­Established track record and steady improvement in operations:
Santhi Processing Unit Private Limited (SPUPL) is promoted by Mr. Durai swami who possess a vast experience of 40 years in the textile industry. With a long track record of operations, SPUPL has become one of the renowned integrated textile player with a total spinning capacity of 14,600 spindles and 82 looms along with 4.45 megawatt (MW) solar power and Windmills for captive consumption. The promoter's extensive industry experience and established existence has helped the company to establish a longstanding relationship with its key suppliers and customers. The extensive experience of promoter is also reflected through significant increase in revenue over the years. During last three years company's revenue has grown at a Compounded Annual Growth Rate (CAGR) of ~40 percent. The significant growth in revenue is mainly due to higher sale of quantity which were manufactured by giving on job work basis. This was done to capture the increased demand of fabrics in the market and yield higher margins. SPUPL depends on job work of looms as the current installed capacity can generate revenue upto Rs.150Cr which has resulted in lower EBITDA margins during last 2 years at 6.62 percent. However, there is steady growth in absolute EBITDA from Rs.14.15Cr in FY21 to Rs.21.80Cr in FY22 and Rs.23.29Cr during FY23.

Despite the volatility in raw material prices and realization rates SPUPL has registered revenue of Rs.194.27Cr till November 2023 against revenue of Rs.206Cr for the same period of FY23 and has shown improvement in EBITDA margin of 8 percent till November 2023 and expected to close the year in the range of 7-7.5 percent. The expected improvement in EBITDA margin is on account of savings from the captive power. Acuite believes that SPUPL will continue to benefit from the partners established presence in the textile industry.

Healthy financial risk profile
SPUPL’s financial risk profile is above average, marked by moderate networth, healthy capital structure and debt protection metrics. Company’s net worth stood at Rs. 66.12 Cr as on March 31, 2023 as compared to Rs. 59.18 Cr as on March 31, 2022. Improvement in networth is on account of accretion for profits to reserves. SPUPL's capital structure is healthy marked by gearing and total outside liabilities to total net worth (TOL/TNW) of 0.64 times and 0.85 times respectively as on March 31, 2023 as against 0.78 times and 1.22 times as on March 31, 2022. The comfortable profitability coupled with healthy gearing levels has resulted in comfortable debt protection metrics with interest coverage of 4.91 times and NCA/TD of 0.39 times for FY23 as against 3.16 times and 0. 28 times, respectively, for FY22. Besides Debt service coverage ratio stood at 1.63 times as on March 31, 2023.
Acuité believes that despite the debt funded capex company’s financial risk profile will remain above average on account of its improving scale of operations and expected improvement in profitability.

Efficient working capital operations
SPUPL’s working capital operations are efficiently managed as reflected by its gross current asset (GCA) days of 60 days during FY23. The company maintains inventory of about 30-45 days and gives credit period of 15-30 days to its customers. Debtor days stood in the range of 25-30 days during the last two years. Timely collection of receivables has led to timely payment to its creditors. The company makes upfront payment to majority of its suppliers. The efficient working capital management and moderate accruals lead to moderate utilisation of its working capital limits at an average of 73 percent over the past 12 months ended September 2023. Acuité believes that the working capital cycle will continue to remain in the similar over the medium term on account of business cycle of cotton industry.

­Intense competition in the industry
The textile industry is highly fragmented, comprising several small and mid-sized players and the operating margins are susceptible to changes in cotton and yarn prices which are highly volatile. The activities in textiles range from the production of natural raw materials such as cotton, jute, silk and wool to the manufacture of quality products such as viscose fibre, synthetic filament and spun yarn. The industry is often plagued by obsolescence, unhealthy regulations. This emphasises the need for strengthening the management mechanism in the industry, to face the emerging challenges. SPUPL is currently incurring capex around Rs.21.00 Cr for Solar Power which could cover upto 60-70% of the electricity usage and Rs.17Cr towards expansion in house looms by another 26 looms. This could reduce the dependency on job work of the yarn to fabric and improve the EBITDA margins. Acuite believes that SPUPL have the experienced management to overcome these demand and price related fluctuations.