Established track record of operations in the cotton industry with experienced management
MCPL has been operating since 1982 and is one of the largest cotton processors in India. MCPL was founded by Mr. Bhupendra Singh Rajpal and Mr. Rajendra Singh Rajpal, who possess more than three decades of experience in the textile industry. The promoters are also well supported by the second-generation management, led by Mr. Sanchit Rajpal. MCPL has established working relationships with a number of customers and suppliers in the domestic and international markets. MCPL has a diversified business profile marked by the processing of cotton ginning, the trading and exporting of cotton yarn to both domestic and international markets, and the extraction of cotton seed oil. Moreover, the company currently has 18 manufacturing facilities, which are located in major cotton-producing regions of India such as Madhya Pradesh, Maharashtra, Karnataka, Telangana, Odisha, and Rajasthan. Further, the proximity to raw materials ensures a steady supply of raw materials at competitive rates. The experience of its promoters and long track record of operations in the cotton industry have helped the company maintain healthy and long-term relationships with both its customers and suppliers. Furthermore, MCPL derives around 75–80 percent of its revenue from the domestic market, with the rest coming from exports. The operating income of the company stood at Rs. 3140.16 crore, against Rs. 7000.54 crore in FY22. Acuité believes that MCPL will continue to benefit from its established presence in the industry, backed by the promoters’ vintage and diversified business risk profile, over the medium term.

Moderate financial risk profile
The financial risk profile of MCPL is moderate, marked by healthy net worth, moderate gearing levels, and moderate debt protection matrices. The net worth of the company is estimated to be Rs. 579.40 crore as of March 31, 2023, compared to Rs. 501.04 crore as of March 31, 2022. The estimated increase in net worth is on account of the accretion of profits to reserves. The total debt of Rs. 581.53 crore as of March 31, 2023E includes long-term borrowings of Rs. 129.04 crore, working capital borrowings of Rs. 452.49 crore, and unsecured loans of Rs. 10.32 crore. The company’s overall gearing is estimated to improve to 0.98 times as of March 31, 2023E, as against 1.34 times as of March 31, 2022. The TOL/TNW is estimated to improve to 1.19 times as of March 31, 2023E, as against 1.79 times as of March 31, 2022. The debt protection metrics of the company are moderate, marked by an estimated interest coverage ratio of 5.41 times in FY23E as against 4.75 times in FY22. The DSCR is estimated to decline to 1.99 times in FY2023E against 3.79 times in FY2022 on account of the commencement of scheduled repayment of term loans availed during the previous financial years. Acuite expects MCPL’s financial risk profile to remain healthy over the medium term in the absence of any major debt-funded capex plan and expected growth in revenues.

Working capital efficient nature of operations, albeit elongation of cycle estimated in FY2023
The working capital operations of MPCL have remained efficient; however, deterioration in the same is expected in FY2023E. The GCA days are estimated to be at 123 days in FY2023E, up from 61 days in FY2022 and 71 days in FY2021. The higher GCA days are on account of higher debtor and inventory levels outstanding towards the year's end. The ginning season for the company has extended beyond the usual months as the arrival of cotton in the market is continuing and is expected to continue until the onset of the monsoon. The debtor days are estimated to be 42 days in FY2023E, against 15 days in FY2022, on account of higher than usual sales levels towards the end of the year in comparison to previous years. The average credit period allowed is in the range of 15–30 days. The extension of the ginning season has also resulted in higher inventory levels towards the year's end. As a result, the inventory days are estimated to be 42 days in FY2023E, compared to 31 days in FY2022. The average utilisation of the fund-based bank limits of the company stood at 44% for the last six months ending March 2023.
Acuite believes that the ability of the company to improve its scale of operations while maintaining an efficient working capital cycle will be a key monitorable.

Susceptibility of operating performance to input price volatility
Cotton prices are regulated by the government through the MSP (Minimum Support Price) mechanism. Profitability is susceptible to changes in the prices of raw materials. However, the selling price of the output depends on the prevailing demand-supply situation, restricting bargaining power with customers and thereby impacting margins. During FY2023, the volumes and price realisations were negatively affected on account of the limited availability of cotton in the market and lower cotton prices.

Competitive nature of industry and agroclimatic risk
MCPL operates in a highly fragmented industry characterised by the presence of many unorganised players, thus limiting its pricing power. Further, the raw material availability is highly dependent upon the climatic conditions, as seed cotton is exposed to agro-climatic risks, and the production is highly dependent upon the monsoon and other climatic conditions. Higher temperatures in already hot areas may hinder cotton development and fruit formation, resulting in reduced yields and a scarcity of raw cotton.