­Established presence in the textile industry and experienced management
MSL is promoted by Mr. Anandkumar Rengaswamy, Mr. Thangavelu Jayaraman, Mr. Thangavelu Raghuraman, Mr. Sethuraman Kalyanaraman, Mr. Parag Harkishon Udani, Mr. Harigovind, Mr. Adithya Raghuraman,Mr. AnanthakumarDhamavanthi and Mr. Swaminathan with more than three decades of experience in the textile industry. The company was incorporated in September 18, 1979 and commenced production in 1981, initially with an installed capacity of 11,856 spindles, which was gradually expanded to the present total capacity of 49,536 spindles at both its plants i.e. in Karnataka and Tamil Nadu. Management have more than 4 decades of experience in spinning industry and with the experience of the management MSL has emerged as a reputed spinning player in south India. The key factors for the success of the company are maintaining consistency in quality of cotton and timely delivery of cotton from the suppliers. Acuité believes that the promoter's extensive experience in the textile industry would aid the business risk profile of the company over the medium term.

Deterioration in operating performance
MSL’s operating performance deteriorated significantly in FY2023 marked by decline in operating income and operating losses. MSL reported revenue of Rs.149.95Cr during FY23 as against Rs.171.65 Cr in FY22.  The operating margins declined to -3.41 percent in FY23 from 18.17 percent in FY2022 driven by surge in input material costs. Raw cotton prices are highly volatile in nature and depend largely on factors like area under cultivation, monsoon, crop yield, international demand-supply and pricing and inventory carry forward of the previous year. Cotton being the major raw material of spinning mills, volatility in the prices of cotton impacts the profitability of the company. Further, The company recently completed its capex towards modernization of existing spindles, increasing spindle capacity in Karnataka plant and installation of solar power of 3MW.  The total cost of the project was Rs. 49.12 Cr (funded vide debt of Rs. 33.50 Cr and balance by internal accruals) incurred over the last years ended March 31, 2023. Modernization of spindles is expected to improve the over all productivity in the medium term and establishment of 3MW solar plant combined with existing wind mills capacity of 2.1MW is expected to contribute 30 percent of the power needs of the group, which would aid in improving the operating margins of the company. Acuite believes the company’s ability to efficiently use its improved capacities thereby recover its scale of operations and profitability margins would be a key rating monitorable over the medium term.

Moderate intensive working capital operations:
The working capital operations of the company are moderately intensive which is evident from Gross Current Asset (GCA) days of 151 for FY23. Generally, the company maintains inventory for 4 months but during FY23, in order to ensure smooth cash flow the company has reduced their inventory holding period by 30 days (from 123 to 93 days), however the bank limits were highly utilized during the past 12 months. Creditor days were stretched by another 30 days and stood at 107 days against 87 days in FY22. Debtors days stood at 14 days for FY23 against 17 days during Previous year. Current ratio declined to 0.84 times during FY23 against 1.34 times during previous year. Acuite believes further elongation of working capital cycle will remain a key rating sensitivity.

Below-average financial risk profile:
MSL financial risk profile is below average marked by decline in net worth to Rs.30.34Cr as on March 31, 2023 (Provisional) against Rs.42.32Cr during previous year. Decline in net worth is on account of net loss suffered by MSL during FY23 further leading to deterioration in Gearing levels to 2.09 times. Debt protection metrics have deteriorated significantly for FY23. As the company reported negative EBITDA resulting in decline in Interest coverage ratio (ICR) and Debt Service Coverage Ratio (DSCR) to -0.12 times and -0.06 times respectively as on March 31, 2023. Total outside liabilities to tangible net worth stood at 3.28 times as on March 31, 2023. Debt to EBITDA stood at -12.70 times as on March 31, 2023 against 1.22 times during previous year.