RATING RATIONALE
30Nov2021
Aarti International Ltd.
Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs. 463.49 Crs. of Aarti International Ltd.
Particulars| Facilities** | Amount(Rs.Crs.) | Tenure | Rating# | |
|---|---|---|---|---|
| Fund Based | 436.19 | Long Term |
BWR A -
/Stable Assignment |
|
| (46.00) | ||||
| (47.60) | ||||
| (47.60) | ||||
| (2.50) | ||||
| (5.00) | ||||
| (73.00) | ||||
| (30.00) | ||||
| (20.00) | ||||
| (37.00) | ||||
| (37.00) | ||||
| (37.00) | ||||
| (50.00) | ||||
| (50.00) | ||||
| (50.00) | ||||
| Non Fund Based | 27.30 | Short Term |
BWR A2 +
Assignment |
|
| Grand Total | 463.49 | (Rupees Four Hundred Sixty Three Crores and Forty Nine lakhs Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure RATING ACTION / OUTLOOK
The ratings derive strength from the long track record of operations of the company and the well-established promoter group, large scale of operations with a wide product portfolio, and the comfortable overall financial risk profile of AIL. The ratings further derive strength from the strong liquidity position, diversified revenue stream and association with well-known brands. These rating strengths are however constrained by the susceptibility of margins to any adverse fluctuations in the raw material and currency prices and the fragmented and competitive nature of industry.
OUTLOOK: STABLE
BWR believes that the business and financial risk profile of AIL will be maintained over the medium term. The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. The outlook may be revised to 'Positive' in case revenue and profitability show a sustained improvement leading to an improved financial and liquidity profile. The rating outlook may be revised to 'Negative' in case the profitability generated is much lower than anticipated, there are aggressive debt-funded capex plans, or there is a significant deterioration in the overall liquidity profile of the company.
KEY RATING DRIVERS
Credit Strengths:
-
Long track record of operations and part of a well-established promoter group :
AIL is a part of the Ludhiana based Aarti group, led by Mr. Shiv Prasad Mittal, and having major business interests in Steel (through Aarti Steels Limited; since 1979) and Textiles. AIL has a long track record of operations, having started its spinning operations in the year 1996. The directors of the company have total business experience ranging from 5-60 years and are involved in the day-to-day operations of the company. The promoters are assisted by a team of highly experienced professionals from different domains. Long track record has led to strong business relationships with the customers and the suppliers in the market.
-
Large scale of operations with a wide product portfolio :
AIL has an installed capacity of ~1.8 lakhs spindles (3600 MTPA) for yarn manufacturing and 7200 MTPA for fabric manufacturing, leading to large scale of operations (total operating income of ~Rs.814 cr. in FY21). Large scale provides the company with the benefits of economies of scale, which lends support to the profitability margins, especially with the commodity nature of the products being manufactured. The company has a wide variety of products in its portfolio viz. 100% Cotton yarn, cotton-polyester blended yarn, grey fabric, value added fabric, etc. The yarn manufactured is upto 40s count, with major concentration in the 30-32s count range. Wide variety allows the company to switch from one product to the other in case of demand uncertainty.
-
Comfortable financial risk profile :
Despite Q1FY21 being affected by the Covid-19 pandemic, AIL was able to achieve an operating income of Rs.814.33 cr. in FY21, compared to Rs.823.82 cr. in FY20 (a marginal decline of ~1%, on a y-on-y basis). This was mainly on the back of better demand in the Q2-Q4FY21 period and improved sales realizations for both yarn and fabric. This led to a significant improvement in the profitability margins of the company with operating and net profit margins improving to 13.15% and 4.33%, respectively, from 6.53% and (-) 0.84% in FY20. Healthy profitability margins resulted in significant improvement in the Interest Service Coverage ratio [to 3.51x in FY21 (PY: 1.45x)] and Net Cash Accruals/ Total Debt (to 0.20x, as on March 31, 2021 from 0.07x, as on March 31, 2020). AIL generated healthy cash accruals of Rs.65.26 Cr. in FY21, compared to Rs.23.42 Cr. in FY20. On the back of aggregation of profits to the networth, the overall gearing ratio of the company has also remained at a satisfactory level of 0.87x, as on March 31, 2021 and improved from 0.97x, as on March 31, 2020.
H1FY22 (Prov.) performance: The company has achieved an operating income of ~Rs.630 Cr. in H1FY22 (Prov.), compared to Rs.283 Cr., achieved in the same period last year (an increase of 122% on a y-on-y basis). The PBILDT margins remained healthy and also improved significantly to 22.52% in H1FY22 (Prov.), from 7.16% in H1FY20 (Prov.). This was owing to increased demand and healthy sales realization, resulting in improved spread/ for the yarn and the fabric sold. The demand for Indian cotton yarn has seen an improvement from Q2FY2021 onwards. This was led by a surge in export orders and was followed by recovery in the domestic downstream demand. Despite a turbulent Q1FY2021, where the operations were disrupted by the lockdown and other restrictions imposed, the industry clocked a more than 5% y-o-y growth in exports in FY2021, on a year-on-year basis. The profitability margins of the cotton yarn spinners have also improved significantly as increased demand has translated into higher spreads, which has significantly improved the profitability margins of the players in the industry. Some of the major factors which have led to the recovery in demand include: low domestic raw material prices (cotton) compared to other countries, ban imposed by the US on the cotton and cotton products originating from the Xinjiang area of China, and recovery in demand in the domestic downstream industry, with ‘China plus one’ trend catching up. These factors have kept the growth momentum high in FY22 also (so far) for the Indian cotton yarn manufacturers, wherein their toplines and margins have been supported by increased demand and better sales realizations. Healthy profits have led to a significant improvement in the interest coverage ratio for AIL, which improved considerably from 1.33x in H1FY21, to 6.62x in H1FY22.
-
Diversified revenue stream and association with well known brands
:
Apart from catering to the domestic market, AIL also derives a substantial income in the textile segment [30% in FY21 and 38% in H1FY22 (Prov.)] from the export market. The products manufactured by the company find clientele in India, China, Bangladesh, Sri Lanka, Germany, Malaysia, Taiwan, etc. Apart from that, the company supplies to some of the well-known brands in the industry, viz. Ralph Lauren, Tommy Hilfiger, Adidas, Levis, Puma, Marks & Spencer, Benetton India and Benetton International, Target, Superdry, Disney, etc. Top-5 and Top-10 customers, in the domestic textile market, contributed ~22% and ~31% of the total operating income from the yarn & fabric segment, respectively.
-
Susceptibility of margins to any adverse movement in the raw material prices and currency fluctuations
:
The margins of the company remain susceptible to any adverse fluctuations in the raw material prices, as the company stores cotton during the Oct-Mar period, for consumption in the remaining part of the year. This increases the reliance of the company on the working capital borrowings during the peak seasons and also exposes its profitability margins to any adverse fluctuations in the raw material and finished goods prices.
Furthermore, AIL derives substantial income from exports (~30% of its operating income from the textile segment, in FY21), while it had negligible reliance on imports; thereby exposing the margins to any adverse fluctuations in the foreign exchange rates, in the absence of a natural hedge. To brace itself from the adverse fluctuations, the company normally hedges ~50-60% of its exposure, while keeping the remaining portion unhedged. Hence, the profitability margins of the company remain exposed to any adverse fluctuations in the foreign exchange rates, in the absence of complete hedging.
-
Fragmented and competitive nature of the industry :
AIL operates in the highly fragmented and competitive cotton yarn and fabric segment, which has the presence of a significant number of unorganized players (both in the domestic and export market), resulting in high competition and lack of pricing power in the market. This limits the growth in profitability margins of the companies having operations in this sector.
For arriving at its ratings, BWR has applied its rating methodology on a standalone basis as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).
RATING SENSITIVITIES
Positive: Substantial improvement in scale of operations, with sustainability of healthy PBILDT margins at ~15-17%, coupled with improvement in the Total Debt/ TNW to ~0.5x.
Negative: Significant decline in operating income and deterioration in the PBILDT margins coupled with moderation in the debt coverage indicators, will lead to an adverse rating action.
The liquidity profile of the company has remained strong, on the back of healthy cash accrual generation in FY21 and H1FY22 (Prov.). Though the operating cycle stood elongated at 130 days, as on March 31, 2021 (owing to high level of inventory maintained, in-line with the industry norms), the average utilization of the fund-based limits have remained at a comfortable level of 56% in the last 12 months, ended Sep-21. In the Nov-2020 to Sep-2021 period, the company undertook a replacement/ modernisation capex for its spinning facilities at a total project cost of Rs.60 cr., which was funded through a term loan of Rs.20 cr., while the remaining portion was funded through the internal accruals. The project was completed in Sep-2021. Apart from that, the company is also undertaking another capex (started in Aug-2021) at a total project cost of Rs.18.89 cr., proposed to be funded through a term loan of Rs.12 cr. (sanctioned), while remaining will be funded through the internal accruals. The capex will be used for the expansion of the dyeing unit and addition of machines in the knitting segment. Apart from that, some more machineries for the dyeing units have been planned in FY22, which will be funded through a debt (proposed) of Rs.8 Cr. Despite commitment towards the capex, the cash accruals are expected to remain healthy compared to the debt repayment obligation in FY22. The company has an external debt repayment obligation of ~Rs.21 Cr. in FY22, which is proposed to be met through the internal accruals. The company has generated cash accruals amounting to Rs.65.26 Cr. in FY21 and 84.70 Cr. in H1FY22 (Prov.), respectively.
Also, being a part of the large and well-established Aarti group, AIL enjoys financial flexibility in the form of regular need based financial support from the promoters & related parties. Funds infused by the promoters and related parties stood at Rs.42.45 cr., as on March 31, 2021 (PY:Rs.60.54 Cr.). Further, the company had a free cash & bank balance of Rs.33.24 cr., as on Sep. 30, 2021, which further lends support to the liquidity profile. On the back of healthy cash accrual generation, the company has also pre-paid some part of its term debt obligation in FY22.
Aarti International Limited (AIL) was incorporated in Dec-1993. The company is engaged in the manufacturing of cotton yarn and cotton-polyester blended spun yarn (yarn constituted ~68% of the total operating income in FY21), along with knitted fabric (~20%). Apart from that the company also derives a marginal income (~4%) from the trading of steel products, while the remaining income is derived from the sale of cotton waste, etc. The company has its operations in Ludhiana (Punjab), having two separate units for the manufacturing of yarn and fabric, with an installed capacity of 1.8 lakhs spindles [36000 Metric Tonnes per annum (MTPA)] for yarn, and 7200 MTPA for fabric. While the yarn manufacturing unit started operations in 1996; in order to achieve the benefits of integration, AIL also forayed into fabric manufacturing in the year 2018, wherein the company uses ~15% of the total yarn manufactured, in-house, for the manufacturing of knitted fabric. The company also has an in-house dyeing, processing and printing unit, to add value to the fabric manufactured.
AIL belongs to the Ludhiana based Aarti group which has major business interests in Textile and Steel. The flagship company of the group- Aarti Steels Limited is engaged in the manufacturing of carbon and alloy steel products, mainly catering to the automobile industry.
| Key Parameters | Units |
FY 20-21 (Audited) |
FY 19-20 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 814.33 | 823.82 |
| EBITDA | Rs.Crs. | 107.10 | 53.76 |
| PAT | Rs.Crs. | 35.28 | -6.93 |
| Tangible Net Worth | Rs.Crs. | 379.26 | 343.07 |
| Total Debt/Tangible Net Worth | Times | 0.87 | 0.97 |
| Current Ratio | Times | 1.48 | 1.28 |
RATING HISTORY FOR LAST THREE YEARS (including withdrawal and suspended)
| Facilities | Current Rating (2021) | 2020 | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| Fund Based | LT | 436.19 |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| FB SubLimit | LT | (46.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| (47.60) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (47.60) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (2.50) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (5.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (73.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (30.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (20.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (37.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (37.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (37.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (50.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (50.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (50.00) |
BWR A-/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| Non Fund Based | ST | 27.30 |
BWR A2+
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| Grand Total | 463.49 | (Rupees Four Hundred Sixty Three Crores and Forty Nine lakhs Only) | |||||||
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
Hyperlink/Reference to applicable Criteria| Analytical Contacts | |
|---|---|
|
Sudeep Sanwal Ratings Analyst sudeep.s@brickworkratings.com |
Tanu Sharma Director - Ratings tanusharma@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Name of the Bank/Lender | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) | |
|---|---|---|---|---|---|---|
| 1 | HDFC Bank | Term LoanOut-standing | 18.97 | _ | 18.97 | |
| 2 | HDFC Bank | Term LoanOut-standing | 3.40 | _ | 3.40 | |
| 3 | HDFC Bank | Term LoanOut-standing | 2.53 | _ | 2.53 | |
| 4 | HDFC Bank | Term LoanOut-standing | 22.00 | _ | 22.00 | |
| 5 | HDFC Bank | Term LoanOut-standing | 15.56 | _ | 15.56 | |
| 6 | HDFC Bank | Working Capital (CC)Sanctioned | 50.00 | _ | 50.00 | |
| Sub-Limit (Post Shipment Finance) Sanctioned | (50.00) | |||||
| Sub-Limit (Pre Shipment Finance) Sanctioned | (50.00) | |||||
| Sub-Limit (WCDL) Sanctioned | (50.00) | |||||
| 7 | Punjab National Bank | ILC/FLCSanctioned | _ | 2.00 | 2.00 | |
| 8 | Punjab National Bank | Working Capital (CC)Sanctioned | 47.60 | _ | 47.60 | |
| Sub-Limit (CC- Book Debts) Sanctioned | (2.50) | |||||
| Sub-Limit (CC- Hypothecation of Stocks) Sanctioned | (47.60) | |||||
| Sub-Limit (Packing Credit) Sanctioned | (46.00) | |||||
| Sub-Limit (WCDL) Sanctioned | (47.60) | |||||
| 9 | Punjab National Bank | Term LoanOut-standing | 8.24 | _ | 8.24 | |
| 10 | Punjab National Bank | Term LoanOut-standing | 16.86 | _ | 16.86 | |
| 11 | Punjab National Bank | Term LoanOut-standing | 6.30 | _ | 6.30 | |
| 12 | State Bank Of India (SBI) | Term LoanOut-standing | 0.01 | _ | 0.01 | |
| 13 | State Bank Of India (SBI) | Term LoanProposed | 8.00 | _ | 8.00 | |
| 14 | State Bank Of India (SBI) | Working Capital (CC)Sanctioned | 135.40 | _ | 135.40 | |
| Sub-Limit (CC- Book Debts) Sanctioned | (5.00) | |||||
| Sub-Limit (EPC/ PCFC) Sanctioned | (73.00) | |||||
| Sub-Limit (FBP/ EBR) Sanctioned | (30.00) | |||||
| 15 | State Bank Of India (SBI) | Stand by Line of CreditSanctioned | 8.40 | _ | 8.40 | |
| 16 | State Bank Of India (SBI) | Bank GuaranteeSanctioned | _ | 5.00 | 5.00 | |
| 17 | State Bank Of India (SBI) | Letter of CreditSanctioned | _ | 17.00 | 17.00 | |
| 18 | State Bank Of India (SBI) | Credit Exposure Limit (CEL)Sanctioned | _ | 3.30 | 3.30 | |
| 19 | State Bank Of India (SBI) | Term LoanOut-standing | 19.00 | _ | 19.00 | |
| 20 | Union Bank of India | Working Capital (CC)Sanctioned | 37.00 | _ | 37.00 | |
| Sub-Limit (FDBP) Sanctioned | (37.00) | |||||
| Sub-Limit (Packing Credit) Sanctioned | (37.00) | |||||
| Sub-Limit (PCFC/ PSFC) Sanctioned | (37.00) | |||||
| Sub-Limit (WCDL) Sanctioned | (20.00) | |||||
| 21 | Union Bank of India | Term LoanOut-standing | 9.60 | _ | 9.60 | |
| 22 | Union Bank of India | Term LoanOut-standing | 27.32 | _ | 27.32 | |
| Total | 436.19 | 27.30 | 463.49 | |||
| TOTAL (Rupees Four Hundred Sixty Three Crores and Forty Nine lakhs Only) | ||||||
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