Rating Rationale
August 28, 2020 | Mumbai
Vardhman Yarns and Threads Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.297.74 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.50 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
 
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Vardhman Yarns and Threads Limited (VYTL) at 'CRISIL AA-/Stable/CRISIL A1+'. 
 
The reaffirmation reflects strong business risk profile driven by established market position in domestic threads market and healthy operating efficiency. It also takes into account strong financial risk profile driven by adequate internal accruals, low gearing and healthy liquidity. These strengths are partially offset by vulnerability to fluctuations in raw material prices, exposure to intense competition in the threads business, and moderately large working capital requirement.
 
Revenue and profitability are expected to be impacted in fiscal 2021, due to the impact of covid-19 pandemic and reduced demand from customers in ready-made garments (RMG) industry. Revenue for fiscal 2021 is expected to be lower by 25-30% compared with fiscal 2020, while operating margin is expected to be lower by 300-350 bps. The impact on the operating performance will be mitigated by strong financial risk profile.
 
For fiscal 2020, operating income was Rs. 894 cr (marginal decline of 1% compared to fiscal 2019) and operating margin of 18.2% (17.4% in fiscal 2019).

Key Rating Drivers & Detailed Description
Strengths:
* Established market position
VYTL is the second-largest player in value terms with market share of around 30% in the domestic threads market. Its superior product mix and increasing proportion of value-added threads enhance the market position and profitability. Strong distribution network with 20 regional offices cum distribution centres further helps cater to several consumers directly, ensuring revenue stability. The company will continue to benefit from Vardhman group's expertise in cotton procurement, high negotiating power because of extensive cotton consumption and ability to maintain large inventory.
 
* Healthy operating efficiency
Operating efficiency is healthy emanating from corporate solution support from Vardhman Textiles Limited (VTXL; rated CRISIL AA+/FAAA/Stable/CRISIL A1+) in the form of central procurement of raw materials. This helps in maintaining consistent quality, which results in a superior operating margin as compared to peers. VYTL has capacity of around 72000 spindles, which caters to 50% of the captive requirement and remaining 50% is outsourced. Operating margins have remained at healthy levels of 17% and above over the past five fiscals and is expected to be sustained at that level over the medium term.
 
* Strong financial risk profile
Financial risk profile remains strong with low gearing of 0.1 time, healthy net worth of Rs 535 crore as on March 31, 2020.  Strong cash accrual and low debt have led to healthy debt protection metrics, as indicated by interest coverage and net cash accrual to total debt ratios of 24.8 times and 1.3 times respectively in fiscal 2020. Debt is expected to decline gradually over the medium term on account of term debt repayment and no major debt funded capital expenditure (capex). More-than-expected dividend payout will continue to be a key rating sensitivity factor.
 
Weaknesses
* Vulnerability to fluctuations in raw material prices
Susceptibility to fluctuations in the prices of key raw materials'polyester fibre, synthetic filament, and cotton fibre'persists. 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. For instance, operating margin in fiscal 2019 dropped by 90 bps due to higher raw material prices.
 
* Exposure to intense competition
The organised sector for manufacturing sewing threads is dominated by two large players: Madura Coats Pvt Ltd (Madura Coats; rated 'CRISIL AA-/Stable/ CRISIL A1+') and VYTL, with the former being the leader. There is also competition from the unorganised sector, which accounts for a sizeable segment of the threads market. Intense competition may constrain scalability, pricing power, and profitability.

* Moderately large working capital requirement
As cotton is a seasonal crop, its availability and quality is generally a challenge after the cotton season. To maintain quality standards, the company procures entire year's requirement of cotton during the peak season resulting in high inventory levels. Furthermore, average outstanding debtors have been at 60-70 days. Against this, credit of 45-60 days is received from suppliers. Gross current assets (days) were thus high at 136 days as on March 31, 2020.
Liquidity Strong

Liquidity is strong due to healthy cash accrual of over Rs 35-40 crore per fiscal over the medium term, against debt obligation of Rs 37 crore in fiscal 2021 and Rs 5 crore in fiscal 2022. The company had liquid investments (including cash and cash equivalents) of Rs 61 crore as on March 31, 2020.  There are no major capex plans over the medium term and hence cash accrual would be sufficient to fund routine capex and meet working capital requirements. In addition, financial flexibility is adequate due to bank limits of Rs 82 crore with average utilisation of around 1% during the 12 months through June 2020.

Outlook: Stable

CRISIL believes VYTL will continue to benefit from its established market position and maintain a strong financial risk profile in absence of any major debt-funded capex plans.
 
Rating Sensitivity factors
Upward factors:
* Significant improvement in the business risk profile driven by sustained double digit growth in revenues while maintaining profitability
* Maintenance of the strong financial risk profile
 
Downward factors:
* Large debt-funded capex or acquisition resulting in an increase in the gearing to above 0.5 time
* Higher than expected dividend pay-out leading to low cash accruals

About the Company

VYTL, incorporated in February 2005, commenced operations in fiscal 2008. 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. American & Efird (A&E), a wholly-owned subsidiary of Platinum Equity Capital Partners (Platinum Equity), holds 89% and VTXL holds 11% stake in VYTL.
 
About A&E/ Platinum Equity
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 Platinum Equity. Founded in 1995 by Mr Tom Gores, Platinum Equity is a global investment firm with more than USD 19 billion of assets under management and a portfolio of over 40 operating companies that serve customers around the world.

Key Financial Indicators
As on / for the period ended March 31 Units 2020 2019
Operating income Rs crore 894 902
Profit after tax (PAT) Rs crore 104 82
PAT margin % 11.7 9.1
Adjusted debt/adjusted networth Times 0.10 0.16
Interest coverage Times 24.81 19.47

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs. Cr)		 Complexity Level Rating Assigned  with Outlook
NA Commercial paper NA NA 7-365 days 50 Simple CRISIL A1+
NA Cash credit * NA NA NA 100.0 NA CRISIL AA-/Stable
NA Letter of credit ** NA NA NA 25.5 NA CRISIL A1+
NA Proposed long-term
Bank loan facility		 NA NA NA 127.04 NA CRISIL AA-/Stable
NA Term loan NA NA Mar - 21 31.9 NA CRISIL AA-/Stable
NA Term loan NA NA Mar -23 13.3 NA CRISIL AA-/Stable
*Interchangeable with other fund-based limits
**Interchangeable with other non-fund-based limits
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  50.00  CRISIL A1+      28-08-19  CRISIL A1+  20-08-18  CRISIL A1+  28-08-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  272.24  CRISIL AA-/Stable      28-08-19  CRISIL AA-/Stable  20-08-18  CRISIL AA-/Stable  28-08-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
Non Fund-based Bank Facilities  LT/ST  25.50  CRISIL A1+      28-08-19  CRISIL A1+  20-08-18  CRISIL A1+  28-08-17  CRISIL A1+  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* 100 CRISIL AA-/Stable Cash Credit* 100 CRISIL AA-/Stable
Letter of Credit** 25.5 CRISIL A1+ Letter of Credit** 25.5 CRISIL A1+
Proposed Long Term Bank Loan Facility 127.04 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 12.5 CRISIL AA-/Stable
Term Loan 45.2 CRISIL AA-/Stable Term Loan 159.74 CRISIL AA-/Stable
Total 297.74 -- Total 297.74 --
*Interchangeable with other fund-based limits
**Interchangeable with other 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 rating short term debt

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