Kallam Textiles Ltd(Formerly known as Kallam Spinning Mills Ltd)

Brickwork Ratings reaffirms the rating for the Bank Loan Facilities of Rs. 369.74 Crs. of Kallam Textiles Ltd (Formerly known as Kallam Spinning Mills Ltd)

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (22 Feb 2021)	Present
Fund Based	307.82	338.74	Long Term	BWR D Removed from Credit Watch and Downgraded	BWR D Reaffirmation
Fund Based	30.00	30.00	Short Term	BWR D Removed from Credit Watch and Downgraded	BWR D Reaffirmation
Non Fund Based	1.00	1.00	Short Term	BWR D Removed from Credit Watch and Downgraded	BWR D Reaffirmation
Grand Total	338.82	369.74	(Rupees Three Hundred Sixty Nine Crores and Seventy Four lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

The rating reaffirmation continues to reflect delay in meeting debt obligation i.e. repayment of TL principal amount with one of the lenders and resultantly account classification being SMA-1 as confirmed by the Lender. Additionally, BWR notes the corporate governance concerns as reflected in the recent removal of the Company Secretary and Compliance Officer of the company with effect from 07Aug2021 due to breaking the code of conduct, committing fraud, violation of employment agreement, guilty of professional Misconduct and unauthorized filing of resignation to the BSE Ltd & MCA. BWR also takes cognizance of the delayed submission of No Default statement (NDS) by the company to Brickwork Ratings (BWR) on 06Aug2021. The NDS submitted by the company declares the default in repayment of principal amount on term loans as cited in their press release dated 06Aug2021.

The ratings continue to factor the seasonality associated with the availability of cotton, working capital intensive operations, strained liquidity and the exposure to forex risks. Susceptibility of the company's revenues to textile demand conditions and raw material price volatilities continue to constrain the ratings. The ratings, however, continue to draw strength from the experience of the promoters in the textile industry, integrated operations (ginning, spinning, weaving, dyeing), long track record of the company and established relationships with clients and suppliers.

KEY RATING DRIVERS

Credit Strengths:

Experienced management and long track record of operations :
The promoters have experience of over three decades in the textile industry and they are supported by a team of experienced professionals. The company has been in this business for the last 27 years and it is one of the largest producers of spun yarn for knitting and weaving industries in Andhra Pradesh.
Integrated operations and established relationship with customers :
Integrated operations with presence across ginning, spinning, weaving and dyeing lends stability to operations and provides operational efficiency. Long and established relationships with customers as well as suppliers have resulted in favourable credit terms and easy access to raw materials.
Diversified product range :
The company offers a diverse product line comprising Ring Spun combed yarn (from Ne.30s to Ne.80s combed warp/compact), TFO (Two for one twisted yarn), ring spun yarn (from Ne.30/2 to Ne 80/2 combed warp/compact), Open End yarn (from Ne.10s to Ne.20s), TFO open end yarn, BCI (Better Cotton Initiative) certified yarn and woven fabric such as yarn dyed shirting and bottom weight fabric.

Credit Risks:

Delay in debt servicing :
Due to the constrained liquidity conditions and short term cash flow mismatch, the company has been facing difficulty in timely servicing of its debt obligations. The company has defaulted in its TL debt obligation due on 31Jul2021 as disclosed by the company on BSE’s website on 06Aug2021. High level of long term and short term borrowings lead to high finance cost which impairs the profitability of the company.
Weakening of financial risk profile :
The company's financial risk profile has weakened in FY21 compared to FY20 due to decline in operating income, high gearing and finance cost, cash flow mismatches, and low net cash accruals. Operating income declined from Rs. 291.61 Crs. in FY20 to Rs. 240.62 Crs. in FY21 due to Covid-19 pandemic. The company continues to incur net losses in FY20 and FY21. Total debt level increased from Rs. 327.75 Crs. as on 31Mar2020 to Rs. 359.12 Crs. as on 31Mar2021. TNW declined from Rs. 93.59 Crs. as on 31Mar2020 to Rs. 86.01 Crs. as on 31Mar2021. Gearing increased from 3.50 times as on 31Mar2020 to 4.18 times as on 31Mar2021. Current ratio remained subdued below one at 0.90 time as on 31Mar2021 compared to 0.80 time as on 31Mar2020. Debt Coverage metrics continued to be weak as reflected in ISCR and DSCR of 1.01 times and 0.46 time as on 31 Mar 2021 respectively.
Working capital intensive nature of operations and forex risk :
Cotton cultivation is usually started in July every year with onset of monsoon. Cotton packing from the fields starts in November and continues till February. Best quality cotton is available in the months of November - March only. Procurement of good quality cotton at economical value is crucial for the company’s manufacturing operations. The best quality cotton is available only in the months of November-March. The company has to purchase enough cotton during those months and hold them as inventory for year round operations. This makes the company’s operations highly working capital intensive with associated short term borrowings and finance costs affecting profitability. The company’s sanctioned working capital limits with various banks were ~64% of FY21 sales. Exports contributed ~40% of total sales in FY21. The company does not hedge its foreign currency receipts making its topline vulnerable to the forex rate fluctuations.
High exposure of the company to agro-climatic and regulatory risk :
Cotton output and quality is affected by the agro-climatic conditions like intensity of monsoon, availability of alternative irrigation sources, soil pH value, availability of sunlight and fertilizers. Any variation in these factors may affect the quality, quantity and market price of cotton output. KTL is also exposed to regulatory risks with respect to the minimum support price (MSP) for raw cotton, which is decided by the government every year. Inability to pass on the increased costs to the customers may further impact the profitability of the company. The company’s revenues and margins are exposed to fluctuations in cotton, yarn and fabric prices as witnessed during the previous fiscal. Besides that, the raw material and yarn prices also remain volatile based on demand and supply, which mainly depends on China’s procurement every year.
Impact of Covid-19 pandemic :
Onset of Covid-19 pandemic led to decline in demand for cotton yarn and fabrics in both domestic and export markets. The decline in demand also led to decline in market price of products offered by the company. The situation started improving in September 2020 and the company registered good sales in Q3FY1 and Q4FY21. Although the sales declined in Q1FY22 compared to Q4FY21, the economic impact of second wave of the pandemic was not as severe as first wave. However, the sustainability of the recovery of the sector in general and the company in particular depends on upon the pace of vaccination and discoveries of further mutations of the Covid-19 virus.

ANALYTICAL APPROACH - Standalone

While assigning the ratings, BWR has applied its rating methodology as detailed at the end of the document. The company does not have any subsidiary as on 31Mar2021.

RATING SENSITIVITIES

Ability of the company to timely service its debt service obligations, improve its scale of operations and profitability, improve gearing, debt coverage metrics and liquidity position, prudently manage working capital requirements and strengthen its overall credit profile would be the key rating sensitivities.

Positive:

Timely debt servicing on a sustainable basis
Improvement in operating income, profitability, gearing and liquidity position on a sustainable basis

Negative:

A further decline in the revenue and profitability leading to deterioration in the overall credit metrics on a sustained basis would be negative for the ratings
Deterioration in financial risk profile on account of stretch in working capital cycle or any large, debt-funded capital expenditure
Adverse impact of any further Covid-19 related disruptions on company operations.

LIQUIDITY INDICATORS - Stretched

The company's liquidity is stretched as reflected in the recent delay in debt servicing, insufficient net cash accruals to service debt repayments, low cash & cash equivalents, subdued current ratio and debt coverage metrics and stretched cash conversion cycle. EBITDA was just able to cover the finance cost in FY21. Net cash accruals of FY21 were insufficient to cover the debt repayments scheduled for the year. Average working capital limit utilization in past 6 months was ~90-95%. Cash & cash equivalents compared to the scale of operations were low at Rs. 3.97 Crs as on 31 Mar 2021. High short term working capital borrowings continue to keep the current ratio subdued below one. Cash conversion cycle further stretched to 214 days as on 31Mar2021 due to elongation of days inventory. The company's liquidity position is expected to be supported by realisation of state government subsidy receivables and shall be a key rating monitorable.

ABOUT THE ENTITY

Kallam Textiles Limited (“KTL”), formerly known as Kallam Spinning Mills Ltd , is a listed company on BSE. It was established in 1992 with its registered office at Guntur, Andhra Pradesh. KTL is an integrated cotton textile unit, with its own ginning, ring spinning, open end spinning, weaving and dyeing divisions. The spinning mill is located at Guntur and the weaving division is located in Addanki (Mandal), Prakasam district. The company currently operates with 59280 ring spindles, 2912 rotors for open end spinning, 28 Ginning machines and automatic baling press and 248 Air-jet/ Rapier looms. Yarn dyeing capacity is around 3000 kg per day and woven fabric capacity is 80,000 meters per day. The company also has three Hydel Power Plants of total capacity of 4 MW and one solar power plant of 3 MW. Revenue from power units contributes less than 1%of the total revenue y-o-y. Exports contributed around 40% of total sales in FY21 with China, Thailand, South Korea and Vietnam being the main export markets.

Mr. P. Venkateswara Reddy is the Chairman and Managing Director.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	240.62	291.61
EBITDA	Rs.Crs.	25.19	21.04
PAT	Rs.Crs.	-7.90	-12.09
Tangible Net Worth	Rs.Crs.	86.01	93.59
Total Debt/Tangible Net Worth	Times	4.18	3.50
Current Ratio	Times	0.90	0.80

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

Not applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2021 (History)		2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	338.74	BWR D (Reaffirmation)	22Feb2021	BWR D (Removed from Credit Watch and Downgraded)	04Mar2020	BWR BBB-Stable (Downgraded)	30Aug2019	BWR BBBStable (Reaffirmed)	29Aug2018	BWR BBBStable (Upgraded)
		NA	NA	NA	NA	11Aug2020	BWR BB+Stable (Downgraded)	NA	NA	NA	NA
		NA	NA	NA	NA	22Oct2020	BWR BB+Credit Watch with Developing Implications (Placed on Credit Watch with Developing Implications)	NA	NA	NA	NA
Fund Based	ST	30.00	BWR D (Reaffirmation)	22Feb2021	BWR D (Removed from Credit Watch and Downgraded)	11Aug2020	BWR A4+ (Downgraded)	NA	NA	NA	NA
		NA	NA	NA	NA	22Oct2020	BWR A4+Credit Watch with Developing Implications (Placed on Credit Watch with Developing Implications)	NA	NA	NA	NA
Non Fund Based	ST	1.00	BWR D (Reaffirmation)	22Feb2021	BWR D (Removed from Credit Watch and Downgraded)	04Mar2020	BWR A3 (Downgraded)	30Aug2019	BWR A3+ (Reaffirmed)	29Aug2018	BWR A3+ (Upgraded)
		NA	NA	NA	NA	11Aug2020	BWR A4+ (Downgraded)	NA	NA	NA	NA
		NA	NA	NA	NA	22Oct2020	BWR A4+Credit Watch with Developing Implications (Placed on Credit Watch with Developing Implications)	NA	NA	NA	NA
Grand Total		369.74	(Rupees Three Hundred Sixty Nine Crores and Seventy Four lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

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
Swarn Saurabh Senior Rating Analyst swarn.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Kallam Textiles Ltd(Formerly known as Kallam Spinning Mills Ltd)

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Bank of Baroda	Cash Credit - Sanctioned	5.00	_	5.00
2	Bank of Baroda	Term Loan - Out-standing	3.86	_	3.86
3	Indian Bank	Cash Credit - Sanctioned	60.00	_	60.00
4	Indian Bank	Term Loan - Out-standing	73.75	_	73.75
5	Indian Bank	Bill Discounted (BD) - Sanctioned	_	20.00	20.00
6	Indian Bank	GECL - Sanctioned	30.36	_	30.36
7	Union Bank of India	Cash Credit - Sanctioned	90.00	_	90.00
8	Union Bank of India	Term Loan - Out-standing	50.35	_	50.35
9	Union Bank of India	Bill Discounted (BD) - Sanctioned	_	10.00	10.00
10	Union Bank of India	Bank Guarantee - Sanctioned	_	1.00	1.00
11	Union Bank of India	GECL - Sanctioned	25.42	_	25.42
Total			338.74	31.00	369.74
TOTAL (Rupees Three Hundred Sixty Nine Crores and Seventy Four lakhs Only)

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