Rating Rationale
December 28, 2018 | 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.

CRISIL believes the Vardhman group's operating performance will remain strong backed by its solid market position in the textiles sector, and continued focus on increasing share of value-added yarns, and fabrics. The group is one of the largest players in the textiles sector in India with sizeable capacity. Improving business with domestic and international clients (over 600) should ensure steady volume growth across its businesses. The performance of the steel business is also expected to improve gradually over the medium term with increase in capacity utilisation.

Besides, improving realisation in the yarn segment, increasing share of fabrics in revenue, and rising profitability of the steel business will enable the group to sustain operating margin during fiscal 2019. During first six months ended 30th September 2018, VTXL posted revenue growth of 10% over corresponding period of the last fiscal backed by realisation growth of 6%   and volume growth of 3% in yarn sales. The operating margin during six months ended 30th September 2018 stood at 18.4% as against 13.5% in the corresponding period last year. The increase in operating margin was on account of low-cost cotton inventory on books and rupee depreciation benefits across yarn and fabric segments. While cotton prices are expected to remain high during Cotton season (CS) 2019 as a result of reduced sowing, the gradual increase in yarn prices should support the margins.

Complementing the group's strong business position is its healthy financial risk profile. Strong annual cash generation (at least Rs 800 crore per annum) and moderate debt for funding capital expenditure (capex; Rs 1700 crore in fiscals 2019 and 2020 for expanding capacity in Madhya Pradesh) is expected to lead to continued strong debt protection metrics. The debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio is expected to reduce below 2 times during fiscal 2019 from 2.7 times during fiscal 2018. Gearing is expected to remain comfortable at 0.4-0.5 time (0.5 time as on March 31, 2018) over the 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 2018, the company had liquid surplus of Rs 1265 crore.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of VTXL, VMT Spinning Co Ltd (VMT Spinning), Vardhman Acrylics Ltd (Vardhman Acrylics), Vardhman Nisshinbo Garments Co Ltd (VNGCL), Vardhman Special Steels Ltd (VSSL) and VTL Investments Ltd (VTL). 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 are combined also because of commitment of support from the group. 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 - Details of consolidation, 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 (58% of revenue in fiscal 2018), fabric (28%), and steel (9%) 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 180 million meter per annum (mmpa) and 152 mmpa, respectively. It is an approved supplier to large retailers such as GAP (rated 'BB+/Stable' by S&P Global Ratings), JC Penney Co Inc (rated 'B/Negative' by S&P Global Ratings), Wal-Mart (rated 'AA/Negative/A-1+' by S&P Global Ratings), Hennes & Mauritz, and Aditya Birla Fashion & 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 proposed 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 is expected to remain healthy at 18% during fiscal 2019.

* Strong financial risk profile
The strong financial risk profile stems from healthy annual cash accrual (over Rs 880 crore in fiscal 2018) and robust networth of Rs 5308 crore as on March 31, 2018. Moreover, prudent capex (average of Rs 400 crore per annum between fiscals 2012 and 2018) and progressive debt repayment improved the gearing to a healthy 0.5 time as on March 31, 2018, from 1 time as on March 31, 2013. Interest coverage and net cash accrual to total debt ratios rose to 8.5 times and 0.3 time, respectively, in fiscal 2018 from 5 times and 0.2 time, respectively, in fiscal 2013, while the debt to EBITDA ratio improved to 2.7 times from 3.6 times.

The group is likely to undertake capex of Rs 1400 crore to enhance spinning capacity by 105000 spindles to 1.2 million spindles, processed fabric capacity by 27 mmpa to 180 mmpa, and grey fabric capacity by 30 mmpa to 210 mmpa. The capex is expected to be funded through a prudent combination of accrual and debt. Healthy annual cash generation and progressive long-term debt repayment should keep key credit metrics healthy over the 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 cotton inventory of around 180 days at the year end. 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, 2018 (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, 2018.

* 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 7.9% in fiscal 2018 from 2.4% in fiscal 2015. However, presence of several unorganised players limits the pricing power of VSSL.
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.

Upside scenario:
* Operating profitability, return on capital employed remain healthy over 18-19% and 14%, respectively, over the medium term
* Debt-to-EBITDA ratio declines to below 1.6 times on a steady-state basis
* Liquidity surplus remains healthy (at least Rs 800 crore).

Downside scenario:
* 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.

Liquidity
VTXL has robust liquidity driven by expected cash accruals of more than Rs 850-950 crore per annum in fiscal 2020 and fiscal 2021 and cash and cash equivalents of Rs 1265 crore as on September 30, 2018. The group also had sizeable unutilised bank limit. The company has long term repayment obligations around Rs 350 - 550 crore per annum along with capex plan of Rs 1700 crore over next two years.

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 2018, VTXL posted revenue of Rs 3385 crore and operating profit of Rs 623 crore as against Rs 3091 crore and Rs. 418 respectively for similar period in corresponding year.

Key Financial Indicators (CRISIL Adjusted Numbers)
As on/for the period ended March 31 Unit 2018 2017
Revenue Rs crore 7113 6,706
Profit After Tax (PAT) Rs crore 617 1,012
PAT Margin % 8.7 15.1
Adjusted Debt/Adjusted Networth Times 0.49 0.58
Interest coverage Times 8.5 9.6

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-2017 7.69% 8-Sep-2021 150.0 CRISIL AA+/Stable
INE825A07068 Non-Convertible Debentures 8-Sep-2017 7.75% 8-Sep-2022 199.8 CRISIL AA+/Stable
INE825A07043 Non-Convertible Debentures 8-Sep-2017 7.59% 8-Sep-2020 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 400 CRISIL AA+/Stable
NA Letter of credit & Bank Guarantee@ NA NA NA 125 CRISIL A1+
NA Letter of credit & Bank Guarantee NA NA NA 75 CRISIL A1+
NA Proposed Rupee Term Loan NA NA NA 465.18 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Apr-2020 386 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Mar 2026 130 CRISIL AA+/Stable
NA Rupee Term Loan NA NA June-2019 20 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Sep-2022 649 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Dec-2022 542 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Dec 2024 385 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Jan-2020 149.05 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
$Interchangeable with non fund based limits
 
Annexure - Details of Consolidation
Entities consolidated  
Vardhman Acrylics Limited Full consolidation
VMT Spinning Co. Limited Full consolidation
VTL Investments Limited Full consolidation
Vardhman Nisshinbo Garments Co. Limited Full consolidation
Vardhman Spinning & General Mills Limited Full consolidation
Vardhman Special Steels Limited Full consolidation
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1000.00  CRISIL A1+  26-06-18  CRISIL A1+    --    --    --  -- 
        16-02-18  CRISIL A1+               
Fixed Deposits  FD  0.00  FAAA/Stable  26-06-18  FAAA/Stable  17-08-17  FAAA/Stable  13-12-16  FAA+/Positive  23-12-15  FAA+/Stable  FAA+/Stable 
        16-02-18  FAAA/Stable  04-08-17  FAAA/Stable  06-10-16  FAA+/Positive  19-11-15  FAA+/Stable   
            29-06-17  FAAA/Stable  31-08-16  FAA+/Positive  06-11-15  FAA+/Stable   
            09-03-17  FAA+/Positive  27-07-16  FAA+/Positive  12-08-15  FAA+/Stable   
                01-07-16  FAA+/Stable  03-08-15  FAA+/Stable   
                16-05-16  FAA+/Stable  15-07-15  FAA+/Stable   
                    02-06-15  FAA+/Stable   
                    25-05-15  FAA+/Stable   
Non Convertible Debentures  LT  2261.05
28-12-18  		CRISIL AA+/Stable  26-06-18  CRISIL AA+/Stable  17-08-17  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+  23-12-15  CRISIL A1+  CRISIL A1+ 
            04-08-17  CRISIL A1+  06-10-16  CRISIL A1+  19-11-15  CRISIL A1+   
            29-06-17  CRISIL A1+  31-08-16  CRISIL A1+  06-11-15  CRISIL A1+   
            09-03-17  CRISIL A1+  27-07-16  CRISIL A1+  12-08-15  CRISIL A1+   
                01-07-16  CRISIL A1+  03-08-15  CRISIL A1+   
                16-05-16  CRISIL A1+  15-07-15  CRISIL A1+   
                    02-06-15  CRISIL A1+   
                    25-05-15  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  5216.23  CRISIL AA+/Stable  26-06-18  CRISIL AA+/Stable  17-08-17  CRISIL AA+/Stable  13-12-16  CRISIL AA/Positive  23-12-15  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
        16-02-18  CRISIL AA+/Stable  04-08-17  CRISIL AA+/Stable  06-10-16  CRISIL AA/Positive/ CRISIL A1+  19-11-15  CRISIL AA/Stable/ CRISIL A1+   
            29-06-17  CRISIL AA+/Stable  31-08-16  CRISIL AA/Positive/ CRISIL A1+  06-11-15  CRISIL AA/Stable/ CRISIL A1+   
            09-03-17  CRISIL AA/Positive  27-07-16  CRISIL AA/Positive/ CRISIL A1+  12-08-15  CRISIL AA/Stable/ CRISIL A1+   
                01-07-16  CRISIL AA/Stable/ CRISIL A1+  03-08-15  CRISIL AA/Stable/ CRISIL A1+   
                16-05-16  CRISIL AA/Stable/ CRISIL A1+  15-07-15  CRISIL AA/Stable/ CRISIL A1+   
                    02-06-15  CRISIL AA/Stable/ CRISIL A1+   
                    25-05-15  CRISIL AA/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  200.00  CRISIL A1+  26-06-18  CRISIL A1+  17-08-17  CRISIL A1+  13-12-16  CRISIL A1+  23-12-15  CRISIL A1+  CRISIL A1+ 
        16-02-18  CRISIL A1+  04-08-17  CRISIL A1+  06-10-16  CRISIL A1+  19-11-15  CRISIL A1+   
            29-06-17  CRISIL A1+  31-08-16  CRISIL A1+  06-11-15  CRISIL A1+   
            09-03-17  CRISIL A1+  27-07-16  CRISIL A1+  12-08-15  CRISIL A1+   
                01-07-16  CRISIL A1+  03-08-15  CRISIL A1+   
                16-05-16  CRISIL A1+  15-07-15  CRISIL A1+   
                    02-06-15  CRISIL A1+   
                    25-05-15  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** 1500 CRISIL AA+/Stable
Foreign Bill Purchase 140 CRISIL AA+/Stable Foreign Bill Purchase 250 CRISIL AA+/Stable
Fund-Based Facilities$ 400 CRISIL AA+/Stable Fund-Based Facilities# 200 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 Proposed Long Term Bank Loan Facility .23 CRISIL AA+/Stable
Rupee Term Loan 2261.05 CRISIL AA+/Stable Proposed Rupee Term Loan 846 CRISIL AA+/Stable
Cash Credit# 700 CRISIL AA+/Stable Rupee Term Loan 2420 CRISIL AA+/Stable
Cash Credit#^ 430 CRISIL AA+/Stable      
Cash Credit 100 CRISIL AA+/Stable      
Letter of credit & Bank Guarantee 75 CRISIL A1+      
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
**Includes Rs 1155 crore sublimit for packing credit
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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