| Vardhman Textiles Limited | ||||||||
| Ratings Reaffirmed | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Vardhman Textiles Limited (VTXL; a part of the Vardhman group). CRISIL Ratings has also withdrawn its rating on the non-convertible debentures of Rs. 200 crore (see Annexure 'Details of Rating Withdrawn' for details) as these are completely redeemed. This is in line with the policy of CRISIL Ratings on withdrawal of debt instruments.
The ratings continue to reflect strong and diversified business risk profile of the Vardhman group, especially in the textiles business, and healthy operating capability. The ratings also factor in strong financial risk profile and robust liquidity. These strengths are partially offset by large working capital requirement, modest market position in the steel business and vulnerability of the operating profitability to volatility in input prices.
After an extraordinary year of fiscal 2022 (in terms of strong revenue growth and decadal high operating profitability), revenue growth will moderate in the first half of fiscal 2023 due to decline in exports and costlier cotton resulting in lesser cotton yarn-cotton spreads. However, higher new cotton crop projected this season, and expected improvement in export competitiveness due to lowering of cotton prices will increase export demand while domestic demand may remain steady. Weak performance in first half of fiscal 2023 and stretch in realisation will result in moderate revenue decline while the operating margins may contract to 12-13% in fiscal 2023 from peak levels of ~24% in fiscal 2022.Thus, cash accrual is projected at Rs 800-900 crore this fiscal. However, cash accrual should increase to more than Rs 1,200-1,500 crore over the medium term, driven by healthy growth potential and strong market position.
Vardhman Special Steels (VSSL) reported healthy performance in fiscal 2022, supported by increase in sales volumes (15.33% year-on-year) and an uptick in realisation. Revenue increased by 47.5% to Rs 1,390 crore in fiscal 2022 from Rs 942 crore in fiscal 2021. Growth in volume was due to the upward trend in the automobile sector – primarily four wheelers. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) grew to Rs 191 crore in fiscal 2022 from Rs 113 crore in the previous fiscal, driven by improved realisation, increase in share of value-added products and cost-optimisation initiatives undertaken by the group; the EBITDA margin also improved to 13.7% from 12.0%. Profit scaled to Rs 101 crore in fiscal 2022 from Rs 44 crore in fiscal 2021.
Financial risk profile of the group remains robust, with healthy cash accrual and moderate debt levels. Capital expenditure (capex) is expected to be moderate over the next two fiscals. Thus, net debt to EBIDTA, which stood at 2.41 times in fiscal 2021 and improved to 0.84 time in fiscal 2022, is projected at below 1.25 times over the medium term.
Liquidity remains comfortable, with consolidated cash and equivalents over Rs 1800 crore as on March 31, 2022, and unutilised bank limit of over Rs. 1700 crore as on October 30, 2022 (backed by drawing power). Against this, debt repayment is modest at ~Rs 500 crore for fiscal 2023. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of VTXL and its subsidiaries, Vardhman Acrylics Ltd (Vardhman Acrylics) and Vardhman Spinning & General Mills Ltd. This is because all the entities, collectively referred to as the Vardhman group, are in the textile business, with an integrated treasury and strong intra-group operational linkages, including procurement of cotton. The business and financial risk profiles of VTXL’s subsidiary, VTL Investments Ltd, and VTXL’s associate, VSSL, have also been combined because of history of support from the group and demonstrated track record. The business and financial risk profiles of Vardhman Yarns and Threads Ltd (VYTL) have not been included since fiscal 2017, as VTXL has divested most of its stake in VYTL, and is now a minority shareholder.
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:
The Vardhman group is present across the textile, fibre and steel segments, which accounted for 85%, 3% and 12% of revenue, respectively, in fiscal 2022, Though the group is a small player in the steel business, it has a strong market position in the cotton yarn and fabrics segment, on the back of large capacity and established relationships with leading global apparel manufacturers . It is one of the largest spinners in the domestic market, with installed capacity of 12 lakh spindles, accounting for 2% of the total installed spindles in India. Additional capacities of around 97,000 spindles to be added by fiscal 2025, and 1,30,000 spindles by fiscal 2026, should help the healthy growth momentum sustain over the medium term.
Strong business position in the textiles business is reinforced by healthy operating capability. The group has continuously invested towards enhancing its spinning productivity. Being one of the largest consumers of raw cotton in the country, procuring over 15 lakh bales per annum, the group enjoys a preferred-buyer status and considerable pricing benefits.
After an extraordinary year of fiscal 2022 (in terms of strong revenue growth and decadal high operating profitability), revenue growth will moderate in the first half of fiscal 2023 due to decline in exports and costlier cotton resulting in lesser cotton yarn-cotton spreads. However, higher new cotton crop projected this season, and expected improvement in export competitiveness due to lowering of cotton prices will increase export demand while domestic demand may remain steady. Weak performance in first half of fiscal 2023 and stretch in realisation will result in moderate revenue decline while the operating margins may contract to 12-13% in fiscal 2023 from peak levels of ~24% in fiscal 2022.Thus, cash accrual is projected at Rs 800-900 crore this fiscal. However, cash accrual should increase to more than Rs 1,200-1,500 crore over the medium term, driven by healthy growth potential and strong market position.
Net cash accrual may decline to Rs 800-900 crore in fiscal 2023 and Rs 1,100-1,200 crore in fiscal 2024 (from Rs 1,682 in fiscal 2022) led by average operating profitability. Capex remains moderate over the next three years, hence, debt should decrease to nearly Rs 1,200-1,300 crore in fiscals 2023 and 2024 from Rs 2,144 crore currently. Better profitability and prudent debt funding will aid debt protection metrics. However, any sharp increase in short-term debt for stocking of cotton is a monitorable.
Debt/EBITDA is expected at 0.93 time in fiscal 2023, as compared to 0.84 time in fiscal 2022, aided by lower debt and higher operating margin. The ratio is expected below 1 time in fiscal 2024 due to moderation in debt and operating profit.
Weaknesses:
The group remains susceptible to volatility in prices of key raw materials, cotton (which accounts for half the cost of yarn) and steel. Cotton prices are exposed to risks such as unfavourable monsoon or pest attacks and are linked to the international demand/supply scenario. Though the group benefits from VTXL's large procurement and adequate risk management systems, profitability remains susceptible to volatility in raw material prices. The operating margin fluctuated between 13.9% and 23.9% in the past decade and was adversely affected during fiscals 2020, 2018, 2015 and 2012, when profitability was hit by the slowdown in demand from China, and government interventions. Similarly, in the steel business, operating margin depends on prices of raw materials such as sponge iron, manganese and nickel.
As cotton is a seasonal crop, its availability and quality is generally an issue post the cotton season. Driven by its commitment to deliver quality products, the group procures cotton during the season and maintains large inventory at the end of the fiscal. Inventory levels fall by September as the stock is consumed in the first half of the fiscal. They start increasing once the cotton season begins from October and remain high in March. VTXL has receivables averaging 51 days (though they were higher at 63 days as on March 31, 2021, amidst the Covid-19 pandemic). Against this, the group had payables of about 29 days.
Gross current assets were high at 275 days as on March 31, 2021, and 196 days as on March 31, 2022 (against an average of 200-220 days for the five fiscals prior to March 2022). In the steel business, dependence on the automotive industry resulted in sizeable working capital requirement, with receivables of 59 days and inventory of 93 days as on March 31, 2022.
Through VSSL, the group has a relatively smaller presence in the steel business. As it derives over 85% of revenue from the automotive sector, it remains vulnerable to cyclicality in this segment. Better utilisation and focus on cost optimisation ensured steady performance, also reflected in the operating margin rising to 13.7% in fiscal 2022 from 2.4% in fiscal 2015.
VSSL saw one of the best quarterly performances in terms of topline and profit after tax (PAT) in the first quarter of fiscal 2023 owing to higher realisation, revived domestic and export demand and increase in volume growth. Growth is attributed to about 20% increase in volumes and about 20% due to price increase from original equipment manufacturers. With better-than-expected recovery in demand from end-user segments, revenue should remain higher than earlier expectations. Sizeable volumes, but higher cost may contribute to slightly lower margin in fiscal 2023 compared to earlier expectation. However, cost-control measures and initiatives undertaken towards better procurement will support the margin in the coming years with debt protection metrics to remain comfortable over the medium term |
Liquidity: Strong Liquidity should remain supported by consolidated cash and equivalents over Rs 1,800 crore in March 2022, and unutilised limit of over Rs 1700 crore backed by drawing power. Long-term debt of around Rs 400-500 crore per annum over the medium term will be serviced via internal accrual. Moderate capex in fiscal 2023 is likely to be met via marginal debt, internal accrual and any surplus liquidity. |
Outlook: Stable The Vardhman group will sustain healthy credit risk profile, backed by strong market position in the textiles business, diversified product portfolio and strong liquidity. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Vardhman group The Vardhman group, headed by Mr S P Oswal, is one of the leading textile groups in India, with operations across the yarn, fabric, sewing threads, fibre, special alloys, and garment sectors. In fiscal 2022, the textile business accounted for 85% of the consolidated operating income, followed by the fibre segment (3%) and the steel alloy segment (12%),. The group has 18 production plants in Punjab, Madhya Pradesh, Gujarat and Himachal Pradesh.
VSSL produces special and alloy steels, and has capacity of 200,000 TPA of steel billets and 180,000 TPA of steel rolled products, Vardhman Acrylics manufactures acrylic fibre, and has capacity of 20,000 TPA.
For the quarter ended June 30, 2022, VTXL posted revenue of Rs 2,812 crore and operating profit of Rs 525 crore, against Rs 1,927 crore and Rs 479 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators (the Vardhman group -- VTXL + VSSL -- Adjusted by CRISIL Ratings)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: 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.crisil.com/complexity-levels. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*includes Rs 200 sublimit for foreign bill purchase #Interchangeable with other non-fund-based limit ^Includes Rs 60 crore as a sub-limit of working capital demand loan/export packing credit (WCDL/EPC) @ Letter of credit & bank guarantee limits are interchangeable
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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#Interchangeable with other non-fund-based limit
^Includes Rs 60 crore as a sub-limit of working capital demand loan/export packing credit (WCDL/EPC)
@ Letter of credit & bank guarantee limits are interchangeable
Criteria Details
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