Rating Rationale
May 27, 2020 | Mumbai
Vardhman Textiles Limited
'CRISIL AA+/Stable' assigned to NCD
 
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.195 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
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 assigned 'CRISIL AA+/Stable' rating on the proposed NCDs of Vardhman Textiles Limited (VTXL, part of Vardhman group) while reaffirming its 'CRISIL AA+/FAAA/Stable/CRISIL A1+' ratings on the bank loan facilities and debt instruments.
 
Operating performance is likely to be impacted in fiscal 2021 as Covid-19 pandemic is expected to impact the demand prospects of cotton textiles in India as well as overseas. Accordingly, the demand for cotton yarn/fabric will also be impacted. CRISIL expects, VTXL's revenues to be lower by 25-30% in fiscal 2021 in line with the fall in the demand. Accordingly the operating profitability is also expected to be lower in fiscal 2021 as compared to ~13.5% estimated for fiscal 2020.
 
However the liquidity remains comfortable with cash & equivalents of over Rs 1300 crore at March end at consolidated level and unutilized bank lines of over Rs 1200 crore (fully backed by drawing power). Against the same, the debt repayments remain modest at around Rs 200 crore this fiscal. The operations have already partially resumed for spinning and fabric units in April and have seen consistent ramp up. That said, the extent of impact due to pandemic will remain a monitorable.
 
Earlier in fiscal 2020, the revenues were estimated to be lower by around 2-3% year on year (y-o-y) with COVID impact started affecting from the month of March. Operating profitability is estimated to have moderated by ~400 basis points, partially owing to inventory loss on cotton inventory at March end due to sharp fall in cotton prices as well as steep fall in cotton yarn exports in first half of fiscal 2020 leading to lower cotton and cotton yarn spreads. At group level (including the steel business) too, the operating performance is likely to see similar impact in fiscal 2021. 
 
Business risk profile remains strong as, VTXL has been able to increase its market share despite adverse market conditions in domestic cotton spinning industry in the past, 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 healthy cash accural and moderate debt levels. The net debt to earnings, before interest, tax, depreciation and amortization (EBIDTA) which stood at 1.3 times in 2019, is estimated to have improved to 1.0 times in 2020 and is expected to remain below 1 times owing to strong liquidity. The capex is also expected to be substantially lower in this fiscal. The group is also likely to maintain sizeable liquid surplus of over Rs 1000 crore, and utilise bank line moderately.
 
CRISIL believes, despite challenging business environment, Vardhman group will sustain its healthy business profile owing to strong market position, wide product portfolio and established client base. 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 was 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 support the business and financial risk profile of the steel business.
 
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.

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 history 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 - 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 (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 12 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 & 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 15 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 2020 despite challenging industry scenario with steep fall in cotton yarn exports leading to fall in cotton and cotton yarn spreads.

* Strong financial risk profile
The strong financial risk profile stems from healthy cash accrual (estimated at around Rs 700 crore in fiscal 2020) and robust networth (estimated at over Rs 6000 crore as on March 31, 2020). 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 below 0.4 time as on March 31, 2020, from 1 time as on March 31, 2013. Interest coverage and net cash accrual to total debt ratios are estimated at ~ 6.5 times and ~0.30 time, respectively, in fiscal 2020.
 
Capex is expected to be low in fiscal 2021 which will keep the debt metrics healthy in spite of lower operating profitability.
 
Weaknesses
* 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 2020, 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.
 
* 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 end of the fiscal. 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. With the cotton procurement starting in October 2019, the same increases by March. 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.

* 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 cash & equivalents of over Rs 1300 crore in March 2020 at consolidated level and unutilized limits of Rs 1250 crore backed by drawing power. The company has long term repayment obligations around Rs 200 - 300 crore per annum. Capex is expected to be low in fiscal 2020 at around Rs 50-100 crore which is expected to be funded out of internal accrual and existing liquidity.

Outlook: Stable

CRISIL believes, despite challenging business environment due to COVID-19, Vardhman group will sustain its healthy credit risk profile, backed by its strong market position in the textiles business, diversified product portfolio, and strong liquidity position.

Rating sensitivity factors
Upward factors:
* 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)

Downward factors:
* Net Debt-to-EBITDA ratio for fiscal 2021 exceeds 1.2 times on a sustained basis, due to larger-than-expected capex, or a stretch in working capital cycle, or a sharper than expected 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 nine months ended 31st December 2019, VTXL, on a standalone basis, posted revenue of Rs. 4966 crore and profit after tax of Rs. 412 crore as against Rs. 4895 crore and Rs. 531 respectively for similar period in corresponding year.

Key Financial Indicators for 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 for Vardhman Textiles Limited (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-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 Non-Convertible Debentures $ NA NA NA 195.0 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-2020 235 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Mar 2026 130 CRISIL AA+/Stable
NA Rupee Term Loan NA NA Sep-2022 224 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 43.50 CRISIL AA+/Stable
NA External Commercial Borrowings NA NA Aug-2024 42.80 CRISIL AA+/Stable
$ Yet to be issued
*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, History of support from the group and past demonstrated track record, Common banking and treasury operations.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1000.00  CRISIL A1+      10-12-19  CRISIL A1+  28-12-18  CRISIL A1+    --  -- 
                26-06-18  CRISIL A1+       
                16-02-18  CRISIL A1+       
Fixed Deposits  FD  0.00  FAAA/Stable      10-12-19  FAAA/Stable  28-12-18  FAAA/Stable  17-08-17  FAAA/Stable  FAA+/Positive 
                26-06-18  FAAA/Stable  04-08-17  FAAA/Stable   
                16-02-18  FAAA/Stable  29-06-17  FAAA/Stable   
                    09-03-17  FAA+/Positive   
Non Convertible Debentures  LT  500.00
27-05-20 
CRISIL AA+/Stable      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+  CRISIL A1+ 
                    04-08-17  CRISIL A1+   
                    29-06-17  CRISIL A1+   
                    09-03-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  4966.23  CRISIL AA+/Stable      10-12-19  CRISIL AA+/Stable  28-12-18  CRISIL AA+/Stable  17-08-17  CRISIL AA+/Stable  CRISIL AA/Positive 
                26-06-18  CRISIL AA+/Stable  04-08-17  CRISIL AA+/Stable   
                16-02-18  CRISIL AA+/Stable  29-06-17  CRISIL AA+/Stable   
                    09-03-17  CRISIL AA/Positive   
Non Fund-based Bank Facilities  LT/ST  450.00  CRISIL A1+      10-12-19  CRISIL A1+  28-12-18  CRISIL A1+  17-08-17  CRISIL A1+  CRISIL A1+ 
                26-06-18  CRISIL A1+  04-08-17  CRISIL A1+   
                16-02-18  CRISIL A1+  29-06-17  CRISIL A1+   
                    09-03-17  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 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 150 CRISIL AA+/Stable Fund-Based Facilities 150 CRISIL AA+/Stable
Letter of credit & Bank Guarantee 250 CRISIL A1+ Letter of credit & Bank Guarantee 250 CRISIL A1+
Letter of credit & Bank Guarantee@ 200 CRISIL A1+ Letter of credit & Bank Guarantee@ 200 CRISIL A1+
Proposed Rupee Term Loan 1123.93 CRISIL AA+/Stable Proposed Rupee Term Loan 1123.93 CRISIL AA+/Stable
Rupee Term Loan 1559.5 CRISIL AA+/Stable Rupee Term Loan 1559.5 CRISIL AA+/Stable
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
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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