Garg Acrylics Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 546.72 Crs. of Garg Acrylics Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (28 Jan 2022)	Present
Fund Based	512.49	481.22	Long Term	BWR BBB+/Stable Upgrade	BWR BBB + /Stable Reaffirmation
	50.00	50.00	Short Term	BWR A2 Upgrade	BWR A2 Reaffirmation
Non Fund Based	15.50	15.50	Short Term	BWR A2 Upgrade	BWR A2 Reaffirmation
Grand Total	577.99	546.72	(Rupees Five Hundred Forty Six Crores and Seventy Two 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 revision in the ratings assigned to the bank facilities of Garg Acrylics Ltd (GAL or the company) factors in an improvement in the company’s financial performance in FY22 and Q1FY23 (Unaudited) marked by a significant improvement in the profitability margins, supported by increased demand and healthy sales realisations, resulting in an improved capital structure and debt coverage metrics. The ratings continue to derive strength from the experienced promoters and management team, diversified product profile and established marketing tie-ups with leading apparel brands. The ratings are further strengthened by the geographically distributed operations of the company with low customer concentration risk. The ratings are, however, constrained by the susceptibility of margins to any adverse fluctuations in raw material and currency prices, and the fragmented and competitive nature of the industry.

OUTLOOK: STABLE

Brickwork Ratings (BWR) believes that the business and financial risk profile of GAL 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 company’s overall liquidity profile.

KEY RATING DRIVERS

Credit Strengths:

• Improvement in the financial risk performance :

  The topline witnessed a northward trend in FY22 and performed substantially well, registering y-o-y growth of 53.48% over FY21; the same stood at Rs.1940.33Crs in FY22 (PY: Rs.1264.25Crs) due to favourable demand for Indian yarn in international markets, coupled with pent up demand from Indian garmenters too. The EBITDA and EBITDA margins too had outperformed, with EBITDA growth of 172% over FY21; the same stood at Rs.347.08Crs in FY22 (PY: 127.24Crs). Furthermore, in percentage terms, the EBITDA margins in FY22 stood at 17.89% (PY: 10.06%). The expected volume growth and improvement in price realisation resulted in an improved scale of operations, which is expected to improve further in FY23 and FY24. Volume growth of only 3.80% in there in FY 22 due the increased production of polyester/blended yarn, coupled with an improvement in spreads/contribution margin continued in FY22, resulting in an improvement in the EBITDA /MT. Furthermore, the PAT and NPM too had outperformed, with the bottom line registering four-digit growth in FY22 over FY21; the same stood at Rs.198.20Crs in FY22 (PY: Rs.14.52Crs). Furthermore, in percentage terms, the NPM in FY22 stood at 10.21% (PY: 1.15%), driven by the increased EBITDA in FY22. Also driven by the increased EBITDA, the company’s ISCR increased substantially at 7.39x in FY22 vis-a-vis 2.18x in FY21, and the DSCR at 1.21x in FY22 against a below unity DSCR of 0.90x in FY21.

  Q1FY23 (unaudited) performance: The company achieved an operating income of ~Rs.474.44Crs in Q1FY23, compared to ~Rs.391.88Crs achieved in the same period last year (an increase of 21.07%, on a y-o-y basis). The PBILDT margins remained healthy at 18.83% in Q1FY23 owing to increased demand and healthy sales realisation, resulting in improved spread/contribution (per unit sold) for the yarn and fabric sold. Demand for Indian cotton yarn has seen an improvement from Q2FY21 onwards. This was led by a surge in export orders and was followed by recovery in the domestic downstream demand despite a turbulent Q1FY21, where the operations were disrupted by the lockdown and other restrictions imposed. The profitability margins of 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 major factors that have led to the recovery in demand include low domestic raw material prices (cotton) compared to other countries, a 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 the China Plus One trend catching up. These factors have kept the growth momentum high in Q1FY23 also (so far) for the Indian cotton yarn manufacturers, wherein their toplines and margins have been supported by increased demand and better sales realisations. In Q1FY23 (Unaudited), the PAT margins stood at 11.11% (PQ: 13.50%) in the same period last year. The ISCR also improved from 7.39x in Q1FY22 (unaudited) to 7.99x in Q1FY23 (unaudited). Furthermore, the sustainability of the overall financial performance of the company will remain a sensitivity and will be closely monitored by BWR.

• Experienced promoters and the management team :

  The company is promoted by the Garg family, based in Ludhiana, Punjab, who ventured into the industry with the setting-up of a worsted spinning unit 1999 and later diversified into various textile products such as synthetic and cotton yarn, fabric and readymade garments. The promoters thus, have over two decades of experience in the textile industry, which has enabled the company to establish itself in the exports, as well as domestic markets, over the years.

• Diversified product profile with established integrated operations :

  The company continues to derive benefit from its diversified product profile with its operations, which are integrated in nature. The company is engaged in the manufacturing and processing of different types of yarns, till the finishing stage of fabric work, which are further value-added to manufacture garments. Various products manufactured by the company include grey and dyed cotton, blended yarns, acrylic yarn, polyester yarn, ready-made garments and knitting fabrics, including value-added products, which ensures stability in its operations and revenue profile. Cotton and polyester yarn contributed more than 70% of the company’s total revenue FY22.

• Strong relationship with its key customers :

  The company is an approved yarn vendor for HM Asia, C&A and Indi tex. It also has an established market presence in the export market, including China and Bangladesh, for its manufactured products. The export sales contribution increased to ~65% in FY22 from ~46% in FY21. Longstanding and established relationships with customers have led to regular and repeat orders from them.

Credit Risks:

• Susceptibility to volatility in raw material prices :

  Raw-cotton prices depend on various factors, such as favourable monsoons, acreage, productivity, demand and government intervention in terms of fixing a minimum support price. These factors lead to significant volatility in raw cotton prices. Adverse movements in the raw material prices (cotton and others) make the profitability margins of the company susceptible to downward pressure.

• Exposure to foreign currency fluctuation risk :

  GAL is exposed to foreign currency fluctuation risk as the company derives a significant portion of its revenue from the export market. The company’s profitability margins remain susceptible to any adverse movement in foreign currency prices as it derived 60% of its total operating income from exports in FY22 and 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. However, the company engages in forward contracts from time to time, thereby mitigating the risk to some extent.

• Fragmented and competitive nature of the industry :

  The Indian textile industry is highly fragmented and competitive in nature, with the presence of various players (both small and large in size), in both domestic and export markets. The company faces major competition from Vietnam, Turkey, China, Bangladesh, Pakistan and other cheap export-based countries. High competition keeps the margins under pressure for the players operating in the industry, especially at the time of a slowdown in demand.

ANALYTICAL APPROACH - Standalone

BWR has considered the standalone business and financial risk profile of the Company, as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale).

RATING SENSITIVITIES

Positive factors: The ratings may be upgraded if the company is able to report a significant, consistent and sustained improvement in the revenue and profitability levels, coupled with an improved overall solvency position, while maintaining adequate liquidity.

Negative factors: The weakening of revenues and profit margins, leading to a sustained deterioration in the gearing and debt coverage metrics, and any significant elongation in the working capital cycle with a high inventory position, resulting in a deterioration in the company’s liquidity position would be a negative factor.

LIQUIDITY INDICATORS - Adequate

The company's liquidity position remains adequate on the back of a substantial increase in its cash generation on the back of improved profitability levels during FY22. The fund-based working capital limit utilisation stood at ~80% over the past 12 months’ period ended May 2022 (with an average utilisation level of less than 70% for the last three months ending May 2022).The company has a repayment obligation of ~Rs.57.73 Crs in FY23 of which the company has already paid obligation of Rs.43.07Crs and remaining Rs.14.66Crs which is expected to be met through the cash accruals too. As per BWR, the company is expected to generated cash accruals of ~147.74 Crs in FY23. Healthy cash accruals generated by the company have been used to lower the reliance on working capital and also for need-based usage. The operating cycle remained elongated at 110 days, as on 31 March 2022 (Previous year: 128 days). The cash and cash balance of the company stood at Rs.4.83Crs, as on 31 March 2022. With no debt-funded capex planned in the near future, the debt profile is expected to remain adequate in the near to mid-term future too.

ABOUT THE ENTITY

Garg Acrylics Ltd (GAL), incorporated in 1983, is based in Ludhiana, Punjab. It is listed on the Metropolitan Stock Exchange (MSE). The company had initially started with a business of leasing and now manufactures cotton, acrylic, polyester and blended yarn, along with ready-made garments. The company’s manufacturing units are located at Bathinda and Ludhiana, Punjab. The units have a total installed capacity of 329,664 spindles, i.e., 57,691 MTPA and 3 million pieces of garments per annum. It has also diversified into the manufacturing of knitted hosiery fabrics as a forward integration step, with an installed capacity of 7200 MTPA.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 21-22 (Audited)	FY 20-21 (Audited)
Operating Revenue	Rs.Crs.	1940.33	1264.25
EBITDA	Rs.Crs.	347.08	127.24
PAT	Rs.Crs.	198.20	14.52
Tangible Net Worth	Rs.Crs.	466.51	270.81
Total Debt/TNW	Times	1.00	2.10
Current Ratio	Times	1.58	1.33

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

NA

ANY OTHER INFORMATION

NA

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

Facilities	Current Rating (2022)			2022 (History)		2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	481.22	BWR BBB+/Stable (Reaffirmation)	28Jan2022	BWR BBB+Stable (Upgrade)	28Jul2021	BWR BBBStable (Reaffirmation and change in Outlook)	10Jun2020	BWR BBB+Negative (Assignment)	NA	NA
		0.00	NA	NA	NA	NA	NA	30Nov2020	BWR BBBCredit Watch with Developing Implications (Downgrade)	NA	NA
Fund Based	ST	50.00	BWR A2 (Reaffirmation)	28Jan2022	BWR A2 (Upgrade)	28Jul2021	BWR A3+ (Reaffirmation)	10Jun2020	BWR A2 (Assignment)	NA	NA
		0.00	NA	NA	NA	NA	NA	30Nov2020	BWR A3+ (Downgrade)	NA	NA
Non Fund Based	ST	15.50	BWR A2 (Reaffirmation)	28Jan2022	BWR A2 (Upgrade)	28Jul2021	BWR A3+ (Reaffirmation)	10Jun2020	BWR A2 (Assignment)	NA	NA
		0.00	NA	NA	NA	NA	NA	30Nov2020	BWR A3+ (Downgrade)	NA	NA
Grand Total		546.72	(Rupees Five Hundred Forty Six Crores and Seventy Two 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

• Approach to Financial Ratios
• Manufacturing Companies
• Short Term Debt
• General Criteria

Analytical Contacts
Neha Jain Senior Rating Analyst Board : +91 11 2341 2232 neha.j@brickworkratings.com	Kewal Krishan Singla Director - Ratings kewalsingla@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	IDBI Bank	Term Loan - Sanctioned	9.13	_	9.13
2	IDBI Bank	Cash Credit - Sanctioned	22.00	_	22.00
3	IDBI Bank	ILC/FLC/BG - Sanctioned	_	10.00	10.00
4	Indian Bank	ILC/FLC/BG - Sanctioned	_	0.30	0.30
5	Indian Bank	Cash Credit - Sanctioned	22.00	_	22.00
6	Indian Bank	Term Loan - Sanctioned	13.25	_	13.25
7	Punjab and Sind Bank	Cash Credit - Sanctioned	140.00	_	140.00
8	Punjab and Sind Bank	Term Loan - Sanctioned	49.38	_	49.38
9	Punjab and Sind Bank	Covid -19 Emergency Line Credit - Sanctioned	12.19	_	12.19
10	Punjab and Sind Bank	Cash Credit (WHR) - Sanctioned	_	50.00	50.00
11	Punjab and Sind Bank	ILC/FLC/BG - Sanctioned	_	0.20	0.20
12	Punjab National Bank	ILC/FLC/BG - Sanctioned	_	5.00	5.00
13	Punjab National Bank	Term Loan - Sanctioned	62.27	_	62.27
14	Punjab National Bank	Cash Credit - Sanctioned	101.00	_	101.00
15	South Indian Bank	Cash Credit - Sanctioned	50.00	_	50.00
Total			481.22	65.50	546.72
TOTAL (Rupees Five Hundred Forty Six Crores and Seventy Two lakhs Only)