| Sri Vishnu Shankar Mills 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 Sri Vishnu Shankar Mill Limited (SVSML) to ‘CRISIL BBB/Negative/CRISIL A3+‘ from ‘CRISIL BBB+/Stable/CRISIL A2’
The rating revision and change in outlook follows expected moderation in SVSML’s operating performance in fiscal 2024, driven by modest cotton to yarn spreads due to lower realisations, and higher power costs. Sluggish revenues, due to correction in realisations, and range bound operating margins of ~6-7% due to modest cotton-yarn spreads, 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 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.20 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, SVSML’s revenue grew by 5% supported by stable order book from established corporate clientele and higher realization. Exports moderated by 5% in fiscal 2023, on account of weak global demand and inflationary pressures in EU markets. Even as revenues registered a stable growth, SVSML’s operating margins dipped sharply to 6.9% in fiscal 2023, from 17.9% in fiscal 2022, due to the moderation in spreads between raw cotton and yarn and increase in power costs. SVSML’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 1.35 in fiscal 2023, from 3.87 times in fiscal 2022.
The ratings reflect SVSML’s modest presence in the domestic textiles sector and average operating efficiencies. The ratings also factor the extensive experience of promoters in the textile sector, and support SVSML is expected to derive, being part of the established Ramco group. The ratings are also supported by the company’s liquid investments in Ramco group companies valued at ~Rs.270 crore as on September 25, 2023. These rating strengths are offset by susceptibility of SVSML’s operating margins to inherent volatility in cotton prices and prices of fabric imports. Besides, SVSML has a weak financial risk profile, including due to high working capital requirements, reflecting 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 SVSML 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. |
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.
Average Operating efficiency driven by synergies with other textile units of the Ramco group: SVSML enjoys healthy realizations due to its presence in higher count yarns from 80s to 120s, 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 13.35 MW which caters to ~52% of its power requirements as of fiscal 2023. SVSML is further investing into captive solar scheme along with other group textile entities for which it has spent ~Rs.3 crore. The company’s initiative to modernize machines and increase share of value-added products such as linen based yarn will lead to better return on capital employed, as cotton-yarn spreads improve. Also, from February 2023, over 70% of power needs will be met from captive wind mills and group captive solar project, supporting profitability.
Adequate financial flexibility derived from being part of Ramco group: SVSML 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. Given the strength of the Ramco Group, SVSML has been able to refinance the debt in the past.
Additionally, SVSML has investments in listed entities of the group, and the market value of the investments stand at Rs 270 Cr as on September 25, 2023; the company has the option to transfer investments to other group companies and raise funds in case of exigencies. CRISIL Ratings also takes comfort from the demonstration of support from stronger entities in the group, which have extended support to SVSML in case of exigencies.
Weakness: Moderate financial risk profile: SVSML’s financial risk profile is constrained by the sizeable debt and moderate networth of about Rs 58 crore as of March 31, 2023. SVSML’s gearing is expected to moderate to ~7 times over the medium term (from 4.72 times in fiscal 2022) on account of expected net losses and debt levels remaining at similar levels. As on March 31, 2023, the total debt of SVSML stood at Rs. 273 crore as compared to Rs. 287 crore a year ago. Debt protection metrics, mainly net cash accruals to total debt and interest coverage ratios deteriorated to 0.04 times and 1.35 times respectively for fiscal 2023 compared to 0.12 times and 3.87 times respectively in fiscal 2022. Debt metrics are expected to gradually improve over the medium term, supported by better profitability and cash generation, as well as limited capex spend, but will continue to remain sub-par for the rating category.
Working-capital-intensive operations and susceptibility to volatility in cotton and yarn prices: SVSML’s key raw material, cotton, which constitutes about 95% of its raw material cost, is a highly seasonal commodity, and good quality cotton is available only during the peak cotton season i.e. October to March. SVSML as a policy procures cotton in bulk and maintains an inventory of three to four 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. However, at the end of fiscal 2023, inventory levels at SVSML peaked to Rs. 125 crore while holding onto imported cotton (high cost) in anticipation of increased exports. |
Liquidity: Adequate SVSML has adequate liquidity in the form of unutilized bank lines (75% utilization during 12 months ended June 2023), and moderate cash surpluses. Its financial flexibility is supported by being part of the established Ramco group, and the liquid investments held in group companies valued at over Rs. 270 crores in September 2023. The debt repayment obligations for fiscal 2024 and 2024 are Rs 27 crore and Rs.38 crore, which will be partly refinanced. Also, expected timely support in form of direct fund infusion or arrangement of funds through guarantees from stronger companies in the group, is expected to be forthcoming to supports SVSML in the event of financial contingencies.
While the capex requirements are modest, SVSML’s operations are working-capital-intensive, 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 200 crore, which has been utilized at about 75% (over drawing power) through the six months period ended July 2023. |
Outlook: Negative CRISIL believes SVSML’s business risk profile will moderate over the near to medium term, driven by fall in revenue, albeit profitability to remain weak in near term, due to unfavorable cotton-yarn spreads, and then increase gradually over the medium term. Low cash generation, moderate capex requirements and continuing high debt levels will affect the financial risk profile. That said, Ramco group is expected to provide timely funding support, in the event of distress. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Incorporated in 1981, SVSML is promoted by Mr P.R. Ramasubramaneya Rajha and Mrs Sharada Deepa (daughter of Mr P.R. Ramasubramaneya Rajha). SVSML manufactures cotton yarn of counts ranging from 80s to 120s and has three manufacturing facilities, two in Rajapalayam and another facility in Andhra Pradesh, with a combined capacity of 80000 spindles and 1008 rotors. SVSML also has wind power facilities aggregating to 13.35 megawatts (MW), which helps it control power costs.
The Ramco group includes Ramco Cements, Ramco Systems Ltd and Ramco Industries Limited (rated ‘CRISIL A1+’) while the textile companies in the group include Rajapalayam Mills Ltd (rated 'CRISIL A+/Stable/CRISIL A1'), The Ramaraju Surgical Cotton Mills Ltd (rated 'CRISIL A-/Negative/CRISIL A2+'), SVSML, Sandhya Spinning Mill Ltd (rated 'CRISIL BBB-/Negative/CRISIL A3') and Rajapalayam Textile Limited (rated 'CRISIL BBB+/Stable'). |
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 EPC/PCFC/ FBN/ FBP/ FBD/ buyer's credit ^Interchangeable with short term loan/EPC/ letter of credit/bank guarantee/ buyer's credit/WCDL/PCFC %Interchangeable with non-fund based facilities $Interchangeable with WCDL/EPC |
| 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 EPC/PCFC/ FBN/ FBP/ FBD/ buyer's credit
^Interchangeable with short term loan/EPC/ letter of credit/bank guarantee/ buyer's credit/WCDL/PCFC
%Interchangeable with non-fund based facilities
$Interchangeable with WCDL/EPC
Criteria Details
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