­Stable business risk profile with integrated operations and efficient procurement channel
PSL has an established operational track record for more than three decades. The promoters of the company, Mr. Shiv Kumar Chaudhary and Mr. Shreyaskar Chaudhary have an experience of over two decades in textile industry and has helped the company to developed healthy relations with various reputed domestic as well as international players such as C&A Buying Gmbh & Co., Jockey International Inc., Levi Strauss, Nike, Zara among others. Furthermore, PSL has fully integrated its business operations with manufacturing facilities for spinning, knitting, dyeing and garmenting. The company does contract farming of cotton on about 100,000 acres spread across Madhya Pradesh, Odisha, Rajasthan and Maharashtra. Around 40 percent of its total cotton requirements are met through contract farming and the rest cotton is purchased from spot market. The stable business profile also supported the revenues of the company which recorded a ~7.40% YoY to Rs. 861.48 Cr in FY23 as against Rs. 802.15 Cr in FY22.

Acuité believes that the business risk profile of the company will continue to remain stable on account of established operations with experience promoters and integrated operations over the medium term.

Successfully exited from CDR
In FY12, the company witnessed liquidity crunch & suffered huge losses in FY12 & FY13. The main reason for the losses were severe recession in global textile industry. As a result, the company decided to approach their lenders led by SBI for restructuring the future debt obligations, without moratorium, on ballooning repayment mode, in a period of 10 years. The company had reinvented its business strategy by putting Garment as its front runner & eliminating external fabric sale. Over a period of time, the company was able to enhance yarn sale for captive consumption towards Garment manufacturing which improved the profitability to a large extent despite reduction in overall revenues. Therefore, the company successfully exited the CDR during FY23 by paying entire dues as per the terms and conditions. The recompense amount of Rs.16.65 Cr has been paid been to the lenders towards interest rate concessions allowed while sanctioning financial restructuring to the company in previous years. 

Above average financial risk profile
The financial risk profile of the company is above average marked by healthy net worth, moderate gearing and moderate debt protection metrics. The tangible net worth of the company stood at Rs. 289.14 Cr in FY23 against Rs. 288.91 Cr in FY22. The total debt of the company stood at Rs.339.36 Cr in FY23 as against Rs. 329.58 Cr in FY22. The debt outstanding of the company in FY23 comprises of long-term debt of Rs.117.95 Cr and Rs. 221.41 Cr of short-term debt. The gearing of the company stood above unity at 1.17 times in FY23 as against 1.14 times in FY22. The TOL/TNW improved yet remained high at 1.63 times in FY23 as against 1.71 times in FY22. The debt protection metrics remained moderate with debt service coverage ratio of 1.05 times in FY23 as against 0.86 times in FY22. The interest coverage ratio stood at 1.91 times in FY23 as against 3.63 times in FY22. The DSCR stood low as the company prepaid some of its loan under the CDR. Further, the company was able to bridge this gap through unencumbered cash & bank balances and internal accruals. Furthermore, the company is planning to incur Rs. 123.58 Cr of capex towards installation of spinning, dyeing and garment capacity and installation of roof top plant.  The project is proposed to be funded through internal accruals of Rs. 38.58 Cr and term loan of Rs. 85 Cr which is not yet sanctioned. However, once the term loan is sanctioned and disbursed, the financial risk profile is expected to be impacted over the near term.

­Exposure to risks associated with planned capital expenditure 
The company is planning to incur Rs.123.58 Cr of capex towards installation of spinning, dyeing and garment capacity and installation of roof top plant.  The company already has existing land on which the proposed expansion is to be carried out. The project is proposed to be funded through internal accruals of Rs. 38.58 Cr and term loan of Rs. 85 Cr. Out of the internal accruals of Rs. 38.58 Cr, ~Rs.32.83 Cr has already been incurred towards capex in FY23 and further Rs.2.52 Cr was incurred till July 2023 and the balance of Rs. 3.23 Cr from the promoters will be met by H2FY24. However, the term loan proposed for the project is not yet sanctioned which increases the funding risk for the company. However, the term loan is expected to be sanctioned in H2FY24 and to be disbursed within the same period. The ongoing capex being incurred in PSL during FY24 is expected to commence its operations and generation of revenues from FY25. Acuite believes, the timely financial closure and commencement of operations from the new project will remain a key rating sensitivity going ahead.

Continuous deterioration in profitability margins
The profitability margins of the company have witnessed continuous deterioration over the years. The operating profit margin of the company declined from 15.71 percent in FY21 to 13.07 percent in FY22 and further declined to 9.55 percent in FY23. The decline is majorly on account of increase in raw material prices during the period. Furthermore, the company reported Profit after Tax of only Rs.1.06 Cr during FY23 as against Rs.36.61 Cr. majorly on account of increase in finance costs and exceptional one-time expense in the form of recompense expenditure amounting to Rs. 16.65 Cr payable to lenders towards interest rate concessions allowed, pursuant to the Letter of Approval issued by CDR-EG while sanctioning financial restructuring to the company in earlier years. Acuité believes that the profitability margins will continue to remain subdued over the near term majorly on account of recession in the international markets such as Europe and US which might lead to delay in shipment of the company.

Working capital intensive in nature
The operations of the company are working capital intensive in nature marked by GCA days which improved yet remained high at 193 days in FY23 as against 223 days in FY22. The inventory levels of the company stood at 99 days in FY23 as against 120 days in FY22. The company has receivable days of 51 days in FY23, as against 63 days in FY22. The creditor days of the company stood at 53 days in FY23 as against 87 days in FY22.
With a huge customer network, the management generally has to stock up sufficient amount of finished goods (around 35% of inventory) to ensure smooth flow of sales and marketing. Further, stock of raw materials which constitute to roughly 45% has to be kept in order to maintain uninterrupted production cycle to meet up the orders on time. The company generally gives a credit period of nearly 60-90 days to its customers and receives credit of 60 days from its suppliers. Further, the debtors more than six months accounted for only 10.05% of the total debtors and 1.34% of total revenue in FY 2023. The average bank limit utilisation by the company remained utilised at 90.27% for fund-based facilities and 56.60% for non-fund based facilities in FY23.

Acuité believes that the working capital management from the company will remain a key rating sensitivity going ahead.

Exposed to risk associated to foreign exchange fluctuations
The exports of the PSL constituted around 60 percent of the total sales. As a result, the company’s business is exposed to fluctuations in foreign exchange rate. The company hedges about 70 percent of its forex exposure to mitigate the same to an extent. Acuité believes that PSL should be able to maintain its operating profitability around existing levels notwithstanding the volatility in prices of its key inputs, on the back of its established position in the domestic and overseas markets.