Experienced management, improving scale of operations and established market position
SCL is engaged in the manufacturing and selling of cotton yarn, knitted fabrics and garments in business since 1996. The company has established presence of over two decades in domestic as well as international textile market. The Directors, Mr. Shyamlal Agarwala (Managing Director) and Mr. Manoj Kumar Jhajharia (Joint Managing Director) have more than four decades of experience in the textile industry. Both were engaged in the trading of cotton yarn from 1986. Further, Mr. Shymlal Agarwala was the president of Coimbatore Yarn Merchants & Brokers Association (CYMBA). The company is also well supported by second line of management.

Further, the company has maintained longstanding relationships with its customers and suppliers. The same has resulted in recurring flow of orders and regular supply of raw materials. These can be observed through higher operating income of Rs. 639.03 crore in FY2022 as against Rs.229.27 crore in FY2021, due to higher trading activity for export orders undertaken by SCL, on back of higher demand in international market. Out of the total sales in FY2022, export sales stood at Rs. 548.92 crore and domestic sales at Rs.61.71 crore

SCL’s customer base is geographically well diversified. SCL exports its products to countries like Bangladesh, Sri Lanka, Hong Kong and Vietnam. The company markets its product under its brand name ‘Salona’ and has a well established distributor network with pan India presence.

Acuité believes that SCL’s established market position, long track record of over two decades in the business and long standing relationship with its customers and suppliers will continue to benefit over the medium term.

Moderate Financial Risk Profile
SCL has a moderate financial risk profile marked by net worth of Rs.57.21 crore as on March 31, 2022 as against Rs.37.96 crore as on March 31, 2021. The gearing (Debt-Equity) of the company stood at 2.42 times as on March 31, 2022 as against 2.02 times as on March 31, 2021. The gearing has increased due to increased short term borrowings, addition of term loans availed to finance construction of solar power plant and GECL loans. The total debt of the company as on March 31 2022 stood at Rs.138.73 crore which comprises of long term debt of Rs.32.08 crore, unsecured loans of Rs.1.62 and short term debt of Rs.105.03 crore. Interest Coverage Ratio stood at 5.07 times in FY2022 as against 3.34 times in FY2021. DSCR stood improved of 2.41 times in FY2022 as against 1.96 times in FY2021. NCA/ TD stood at 0.17 times as on March 31, 2022 as compared to 0.12 times as on March 31, 2021. Further, TOL/TNW (Total outside Liabilities/Tangible Net worth) ratio stood at 2.98 times in FY2022 as against 2.64 times in FY2021.

Acuité believes that SCL’s financial risk profile will remain moderate on account of absence of any major debt funded capex plan. 

Stable profitability margins
The operating profitability of the Company remained range bound between 5.5-7 percent for the last three years ended FY2022. The operating profitability margin stood at 5.85 percent in FY2022 as against 6.44 percent in FY2021, the decline is primarily due to increase in low margin generating trading activity and volatility in cotton prices. Revenue generation from trading stood at 69 percent of the total sale in FY2022 as against 50 percent in FY2021.  PAT margin stood at 3.10 percent in FY2022 as against 2.70 percent in FY2021. SCL commissioned its newly constructed 2MW solar power plant in March, 2022. The volatility in cotton prices is expected to be set off by the savings in power cost expected to be generated over the medium term, thus Acuite expects SCL’s profitability to remain stable over the medium term. 

Working Capital Intensive Nature of operations
The operations of SCL are  moderately working capital intensive in nature. The Company’s  gross current assets (GCAs) days stood at 105 days in FY2022 as against 175 days in FY2021.  The decline in GCA days is primarily on account of reduction in inventory days. Inventory holding days stood at 38 days in FY2022 as against 73 days in FY2021. Due to volatility in cotton prices, SCL had reduced its inventory levels to minimise its price risk. The  receivable days of SCL  stood at 58 days in FY2022 as against 87 days in FY2021.The working capital bank limit utilization of its cash credit  facility is ~13.93 percent for seven months  June 2022 and of the bills discounting facility is ~65.00 percent for the same period. The creditor days stood at 12 days for FY2022 as against 35 days for FY2021.

Highly competitive industry and susceptibility of margins to volatility in raw material prices
The textile industry is a highly fragmented industry and presence of large number of organised and unorganised players have created high competition in the industry. The company faces competition from large players from organized segment as well as numerous players in the unorganised segment. Also, SCL undertakes trading activity, the entry barriers are low thereby leading to stiff competition for players like SCL. Further, SCL operates in textile industry which is exposed to raw material fluctuation risk i.e. cotton and agro climatic risk depending on monsoon. The fluctuation in raw material prices has direct impact on revenues and operating margins of the company. The company is also exposed to forex risk as company is also involved into exports and exports contributed to 89.9% of the total revenue in FY2022.

Acuité believes that the ability of the company to pass on volatility in raw material to its customers while maintaining profitability and managing working capital cycle remain key rating sensitivity factors.