Rating Rationale
December 11, 2019 | Mumbai
Somany Fine Vitrified Private Limited
Rating removed from 'Watch Developing' ; Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.40 Crore
Long Term Rating CRISIL A/Stable (Removed from 'Rating Watch with Developing Implications' ; Rating Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its rating on the bank facilities of Somany Fine Vitrified Private Limited (SFVPL) from 'Rating Watch with Developing Implications' and has reaffirmed its rating at 'CRISIL A' while assigning 'Stable' outlook on the long term bank facilities.
 
The rating action follows the parent - Somany Ceramics Ltd's (SCL's, rated 'CRISIL AA-/Stable/CRISIL A1+') update regarding default by one of the company's stockbrokers, Mentor Financial Services Pvt Ltd (Mentor). A cheque of Rs 26 crore issued in favour of SCL by Mentor bounced owing to insufficient funds. SCL, against this, has issued demand notices for repayment to Mentor and its directors has filed a criminal complaint against Mentor and its directors.

As an abundant caution, SCL has provided for the cheque bouncing event in the financial statements for Q2 fiscal 2020 and disclosed it under the head 'Exceptional Items'. This is a one-time event which has led to PBT losses for Q2 of FY 2020. No further provisioning for the said case or any other advances is expected further as broker advances have reduced to nil as on Sept 30, 2019.

Moreover, advances outstanding at Rs 22 crore as on Sept 30, 2019 (as a part of treasury operations) to external parties are expected to reduce to nil by the end of March 2020, as indicated by the management. Hence, the ratings have now been removed from rating watch with clear articulation by the management that all free cash would either be kept as marketable securities or bank balances.
 
The rating continues to reflect low offtake risk, supported by an agreement with SCL, extensive experience of the promoters in the ceramic tiles industry, favourable location of the manufacturing unit, and the comfortable financial risk profile.These rating strengths are partially offset by the modest scale of operations, amidst exposure to intense competition and fluctuations in raw material and fuel prices.

Analytical Approach

For arriving at its rating, CRISIL has factored in the strong support received by SFVPL from the largest shareholder, SCL.

Key Rating Drivers & Detailed Description
Strengths
* Extensive experience of the promoters, and favourable location of the manufacturing unit
The decade-long experience of the promoters in the ceramic tiles industry will continue to support the business risk profile. The manufacturing unit is located in Morbi (Gujarat), which accounts for around 80% of India's ceramic tiles production. The favourable location ensures easy access to red clay (main raw material), and availability of contractors and skilled labourers.
 
* Moderate financial risk profile:
Capital structure has improved, marked by gearing of 1.2 times as on March 31, 2019, aided by continuous debt repayment. Debt protection metrics were moderate with net cash accrual to total debt and interest coverage ratios at 0.21 time and 3.6 times, respectively, for fiscal 2019, on account of moderate operating profitability and accretion to reserves.
 
Weaknesses
* Modest scale of operations amidst intense competition:
Operating income declined to Rs 85.7 crore in fiscal 2019, from Rs 93.9 crore in fiscal 2018, mainly due to the slowdown in the real estate industry, post government reforms such as demonetisation, implementation of the Goods and Service Tax and the Real Estate (Development and Regulation) Act, led to lower offtake from SCL. The Somany group also faces intense competition from several small and large players in the ceramic tiles industry.
 
* Susceptibility to fluctuations in raw material and fuel prices, and low pricing power: Prices of key raw materials, such as clay, feldspar, and carbonates, and that of natural gas, have been volatile over the past three years. Although operating margin is likely to be moderate, exposure to intense competition, can lead to a drop in margin, as the company may not be in a position to pass on any hike in raw material cost.
Liquidity Adequate

Liquidity is moderate, marked by tightly matched cash accrual against the maturing debt, low bank limit utilisation and funding support from the promoters. Net cash accrual of Rs 6.9 crore and Rs 7.75 crore, expected in fiscals 2020 and 2021, would be just sufficient to service the yearly debt of Rs 6.7 crore. Bank limit utilisation averaged around 45% for the 12 months through March 2019.

Outlook: Stable

CRISIL believes SFVPL will continue to benefit from the extensive industry experience of its promoters and support from the parent, SCL.

Rating Sensitivity factors
Upward Factors
* Significant growth in revenue by more than 25% and profitability by 150 basis points
* Improvement in the parent's rating

Downward Factors
* Any major capital expenditure or increasing working capital requirements,
* Significantly low cash accruals and profitability reduction by 150 basis points, weakening the financial risk profile.
* Weakened credit risk profile of the parent.
About the Company

SFVPL, incorporated in fiscal 2012, has set up a facility in Rajkot (Gujarat) to manufacture vitrified floor tiles; operations commenced in October 2015. SCL has a 51% stake in the company; while the balance 41% is held collectively by the promoters, Mr Vasant Kumar Lalji Ghodasara, Ms Alpa Vasant Patel and others.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 85.7 93.9
Profit After Tax (PAT) Rs crore 1.65 1.9
PAT margin % 1.9 2.0
Adjusted debt/adjusted networth Times 1.2 1.4
Interest coverage Times 3.6 4.0

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)		 Rating Assigned with Outlook
NA Cash Credit NA NA NA 15 CRISIL A/Stable
NA Long Term Loan NA 11 Jun-2022 16 CRISIL A/Stable
NA Proposed Fund-Based Bank Limits NA NA NA 9 CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  40.00  CRISIL A/Stable  16-09-19  CRISIL A/Watch Developing  30-07-18  CRISIL A/Stable  18-04-17  CRISIL A/Stable  22-11-16  CRISIL BBB/Positive  -- 
        31-07-19  CRISIL A/Stable          30-06-16  CRISIL BBB/Stable   
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
Cash Credit 15 CRISIL A/Stable Cash Credit 15 CRISIL A/Watch Developing
Long Term Loan 16 CRISIL A/Stable Long Term Loan 16 CRISIL A/Watch Developing
Proposed Fund-Based Bank Limits 9 CRISIL A/Stable Proposed Fund-Based Bank Limits 9 CRISIL A/Watch Developing
Total 40 -- Total 40 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Construction Industry
CRISILs Approach to Recognising Default
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
The Rating Process

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