Rating Rationale
December 10, 2019 | Mumbai
Vardhman Textiles Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.5416.23 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Fixed Deposits FAAA/Stable (Reaffirmed)
Rs.1000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/FAAA/Stable/CRISIL A1+' ratings on the bank loan facilities and debt instruments of Vardhman Textiles Limited (VTXL; part of the Vardhman group).

The ratings continue to reflect the Vardhman group's strong and diversified business risk profile, 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 operating profitability to volatility in input prices.

In fiscal 2020, the operating profitability of the VTXL is expected to moderate by around 200 basis points to 16% as compared to fiscal 2019 as the cotton yarn and cotton spread has fallen in first half of fiscal 2020 owing to fall in India's cotton yarn exports which in turn has created oversupply situation in domestic market. Earlier in fiscal 2019, the company's operating profitability improved to 18.2% as against 15.0% year on year (y-o-y), owing to increased cotton yarn and cotton spreads in its cotton textile business. At group level (including the steel business), the operating profitability is expected to moderate to 15% in fiscal 2020 from 16.5% in fiscal 2019 as the steel business is expected to post lower profitability owing to slowdown in domestic auto industry, its key end user industry. 

In first six months of fiscal 2020, VTXL posted revenue growth of -2% on y-o-y basis, mainly owing to lower yarn exports, while operating margin stood at 15.0% in the same period as against 18.3% y-o-y. In spite of the adverse market conditions in domestic cotton spinning industry, VTXL has been able to increase its market share owing to solid market position in the textiles sector, and continued focus on increasing share of value-added yarns, fabrics and healthy operating efficiency.

The financial risk profile of the group remains robust with strong annual cash generation over Rs 800 crore per annum and moderate debt levels. The debt to earnings, before interest, tax, depreciation and amortization (EBIDTA) which stood at 1.8 times in 2018 and improved to 1.7 times in 2019, is expected to remain below 2 times in fiscal 2020. The same is expected to fall below 1.5 times by fiscal 2022 as the group doesn't have any major debt funded capex plan over medium term. Also, the group is likely to maintain sizeable liquid surplus of Rs 800-1000 crore annually, and utilise bank line moderately. As on 30th September 2019, the company had liquid surplus of around Rs 1400 crore.

CRISIL believes the Vardhman group's operating performance will remain healthy supported by tis strong market position and wide product portfolio. The group is one of the largest players in the textiles sector in India with sizeable capacity. While the performance of the automotive steel business has been impacted in fiscal 2020 owing to adverse market conditions in domestic automotive industry, the acquisition of minority stake by Japanese steel manufacturer, Aichi Steel Corporation, (Toyota Group associate company) in fiscal 2020, will enhance the business and financial risk profile of the steel business.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of VTXL and its subsidiaries, VMT Spinning Co Ltd (VMT Spinning), Vardhman Acrylics Ltd (Vardhman Acrylics) and Vardhman Nisshinbo Garments Co Ltd (VNGCL). This is because all the entities, collectively referred to as the Vardhman group, are in the textile business, have an integrated treasury and strong intra-group operational linkages, including common procurement of cotton. The business and financial risk profiles of VTXL's subsidiary, VTL Investments Limited and VTXL's associate, Vardhman Special Steels Ltd (VSSL) are also combined because of commitment of support from the group and past demonstrated track record. CRISIL has not combined the business and financial risk profiles of Vardhman Yarns and Threads Ltd (VYTL) from 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:
* Strong, diversified business risk profile, especially in the textiles business
The Vardhman group has a diversified portfolio with presence in the yarn (55% of revenue in fiscal 2019), fabric (28%), and steel (11%) segments. While the group is a small player in the steel business, it has a strong presence in the cotton yarn and fabrics segment, benefiting from large capacity and established relationships with leading global apparel manufacturers (over 600 clients). It is one of the largest spinners in India, with installed capacity of 11 lakh spindles, accounting for 2% of the country's total installed spindles.

The group is also among the top three woven fabric manufacturers in India, with grey and processed fabric capacity of 1550 looms and 170 million meter per annum (mmpa), respectively. It is an approved supplier to large retailers such as, Wal-Mart (rated 'AA/Stable/A-1+' by S&P Global Ratings), GAP (rated 'BB/Negative' by S&P Global Ratings, Hennes & Mauritz, and Aditya Birla Fashion and Retail Ltd ('CRISIL AA/Stable/CRISIL A1+'). The group is one of the largest players in the domestic acrylic fibre market (3% of revenue), with capacity of 20,000 tonne per annum (tpa). The capacity expansion at Madhya Pradesh will augment presence in the textile sector.

* Healthy operating capability
The strong business position in the textiles business is reinforced by healthy operating capability. The group has continuously invested in enhancing its spinning productivity. It is one of the largest consumers of raw cotton in the country (procuring over 13 lakh bales per annum), which has led to a preferred-buyer status and considerable pricing benefits. Benefits of scale, and focus on enhancing share of value-added business helped maintain operating profitability at 14% in fiscal 2018 despite challenging industry scenario with steep increase in cotton prices post demonetisation. Profitability improved in fiscal 2019 at 18% owing to favourable cotton yarn-cotton spreads and is expected at around 16% in fiscal 2020.

* Strong financial risk profile
The strong financial risk profile stems from healthy annual cash accrual (over Rs 930 crore in fiscal 2019) and robust networth of Rs 6001 crore as on March 31, 2019. Moreover, prudent capex (average of Rs 500 crore per annum between fiscals 2012 and 2019) and progressive debt repayment improved the gearing to a healthy 0.4 time as on March 31, 2019, from 1 time as on March 31, 2013. Interest coverage and net cash accrual to total debt ratios rose to 8.2 times and 0.36 time, respectively, in fiscal 2019 from 5 times and 0.2 time, respectively, in fiscal 2013.

The group has planned capex of around Rs 1700 crore over fiscal 2019 and 2020 to enhance spinning, processed fabric and grey fabric capacity. With the completion of this capex in 2020, the capex requirements over medium term will remain low at around Rs 300 crore p.a. The same will result in progressive debt reduction and further improvement in debt metrics over medium term.
 
Weaknesses:
* Large working capital requirement
As cotton is a seasonal crop, its availability and quality is generally an issue after the cotton season. Due to its commitment to delivering quality products, the group follows a strategy of procurement during the cotton season and maintains large inventory at the year end. The inventory levels fall by September as the inventory is consumed in first half of the fiscal and again increases as the cotton season starts in October. For instance, the inventory which stood at Rs 2610 crore as on 31st March 2019 reduced to Rs 1647 crore by 30th September 2019. With the cotton procurement starting in October 2019, the same is likely to increase by March 2020. VTXL also has receivables of 60 days. Against this, it gets credit of just about 30 days, leading to large working capital requirement, reflected in gross current assets of 188 days as on March 31, 2019 (average of 195 days for the past five fiscals). In the steel business, dependence on the automotive industry resulted in sizeable working capital requirement, with receivables of 88 days and inventory of 73 days as on March 31, 2019.
 
* Vulnerability of operating profitability to volatility in input prices
The group is susceptible to volatility in prices of key raw materials, cotton (which accounts for half the cost of yarn) and steel. Cotton prices are volatile as they are sensitive to factors such as unfavourable monsoon or pest attacks, and are linked to the international demand/supply scenario. Despite the benefits derived from VTXL's large procurement and adequate risk management systems, the group's profitability remains susceptible to volatility in raw material prices. Operating profitability was adversely affected by volatility in cotton prices during fiscals 2018, 2015, and 2012, when operating margin declined due to slowdown in demand from China and government interventions. Similarly, in the steel business, operating profitability depends on the prices of raw materials such as sponge iron, manganese, and nickel.

* Modest market position in the steel business
The group is a relatively small player in the steel business through VSSL, with large revenue concentration in the automotive sector (over 85%). This leads to susceptibility to cyclicality in the automotive segment. The steel business witnessed steady improvement in the recent past, due to better utilisation and focus on cost optimisation, resulting in operating margin rising to 6.1% in fiscal 2019 from 2.4% in fiscal 2015.  However, presence of several unorganised players limits the pricing power of VSSL.
Liquidity Strong

VTXL has robust liquidity driven by expected cash accruals of more than Rs 800-1000 crore per annum in fiscal 2020 and fiscal 2021 and cash and cash equivalents of Rs 1400 crore as on September 30, 2019. VTXL's working capital limits of Rs 1950 crore were utilized at average 31% over past seven months ended September 2019. The company has long term repayment obligations around Rs 350 - 550 crore per annum along with capex plan of Rs 300 crore p.a. over next two years which is expected to be funded out of internal accrual.

Outlook: Stable

CRISIL believes the Vardhman group will sustain its healthy credit risk profile over the medium term, backed by its strong market position in the textiles business, diversified product portfolio, and strong cash generating ability. The group is also likely to maintain healthy credit metrics, on account of moderate capex plan.

Rating Sensitivity factors
Upward factors:
* Substantial increase in revenue driven by product diversity and sustained improvement in operating margin to 20%
* Sustenance of the robust financial risk profile and sustained increase in cash surplus liquidity, for instance Debt-to-EBITDA ratio improve to below 1 times on a steady-state basis

Downward factors:
* Sharp decline in operating profitability (below 15%) and RoCE (below 12%) on a sustained basis
* Debt-to-EBITDA ratio exceeds 2.5 times on a sustained basis, due to larger-than-expected capex, or a stretch in working capital cycle, or a sharp decline in EBITDA
* Sizeable reduction in liquidity due to share buyback, more-than-expected dividend payout, and additional capex.
About the Group

The Vardhman group, headed by Mr S P Oswal, is one of India's leading textile groups, with operations across the yarn, fabric, sewing threads, fibre, special alloys, and garment sectors. In fiscal 2018, revenue from the yarn business accounted for 58% of the consolidated operating income, while fabric and steel alloy accounted for 28% and 9%, respectively; the rest of the revenue came from the acrylic fibres and garments business. 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. VMT Spinning produces cotton yarn and has 45,120 spindles. Vardhman Acrylics manufactures acrylic fibre and has capacity of 20,000 tpa. VNGC produces garments and has capacity to manufacture 18 lakh shirts annually.

During first six months ended 30th September 2019, VTXL, on a standalone basis, posted revenue of Rs. 3111 crore and profit after tax of Rs. 224 crore as against Rs. 3136 crore and Rs. 342 respectively for similar period in corresponding year.
 

Key Financial Indicators - Vardhman Group (CRISIL Adjusted numbers)
As on / for the period ended March 31  Unit 2019 2018
Revenue Rs crore 8025 7137
Profit after tax Rs crore 760 799
PAT margin % 9.5 11.2
Adjusted Debt/Adjusted Networth Times 0.43 0.47
Interest coverage Times 8.2 6.8
 
Key Financial Indicators - VTXL (CRISIL Adjusted numbers)
As on / for the period ended March 31  Unit 2019 2018
Revenue Rs crore 6904 6267
Profit after tax Rs crore 738 774
PAT margin % 10.7 12.3
Adjusted Debt/Adjusted Networth Times 0.40 0.46
Interest coverage Times 9.0 7.3

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 Crore)		 Rating Assigned with Outlook
INE825A07050 Non-Convertible Debentures 8-Sep-17 7.69% 8-Sep-21 150.0 CRISIL AA+/Stable
INE825A07068 Non-Convertible Debentures 8-Sep-17 7.75% 8-Sep-22 199.8 CRISIL AA+/Stable
INE825A07043 Non-Convertible Debentures 8-Sep-17 7.59% 8-Sep-20 150.0 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 days 1000 CRISIL A1+
NA Fixed Deposits NA NA NA 0.0 FAAA/Stable
NA Cash Credit*# NA NA NA 720 CRISIL AA+/Stable
NA Cash Credit# NA NA NA 700 CRISIL AA+/Stable
NA Cash Credit^# NA NA NA 430 CRISIL AA+/Stable
NA Cash Credit NA NA NA 100 CRISIL AA+/Stable
NA Foreign Bill Purchase NA NA NA 140 CRISIL AA+/Stable
NA Fund-Based Facilities NA NA NA 150 CRISIL AA+/Stable
NA Letter of credit & Bank Guarantee@ NA NA NA 200 CRISIL A1+
NA Letter of credit & Bank Guarantee NA NA NA 250 CRISIL A1+
NA Proposed Rupee Term Loan NA NA NA 1123.93 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Apr-20 235 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Mar 26 130 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Sep-22 224 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Dec-22 542 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Dec 24 385 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Jan-20 43.50 CRISIL AA+/Stable
NA External Commercial Borrowings NA NA Aug-24 42.80 CRISIL AA+/Stable
*includes Rs. 200 sublimit for foreign bill purchase
#Interchangeable with other non-fund based limits
^Includes Rs. 60 Crs as a sub-limit of WCDL/EPC
@ Letter of Credit & Bank Guarantee limits are interchangeable
 
Annexure - List of entities consolidated
Entities consolidated Extent of consolidation Rationale for consolidation
Vardhman Acrylics Limited Full consolidation Subsidiaries, Common line of business, Integrated treasury and strong intra-group operational linkages
VMT Spinning Co. Limited Full consolidation
Vardhman Nisshinbo Garments Co. Limited Full consolidation
Vardhman Spinning & General Mills Limited Full consolidation
VTL Investments Limited Full consolidation Subsidiary.
Vardhman Special Steels Limited Full consolidation Associate, Support from the group and past demonstrated track record, Common banking and treasury operations.
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
Commercial Paper  ST  1000.00  CRISIL A1+      28-12-18  CRISIL A1+    --    --  -- 
            26-06-18  CRISIL A1+           
            16-02-18  CRISIL A1+           
Fixed Deposits  FD  0.00  FAAA/Stable      28-12-18  FAAA/Stable  17-08-17  FAAA/Stable  13-12-16  FAA+/Positive  FAA+/Stable 
            26-06-18  FAAA/Stable  04-08-17  FAAA/Stable  06-10-16  FAA+/Positive   
            16-02-18  FAAA/Stable  29-06-17  FAAA/Stable  31-08-16  FAA+/Positive   
                09-03-17  FAA+/Positive  27-07-16  FAA+/Positive   
                    01-07-16  FAA+/Stable   
                    16-05-16  FAA+/Stable   
Non Convertible Debentures  LT  499.80
10-12-19  		CRISIL AA+/Stable      28-12-18  CRISIL AA+/Stable  17-08-17  CRISIL AA+/Stable    --  -- 
            26-06-18  CRISIL AA+/Stable           
            16-02-18  CRISIL AA+/Stable           
Short Term Debt (Including Commercial Paper)  ST              17-08-17  CRISIL A1+  13-12-16  CRISIL A1+  CRISIL A1+ 
                04-08-17  CRISIL A1+  06-10-16  CRISIL A1+   
                29-06-17  CRISIL A1+  31-08-16  CRISIL A1+   
                09-03-17  CRISIL A1+  27-07-16  CRISIL A1+   
                    01-07-16  CRISIL A1+   
                    16-05-16  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  4966.23  CRISIL AA+/Stable      28-12-18  CRISIL AA+/Stable  17-08-17  CRISIL AA+/Stable  13-12-16  CRISIL AA/Positive  CRISIL AA/Stable/ CRISIL A1+ 
            26-06-18  CRISIL AA+/Stable  04-08-17  CRISIL AA+/Stable  06-10-16  CRISIL AA/Positive/ CRISIL A1+   
            16-02-18  CRISIL AA+/Stable  29-06-17  CRISIL AA+/Stable  31-08-16  CRISIL AA/Positive/ CRISIL A1+   
                09-03-17  CRISIL AA/Positive  27-07-16  CRISIL AA/Positive/ CRISIL A1+   
                    01-07-16  CRISIL AA/Stable/ CRISIL A1+   
                    16-05-16  CRISIL AA/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  450.00  CRISIL A1+      28-12-18  CRISIL A1+  17-08-17  CRISIL A1+  13-12-16  CRISIL A1+  CRISIL A1+ 
            26-06-18  CRISIL A1+  04-08-17  CRISIL A1+  06-10-16  CRISIL A1+   
            16-02-18  CRISIL A1+  29-06-17  CRISIL A1+  31-08-16  CRISIL A1+   
                09-03-17  CRISIL A1+  27-07-16  CRISIL A1+   
                    01-07-16  CRISIL A1+   
                    16-05-16  CRISIL A1+   
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*# 720 CRISIL AA+/Stable Cash Credit*# 720 CRISIL AA+/Stable
Cash Credit# 700 CRISIL AA+/Stable Cash Credit# 700 CRISIL AA+/Stable
Cash Credit#^ 430 CRISIL AA+/Stable Cash Credit#^ 430 CRISIL AA+/Stable
Cash Credit 100 CRISIL AA+/Stable Cash Credit 100 CRISIL AA+/Stable
External Commercial Borrowings 42.8 CRISIL AA+/Stable Foreign Bill Purchase 140 CRISIL AA+/Stable
Foreign Bill Purchase 140 CRISIL AA+/Stable Fund-Based Facilities$ 400 CRISIL AA+/Stable
Fund-Based Facilities 150 CRISIL AA+/Stable Letter of credit & Bank Guarantee@ 125 CRISIL A1+
Letter of credit & Bank Guarantee@ 200 CRISIL A1+ Proposed Rupee Term Loan 465.18 CRISIL AA+/Stable
Letter of credit & Bank Guarantee 250 CRISIL A1+ Letter of credit & Bank Guarantee 75 CRISIL A1+
Proposed Rupee Term Loan 1123.93 CRISIL AA+/Stable Rupee Term Loan 2261.05 CRISIL AA+/Stable
Rupee Term Loan 1559.5 CRISIL AA+/Stable -- 0 --
Total 5416.23 -- Total 5416.23 --
*includes Rs. 200 sublimit for foreign bill purchase
#Interchangeable with other non fund based limits
^Includes Rs. 60 Crs as a sub-limit of WCDL/EPC
@Letter of Credit & Bank Guarantee limits are interchangeable
$Interchangeable with non-fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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