| Established track of operations
SDL has an established track record of operations dating back to more than a decade. Over the years company has established a strong position in the denim fabric manufacturing industry. The experience of the management is reflected in the growing operations of the company. The denim fabric manufactured by the company is sold to various traders and readymade garment manufacturers at domestic and international markets like Bangladesh, Egypt & Sri Lanka. SDL made exports to the extent of ~8.32 percent of the total revenue in FY24 and is focusing to increase the same, resulting which the export increased to ~12.51 percent during 9MFY25.
Acuité believes that the industry experience and domain knowledge of the management are expected to support its business risk profile over the medium term.
Incentives from government supporting cashflows
Apart from the denim business, the company is also focused on adapting renewable energies sources by the way of setting up of windmill and solar plant for power generation for which it receives state subsidies. The company also receives other interest and GST subsidies. It has received subsidies worth Rs.12.61 Cr. from FY21-24 and Rs. 2.42 Cr. subsidy in FY25 upto February 28, 2025. Further, the company is receiving GST subsidy from 2018 and is expected to receive ~ Rs 3.75 Cr. for the next two years.
Expected growth in revenue and improvement in margins
The total operating income of SDL decreased from Rs. 231.11 Cr. in FY23 to Rs.167.44 Cr. in FY24 owing to reduction in the sales quantity on account of subdued production due to the boiler capex and lower purchases by the customers due to the changes in the MSME payment terms. Further, the decrease in cotton prices during the year also affected the realisations of the company. However, the scale of operations is expected to stabilize from FY25 onwards on account of resurgence in the volumes coupled with improving realisations. The company has made revenue of ~Rs.175 Cr. till February 28, 2025.
Despite the moderation in the revenue, the operating and profitability margins increased in comparison with the previous year. The operating margin stood at 7.96 percent in FY24 as against 7.51 percent in FY23; this was on account of lower raw material costs and secondly due to lowering of the power cost which was because of the new windmill for which credits was received. The margins are further expected to improve in FY25 with the setting up of the solar plant and increased focus on exports which offer higher margins.
Moderate Financial risk profile
The financial risk profile of the company stood moderate marked by low gearing, moderate net worth and low debt protection metrics. In FY23, of the total unsecured loan (USL) of Rs.23.76 Cr, Rs.15 Cr. was classified as quasi equity. However, as per the recent sanctions of the bank; this quasi equity has been reclassified into USL for FY24. Therefore, this led to reduction in the networth from Rs.69.73 Cr. in FY23 to Rs.56.08 Cr. in FY24 and increase in debt, thereby moderating the overall gearing to 1.25 times as on 31st March, 2024 as against 0.70 times as on 31st March, 2023. Given this moderation in capital structure & profitability position, the debt coverage indicators stood moderated with the Debt/EBITDA of 5.23 times in FY24 as against 2.81 times in FY23. Further, the interest coverage and debt service coverage (DSCR) also stood low at 2.55 times and 0.87 times in FY24 as against 3.72 times and 1.04 times respectively in FY23. The repayments were managed through working capital adjustments.
Acuité understands that while the company shall be raising debt of Rs.12.60 Cr for the solar project in the near term, the financial risk profile is expected to improve on back of growth in cash accruals.
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| Moderately intensive working capital operations
The working capital operations of the company stood moderately intensive marked by gross current assets (GCA) of 152 days in FY24 as against 125 days in FY23 which majorly includes other current assets of ~Rs.11 Cr. consisting of receivables from government (GST and subsidy) and inventory holding which stood elongated at 73 days in FY24 as against 35 days in FY23 owing to lower sales which led to inventory pile up. The collection period reduced to 59 days in FY24 as against 71 days in FY23 owing to a better credit period of over 30-60 days extended to the customers post change in the MSME payment guidelines. On the other hand, the creditors’ period stood similar to FY23 at 17 days in FY24 as well. The average bank limit utilisation for fund based limits stood at ~73% for the last 12 months ended December 31, 2024 and the non-fund based utilisation stood at an average of ~88% during the same period. Going ahead, the working capital operations are expected to remain in the same level considering the nature of the business.
Customer concentration risk and susceptibility of profitability to volatility in raw material prices
The company is susceptible to customer concentration risk as ~50 percent of the company’s revenue are generated through sales to one customer. Any financial or business risk faced by any of its top customers could affect business negatively. Further, the company faces the risk from the volatility in raw material prices as cotton business is highly seasonal in nature and prices are driven by global demand supply parameters. Also, the cotton prices saw a downtrend in recent years which affected the realisations. However, due to the raw material pass through mechanism the margins generally remain range bound.
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