Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA (CE)/Negative/CRISIL BBB-/Stable’ ratings on the long-term bank facilities of Shree Rama Multi-Tech Ltd (SRMTL).
The rating reaffirmation continues to take into account the strength of the continuing, unconditional and irrevocable corporate guarantee by Nirma Ltd (Nirma; ‘CRISIL AA/CRISIL AA-/Negative/CRISIL A1+’).
The negative outlook reflects a possibility that financial risk profile of Nirma (guarantor) could weaken in case of delay in the equity issuance coupled with lower-than-expected deleveraging in the Nirma group. However, CRISIL Ratings has noted the announcement by Nuvoco Vistas Corporation Ltd (NVCL; rated ‘CRISIL AA/CRISIL AA-/Negative/CRISIL A1+’) for equity issuance of Rs 5,000 crore, a large part of which is expected to be used towards deleveraging of Nirma group.
Nirma has currently guaranteed SRMTL’s bank facilities amounting to Rs 28 crore which CRISIL Ratings understands can further be extended up to Rs 80 crore as Nirma has board approval for the same. CRISIL Ratings also understands that Nirma has taken measures to monitor the cash flow of SRMTL to ensure that all debt obligations are met on the due date.
The 'CRISIL BBB-/Stable' unsupported rating (without any credit enhancement) on the proposed long-term bank facility of SRMTL factors in the company’s diversified products, strong clientele, and moderate financial flexibility as part of the Nirma group. The Covid-19 pandemic is likely to have a limited impact on the company in fiscal 22, given its healthy order flow, less severe lockdowns in the wake of the second wave of the pandemic and operations categorised as essential services. Liquidity remains supported by unutilised working capital lines of Rs 21 crore and nil long-term debt. The strengths are partially offset by modest scale of operations, large working capital requirement, susceptibility to fluctuations in raw material prices, and financial risk profile undermined by a large contingent liability. |
Analytical Approach For arriving at the credit enhanced rating, CRISIL Ratings has applied its criteria for rating instruments backed by guarantees for the bank facilities guaranteed by Nirma. The 'CE' suffix in the rating reflects the payment structure that is designed to cover the principal and interest obligations on the bank facilities backed by the corporate guarantee.
For arriving at the unsupported ratings, CRISIL Ratings has applied its group notch-up framework to factor in the support available to SRMTL from the Nirma group. |
Key Rating Drivers & Detailed Description Strengths: Strength of continuing, unconditional and irrevocable corporate guarantee by Nirma The credit enhanced rating is based on the strength of the continuing, unconditional and irrevocable guarantee provided by the guarantor (Nirma). The credit quality of the rated facility thus reflects the credit quality of the guarantor. CRISIL Ratings understands that Nirma has taken measures to monitor the cash flow of SRMTL to ensure timely servicing of debt on the due date.
Diversified product profile and strong customer base SRMTL manufactures laminated tubes, specialty packaging products and laminates. The company has a diversified client base, with the top 10 customers contributing 55-60% to revenue. The company also exports to Africa and Europe. Revenue shall be supported by healthy order book backed by regular order inflow from existing clients and new orders from overseas clients.
Moderate financial flexibility as a part of the Nirma group SRMTL is a part of the Nirma group, which holds 42.51% stake in the company. The external bank loan facility guaranteed by Nirma suggests that SRMTL enjoys financial flexibility as part of the Nirma group.
Weaknesses Modest scale of operations The modest scale is reflected in revenue of Rs 120-140 crore for the three fiscals through 2021. In fiscal 2020, cash accrual was supported by sale of assets at the Ambaliyara unit in Gujarat, and the proceeds were used for capital expenditure (capex) related to modernisation of plant and machinery and to repay loans. Revenue may remain constrained in the near term, driven by the economic slowdown caused by the pandemic.
Large working capital requirement The working capital cycle may remain stretched in the near term. Hence, its management will be closely monitored. Gross current assets were 134 days as on March 31, 2021, due to receivables of 60 days and inventory of 60 days. The company gets credit of 56 days from suppliers.
Susceptibility to fluctuations in raw material prices As the cost of procuring the major raw materials (polymers and aluminum) accounts for a bulk of the total production cost, variation in their prices may drastically impact profitability. Margins were impacted in last fiscal due to increase in raw material prices and job work related expenses. Limited ability to pass on any drastic price increase further constrains the operating margin.
Average financial risk profile Though debt protection metrics remained healthy in fiscal 2021 because of reduced debt, the financial risk profile remains constrained by the large contingent liability. Interest coverage and net cash accrual to total debt (NCATD) ratios improved to around 13 times and 0.16 time, respectively, from around 10 times and 0.25 time, respectively, in fiscal 2020. Accrual moderated in fiscal 2021 as the company had recorded one-time income from sale of assets in the previous fiscal. The interest coverage and NCATD ratios are expected to remain around 9-10 times and 0.1-0.15 time, respectively, over the medium term.
Large contingent liability Contingent liability of Rs 164 crore (interest overdue) as on March 31, 2021, pertains to the debt restructuring scheme filed by the company in the Honorable High Court of Gujarat, which rejected the scheme in its order dated February 20, 2020. CRISIL Ratings understands the company has filed a review petition against the order. Also, it has entered into an agreement with non-convertible debenture/term loan lenders to repay the principle through the rights issuance by August 2021. As part of the Nirma group, the company is unlikely to be adversely affected by any delay in raising funds. However, settlement of the liability and its funding remain key monitorables. |
Liquidity: Strong Liquidity is strong, backed by the credit enhancement in the form of corporate guarantee and strong liquidity of the guarantor (Nirma). On a standalone basis, SRMTL has adequate liquidity, supported by unutilised working capital facility of Rs 21 crore apart from cash accrual from the business vis-à-vis nil long-term debt. SRMTL plans capex of Rs 12-15 crore in fiscal 2022, which will likely be funded through internal accrual. |
Outlook: Negative (for cash credit facility) The outlook signifies that the financial risk profile of guarantor may deteriorate in case of delay in equity issuance or lower-than-expected deleveraging in the Nirma group.
Outlook: Stable (for proposed working capital facility) CRISIL Ratings believes SRMTL will continue to benefit from its strong track record, diversified product profile and established client relationships. |
Rating Sensitivity factors Upward factors
Downward factors
|
Adequacy of credit enhancement structure The rating on the cash credit facility of SRMTL reflect the unconditional and irrevocable guarantee from Nirma. CRISIL Ratings understands Nirma has taken measures to monitor the cash flow of SRMTL to ensure timely servicing of debt (principal, interest, and other monies payable on the guaranteed bank facility) on the due date. |
Unsupported ratings - CRISIL BBB- CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019. |
Key drivers for unsupported ratings For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SRMTL. The company enjoys moderate financial flexibility as a part of the Nirma group. CRISIL Ratings has also applied its group notch-up framework to factor in the extent of support available to SRMTL from the Nirma group. |
About the Company SRMTL, incorporated in 1993, is a Gujarat-based integrated packaging company that manufactures laminated tubes and specialty packaging products. It has installed capacity of 9,514 lakh multi-layer tubes. It has more than 150 clients in India and abroad. SRMTL is a part of the Nirma group, which holds 42.51% stake in the company. |
About the guarantor Nirma, set up by Dr Karsanbhai K Patel in 1980 to manufacture detergents, has expanded operations to soaps, chemicals, and processing of minerals. It has plants in Mehsana, Ahmedabad, Vadodara, Porbandar and Bhavnagar in Gujarat and in Searles Valley in the US. |
Key Financial Indicators
|
List of covenants The material covenants of the instruments are as follows:
|
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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Cash Credit | RBL Bank Limited | 28 | CRISIL AA (CE)/Negative |
| Proposed Working Capital Facility | Not Applicable | 34.34 | CRISIL BBB-/Stable |
| Proposed Working Capital Facility | Not Applicable | 17.66 | CRISIL BBB-/Stable |
This Annexure has been updated on 2-Sep-2021 in line with the lender-wise facility details as on 19-Aug-2021 received from the rated entity.
Criteria Details
|