| Sandhya Spinning Mill Limited | ||||||
| Ratings downgraded to 'CRISIL BBB-/Negative/CRISIL A3'; Rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| 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 downgraded its ratings on the bank facilities of Sandhya Spinning Mill Limited (SSML) to ‘CRISIL BBB-/Negative/CRISIL A3‘ from ‘CRISIL BBB/Stable/CRISIL A3+’.
The rating revision follows CRISIL Ratings expectation that SSML’s operating performance will moderate in fiscal 2024, driven by modest cotton to yarn spreads due to lower realisations, and higher power costs. Sluggish revenues and operating margins of ~7%, will result in lower operating profits. This is despite some cost savings in the second half due to increased sourcing of solar power under group captive scheme, from October 2023. Ergo, lower operating profits, including due to inventory related losses arising due to decline in cotton prices in the first half of fiscal 2024, from highs seen in fiscal 2023, and higher interest costs, due to increase in debt levels, will result in net losses for fiscal 2024. Debt metrics, which were at sub-par levels in fiscal 2023, are expected to further deteriorate due to additional debt of ~Rs.60 crores being availed to service sizeable debt obligations (as accruals will not be adequate), and working capital needs, even as operating profits decline.
While operating performance is expected to recover over the medium term supported by better domestic and export prospects 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.
In fiscal 2023, SSML’s revenue grew by 17% supported by strong order book from established corporate clientele and higher realization. Exports grew by 2% in fiscal 2023, supported by healthy customer relationships and presence in value added yarn. Even as revenues registered a healthy growth, SSML’s operating margins dipped sharply to 7.6% in fiscal 2023, from 20% in fiscal 2022, due to the moderation in spreads between raw cotton and yarn and increase in power costs. SSML’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 1.17 in fiscal 2023, from 3.16 times in fiscal 2022.
The ratings reflect SSML’s modest presence in the domestic textiles sector and average operating efficiencies. The ratings also factor in the extensive experience of promoters in the textile sector, and support SSML is expected to derive, being part of the established Ramco group. These rating strengths are offset by susceptibility of SSML’s operating margins to inherent volatility in cotton prices and prices of fabric imports. Besides, SSML has a weak financial risk profile, including due to high working capital requirements, reflected in sub-par debt protection metrics. |
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, equity infusion 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, through RML established nearly 80 years back in 1938. 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. SSML has benefitted from the rich experience of the promoters in the textile industry that 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. SSML’s enjoys better realizations than commodity yarn producing peers due to its presence in value-added yarn. The modernization of machines, better realizations and higher share of value-added yarn (21% of the overall sales in fiscal 2023 compared to 4% in fiscal 2018) is expected to aid the improvement in profitability.
Average operating efficiency driven by synergies with other textile units of the Ramco group: SSML enjoys healthy realizations due to its presence largely in higher count yarns from 80s to 140s, and 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 ~51% of its power requirements. The company is investing in solar power capacity of 6 MW, which will cater to another 37% of power requirements in the near to medium term and help reduce power costs In fiscals 2023 and 2024, the company’s operating profitability was also impacted due to rise in grid power cost.
Adequate financial flexibility derived from being part of 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 arm’s length basis and through corporate guarantees. The group has a track record of nil default instances in any of its companies over the past 80 years. The bankers are kept common with most of the companies in group to facilitate any individual company raise debt when required. 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. In FY 24, promoters have committed to convert existing portion of loans from promoters worth Rs.5 crores to equity which will partly mitigate the moderation in net worth. Earlier too, promoters had infused equity in SSML.
Weakness: Susceptibility of operating margins to volatility in cotton and yarn prices: The company derives a significant portion of revenue from the yarn segment, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin has fluctuated between 8% and 20% over the past 10 fiscals through fiscal 2023. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021), wherein demand spiraled and then fell rapidly. Due to its presence in value added yarn, however, the extent of fall in operating margins for SSML, has however been lower than that of commodity yarn players. Working-capital-intensive operations: 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. The 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.
Sub-par financial risk profile: SSML’s financial risk profile is constrained by the sizeable debt and modest net worth of Rs 36 crore as of March 31, 2023. SSML’s gearing stands at 8.79 times as on March 31, 2023 while the net cash accruals to total debt (NCATD) and interest coverage ratios at 0.02 times and 1.17 times, respectively for fiscal 2023 which are inadequate for the rating category. Long term debt is expected to increase as SSML has availed Rs.60 crores term loan to meet its debt obligations, however working capital borrowings are expected to come down with moderation of raw material prices leading to release of working capital. |
Liquidity: Adequate Expected timely support in form of direct fund infusion or arrangement of funds through guarantees from stronger companies in the group, supports SSML’s liquidity positon, as financial flexibility. On a standalone basis though, SSML’s liquidity is stretched with accruals unlikely to be adequate to service sizeable debt obligations in fiscals 2024, and 2025. That said, SSML has also raised long term debt in fiscal 2024, which will be used to repay forthcoming sizeable debt obligations of Rs. 23 crore in fiscal 2024 (~Rs. 6 crore already repaid in the first quarter), and is expected to continue to do so in fiscal 2025 as well (repayment obligations of Rs. 30 crore). While capex requirements will be modest, SSML’ operations remain working-capital-intensive, driven by large inventory requirements because of seasonal availability of its key raw material, cotton. Moderation in cotton prices will reduce the working capital requirements; working capital limits are currently highly utilized at ~99% of available drawing power for 13 months between June 2022 and July 2023. |
Outlook: Negative CRISIL Ratings believes SSML’s business risk profile is expected to 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 corporate & export orders (especially linen based 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
Downward factors
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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 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+/Stable/A1), Rajapalayam Textile Ltd (rated ‘CRISIL BBB+/Stable’), Ramaraju Surgical Cotton Mills Ltd (rated ‘CRISIL A-/Negative/CRISIL A2+’), Sri Vishnu Shankar Mills Ltd (rated ‘CRISIL BBB+/Stable/CRISIL A2’), SSML and Sri Harini Textiles Ltd. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
&Interchangeable with short-term loans; includes sublimit of PC/ PCFC/ WCDL ^Interchangeable with WCDL/PCL/PCFC %Interchangeable with EPC/PCFC/FBN/FBP/FBD/LCBD/CBD/LC/BC/BG/FCNRB; includes sublimit of WCDL to the extent of Rs.50 crs. #Interchangeable with EPC/PCFC/FBD/PSCFC/PBD/LC/BC; includes sublimit of CC to the extent of Rs.4 crs |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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&Interchangeable with short-term loans; includes sublimit of PC/ PCFC/ WCDL
^Interchangeable with WCDL/PCL/PCFC
%Interchangeable with EPC/PCFC/FBN/FBP/FBD/LCBD/CBD/LC/BC/BG/FCNRB; includes sublimit of WCDL to the extent of Rs.50 crs.
#Interchangeable with EPC/PCFC/FBD/PSCFC/PBD/LC/BC; includes sublimit of CC to the extent of Rs.4 crs
Criteria Details
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