Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Vardhman Yarns and Threads Limited (VYTL) at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

The ratings continue to reflect the established position of VYTL in the domestic threads market, its healthy business risk profile, consistent operating efficiency, and strong financial risk profile. These strengths are partially offset by the exposure to risks related to fluctuations in raw material prices, intense competition from the unorganised sector in the threads business, and moderately large working capital requirement due to seasonality of the raw materials used especially cotton. 

 

Operating performance remained strong during fiscal 2023, with revenue growth of 8% to reach Rs 1,084 crore, led by increased realisations while the volumes remained stable. Operating margin remained steady at 18.9% (19.6% during fiscal 2022) despite increase in input price due to the company’s ability to pass on price variations to the consumers. Net cash accruals have remained at ~Rs 90 crore for the past two fiscals through fiscal 2023 and are expected to remain at similar levels over the medium term, with sustenance of operating performance on a standalone basis.

 

Financial risk profile has been strong due to its debt-free balance sheet (gearing ratio: nil as on March 31, 2023; 0.01 time as on March 31, 2022) and healthy operating performance. The company is in the process of acquiring Guetermann India Pvt Ltd (GIPL; a group entity in similar lines of business with revenue of Rs 88 crores in fiscal 2023) and is expected to complete the transaction in the current year. This transaction will be funded through internal accruals and existing cash and equivalents (Rs 213 crore as on March 31, 2023) as the company has strong liquidity, with low bank limit utilisation. The financial risk profile is expected to sustain over the medium term, with debt-free balance sheet due to no major, debt-funded capital expenditure plans.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profile of VYTL. CRISIL Ratings will reassess its analytical approach, subject to successful completion of the acquisition of GIPL and its linkages with VYTL and its support philosophy.

Key Rating Drivers & Detailed Description

Strengths:

Established market position

VYTL is the second-largest player in value terms, with a market share of around 30% in the domestic threads market. Its superior product mix and increasing proportion of specialty yarns and technical textiles in non-apparel segments enhance the market position and profitability. Strong distribution network with 25 regional offices cum distribution centres helps cater to consumers directly, ensuring revenue stability. The company will continue to benefit from the expertise of the Vardhman group in cotton procurement, high pricing power because of extensive cotton consumption and ability to maintain large inventory. The company has capacity addition plan for smaller dye machines to meet smaller orders, adding twisting capacity in the specialty thread business and winding capacity in the industrial segment. Growth over the medium term is expected to be driven by addition of new clients, new business segments and higher price realisations. The company is also in the process of acquiring GIPL, which operates in the premium apparel and leather goods category, which should strengthen its position in the premium segment.

 

Healthy operating efficiency

Operating efficiency continues to be healthy, with significant corporate solution support from the parent Vardhman Textiles Ltd (VTXL; ‘CRISIL AA+/Stable/CRISIL A1+), via procurement of raw materials. This ensures consistency in product quality and minimal supply chain losses, which leads to a superior operating margin as compared to industry peers. Operating margins remained healthy at above 17% for the past five fiscals through fiscal 2023 and are expected to sustain at that level over the medium term due to the ability of the company to change the product mix and pass on any variation in the raw material prices to its customers. The company is consistently working towards growth, driven by addition of new clients and new business segments, thereby boosting the operating margin.

 

Strong financial risk profile

The financial risk profile remains strong due to its debt-free balance sheet and healthy networth of Rs 696 crore as on March 31, 2023.  Healthy cash accruals and low debt levels have led to strong debt protection metrics, as indicated by interest coverage ratio of 169 times during fiscal 2023 (93 times during fiscal 2022). The financial risk profile is expected to remain strong with net cash accruals of around Rs 90-100 crore per annum (factoring dividend payout of ~50% of net profit); no long-term debt obligation and the absence of any major, debt-funded capex should aid the financial risk profile. Any substantial increase in dividend payouts or undertaking any large, debt-funded capex/acquisition will remain key rating sensitivity factors.

 

Weaknesses:

Exposure to volatility in raw material prices

Susceptibility to fluctuations in the prices of key raw materials - polyester fibre, synthetic filament, and cotton fibre persist. The prices of polyester fibre and filament are closely linked to crude oil rates, which remain volatile. Cotton fibre prices, too, exhibit cyclical volatility and depend on the monsoon and international demand. Operating margin has fluctuated between 15% and 20% in the past decade.

 

Intense competition in the industry

The domestic organised sector for manufacturing sewing threads is dominated by two large players -- Madura Coats Pvt Ltd (‘CRISIL AA-/Stable/CRISIL A1+’) and VYTL, with the former being the market leader. There is also significant competition from the unorganised sector, which accounts for a large chunk of the domestic threads market. Intense competition may continue to constrain scalability, pricing power and profitability.

 

Moderately large working capital requirement

Due to seasonality of the cotton crop, its availability and quality are generally a challenge after the culmination of the cotton procurement season. To maintain appropriate quality standards, the company procures the entire year’s supply of cotton during the peak season, resulting in relatively high inventory. It eases post that to reach around 90 days by the end of March. Further, the average outstanding debtors were 45-60 days and creditors at 60-90 days for the past several years.

Liquidity: Strong

VYTL has strong liquidity with cash and equivalents of Rs 213 crore as on March 31, 2023. Utilisation of the bank limit worth Rs 82 crore stood around 26% (fund based – 1%; non-fund based – 25%) during the 12 months period through June 2023. Cash and equivalents and annual net cash accruals of ~Rs 90-100 crore per annum) should be adequate for the planned acquisition, minor annual capex worth Rs 25-35 crore and meeting incremental working capital requirement over the medium term.

Outlook: Stable

CRISIL Ratings believes VYTL will continue to benefit from its established market position in the domestic threads market, steady support from the parent brands -- VTXL and A&E, and sustenance of a strong financial risk profile in the presence of high cash accrual and the absence of any, major, debt-funded capex plans in the future.

Rating Sensitivity Factors

Upward Factors

• Significant and sustained improvement in scale of operations while maintaining profitability, resulting in net cash accruals of over Rs 150-180 crore
• Sustenance of strong financial risk profile

 

Downward Factors

• Large, debt-funded capex or acquisition, resulting in gearing increasing more than 0.5 time
• Weakening of operating performance or higher-than-expected dividend payout, reducing the net cash accruals on a sustained basis

About the Company

VYTL, incorporated in February 2005, commenced operations in fiscal 2008. It is a joint venture between American & Efird Global, LLC (“A&E Global”) and Vardhman Textiles Limited (“VTXL”). VYTL provides a wide range of solutions for sewing, embroidery and for special applications in clothing, home textile and leather products. Additionally, VYTL provides value-added services such as thread advisory and thread consumption through their technical toolset. It has five domestic manufacturing facilities at Hoshiarpur (Punjab), Ludhiana (Punjab), Perundurai (Tamil Nadu) and Vizag (Andhra Pradesh) along with 25 regional offices cum distribution centers. The threads business of Vardhman Threads Ltd (VTL) and VTXL, including all the corresponding assets and liabilities, were transferred to VYTL with effect from April 2007 and April 2008, respectively. A&E, a wholly owned subsidiary of Elevate Textiles Inc, holds 89% and VTXL holds the remaining 11% stake in VYTL.

About A&E

A&E is one of the world’s foremost manufacturers of sewing thread, embroidery thread, and technical textiles. Its global presence extends from Asia to Europe to the Americas. The company is owned by Elevate Textiles Inc, which is further held by a consortium of global investment firms.

Key Financial Indicators (Standalone)*

As on/for the period ended March 31	Units	2023	2022
Operating income	Rs crore	1090	1012
Profit after tax (PAT)	Rs crore	142	131
PAT margin	%	13	13
Adjusted debt/adjusted networth	Times	0.00	0.014
Adjusted interest coverage	Times	169	93

    *CRISIL Ratings-adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	82	NA	CRISIL AA-/Stable
NA	Letter of credit**	NA	NA	NA	0.5	NA	CRISIL A1+
NA	Proposed long-term bank loan facility	NA	NA	NA	132.04	NA	CRISIL AA-/Stable
NA	Term loan	NA	NA	Mar-23	13.3	NA	CRISIL AA-/Stable

*Interchangeable with non-fund-based limit

**Interchangeable with other non-fund-based limits