period ended April 2022.

 

CRISIL Ratings believes that SSML’s liquidity will remain adequate over the medium term supported by improvement in cash accruals, moderate capex requirements and refinancing capabilities to meet annual debt obligations.

Outlook: Stable

CRISIL Ratings believes SSML’s business risk profile will continue to improve over the medium term driven by steady monetization of expanded capacities, efficiencies arising out of modernization of plants, and focus on more value-added products and more-profitable export orders. Improving cash generation, prudent working capital management and scheduled repayment of term loans will also lead to steady improvement in financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Sustained improvement in revenues leading to substantial cash generation
  • Improvement in debt metrics for instance TOL/TNW <4 times

 

Downward factors:

  • Continued negative cash accruals leading to erosion of networth.
  • Any sizeable debt-funded capital spending, or a stretch in the working capital cycle, impacting the financial risk profile.
  • Any significant deterioration in credit profile of key Ramco group entities impacting the overall group’s credit profile will also remain a rating sensitivity factor.

About the Company

Incorporated in 1994, SSML is promoted by Mr P.R. Ramasubramaneya Rajha (former chairman of all companies in the Ramco group) and Mrs B. Sri Sandhya Raju, Managing Director (grand daughter of Mr. P.R. Ramasubramaneya Rajha). SSML manufactures cotton yarn of counts ranging from 30’s to 140’s with manufacturing facilities in Rajapalayam, with combined capacity of 71,136 spindles and 1,040 rotors. SSML also has wind power facilities aggregating to 10.95 megawatts (MW), which helps it control power costs.

 

The Ramco group includes The Ramco Cements Ltd (formerly Madras Cements Ltd, rated ‘CRISIL A1+’), Ramco Systems Ltd and Ramco Industries Ltd (rated ‘CRISIL A1+’), while the textile companies in the group include Rajapalayam Mills Ltd (rated ‘CRISIL A/Positive/CRISIL A1), Rajapalayam Textile Ltd (rated ‘CRISIL BBB/Stable’), The Ramaraju Surgical Cotton Mills Limited (rated ‘CRISIL A-/Positive/CRISIL A2+’), Sri Vishnu Shankar Mills Ltd (rated ‘CRISIL BBB/Positive/CRISIL A3+’), SSML and Sri Harini Textiles Ltd.

Key Financial Indicators

As on / for the period ended March 31

 

2022

2021

Revenue

Rs Crores

236

139

Profit after tax (PAT)

Rs Crores

20

-2

PAT margins

%

8.4

-1.6

Adjusted debt/adjusted net worth

Times

5.85

17.09

Interest coverage

Times

3.4

1.30

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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

Level

Rating Assigned

with Outlook

NA

Cash Credit%

NA

NA

NA

40

NA

CRISIL BBB/Stable

NA

Cash Credit

NA

NA

NA

26.5

NA

CRISIL BBB/Stable

NA

Cash Credit^

NA

NA

NA

10

NA

CRISIL BBB/Stable

NA

Cash Credit$

NA

NA

NA

21.5

NA

CRISIL BBB/Stable

NA

Corporate Loan

NA

NA

Dec-22

2

NA

CRISIL BBB/Stable

NA

Corporate Loan

NA

NA

Jun-23

14.5

NA

CRISIL BBB/Stable

NA

Bills Discounting&

NA

NA

NA

12

NA

CRISIL BBB/Stable

NA

Foreign Bill exchange

NA

NA

NA

1

NA

CRISIL A3+

NA

Proposed Long Term

Bank Loan Facility

NA

NA

NA

24.44

NA

CRISIL BBB/Stable

NA

Term Loan

NA

NA

Sep-29

36.11

NA

CRISIL BBB/Stable

NA

Working Capital Demand Loan

NA

NA

NA

10

NA

CRISIL BBB/Stable

NA

Working Capital Demand Loan#

NA

NA

NA

10

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Feb-26

8.33

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Mar-26

1.96

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Sep-26

28.5

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Feb-26

8.64

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Jan-26

5.59

NA

CRISIL BBB/Stable

NA

Working Capital Term Loan

NA

NA

Feb-28

12.86

NA

CRISIL BBB/Stable

& - Interchangeable with IBN/FBN/FBP/FBD/Advance against Collection Bills (AACB)/PSFC/FLC/FCL/BG for Short term trade credit (STTC)

^ - Interchangeable with WCDL/PCL/PCFC

% - Interchangeable with EPC/PCFC/FBN/FBP/FBD/LCBD/CBD/LC/BC/BG; includes sublimit of WCDL to the extent of Rs.15 crs

$ - Interchangeable with short-term loans; includes sublimit of PC/ PCFC/ WCDL

# - Interchangeable with EPC/PCFC/FBD/PSCFC/PBD/LC/BC; includes sublimit of CC to the extent of Rs. 5 crs.  

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 273.93 CRISIL A3+ / CRISIL BBB/Stable   -- 07-07-21 CRISIL A4+ / CRISIL BB+/Positive 21-05-20 CRISIL BB+/Stable / CRISIL A4+ 18-01-19 CRISIL BBB-/Stable / CRISIL A3 CRISIL BBB-/Stable / CRISIL A3
      --   --   -- 31-01-20 CRISIL BBB-/Stable / CRISIL A3   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bill Discounting& 12 Tamilnad Mercantile Bank Limited CRISIL BBB/Stable
Cash Credit% 40 IDBI Bank Limited CRISIL BBB/Stable
Cash Credit 5 IDFC FIRST Bank Limited CRISIL BBB/Stable
Cash Credit 21.5 Indian Bank CRISIL BBB/Stable
Cash Credit$ 21.5 Tamilnad Mercantile Bank Limited CRISIL BBB/Stable
Cash Credit^ 10 The Federal Bank Limited CRISIL BBB/Stable
Corporate Loan 14.5 Tamilnad Mercantile Bank Limited CRISIL BBB/Stable
Corporate Loan 2 The Federal Bank Limited CRISIL BBB/Stable
Foreign Bill Exchange 1 IDBI Bank Limited CRISIL A3+
Proposed Long Term Bank Loan Facility 24.44 Not Applicable CRISIL BBB/Stable
Term Loan 36.11 Tamilnad Mercantile Bank Limited CRISIL BBB/Stable
Working Capital Demand Loan# 10 DCB Bank Limited CRISIL BBB/Stable
Working Capital Demand Loan 10 Kotak Mahindra Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 5.59 IDBI Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 28.5 IDFC FIRST Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 1.96 Kotak Mahindra Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 12.86 The Federal Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 8.33 The Federal Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 8.64 The Federal Bank Limited CRISIL BBB/Stable

This Annexure has been updated on 10-Feb-23 in line with the lender-wise facility details as on 10-Feb-23 received from the rated entity.

& - Interchangeable with IBN/FBN/FBP/FBD/Advance against Collection Bills (AACB)/PSFC/FLC/FCL/BG for Short term trade credit (STTC)

^ - Interchangeable with WCDL/PCL/PCFC

% - Interchangeable with EPC/PCFC/FBN/FBP/FBD/LCBD/CBD/LC/BC/BG; includes sublimit of WCDL to the extent of Rs.15 crs

$ - Interchangeable with short-term loans; includes sublimit of PC/ PCFC/ WCDL

# - Interchangeable with EPC/PCFC/FBD/PSCFC/PBD/LC/BC; includes sublimit of CC to the extent of Rs. 5 crs.  

Criteria Details
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
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support

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