| Experienced management
The group is promoted by Mr. Jagatheesan, who has around three decades of experience in the textile industry. The group was started in 1994 and has gradually expanded to the present total capacity of 2.27 lakh spindles with utilization levels of ~90 percent at its plants in Namakkal, Tamil Nadu. The units are located in the textile hubs of Erode, Coimbatore, and Tirupur. The group has a competent management supported by a team of well qualified and experienced second-line personnel. The promoter's experience in textile industry has helped the company build healthy relationship with its suppliers and customers, to ensure a steady raw material supply and large offtake.
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.
Augmentation in operating performance albeit moderation in revenue
The operating performance of the group recorded a strong Y-o-Y growth of 101 percent driven by healthy demand for cotton yarn coupled with availability of additional capacity. In August 2021, the group acquired Thirupur Suriya factory where the capacity of the group increased from 1,66,448 spindles to 2,27,328 spindles. The total operating income of the group stood at Rs. 608.39 crore in FY22 as against Rs. 302.88 crore in FY21. The operating performance of the group however remained subdued in H1FY23 on account of high cotton prices. The total operating income in H1FY23 stood at Rs. 216.01 crore.
Operating profit margins of the group saw a marginal decline of 60.74 bps and stood at 16.13 percent in FY22 as against 16.73 percent in FY21. The operating profit margins stood at 16.51 percent in H1FY23. The group already has 7.40 MW of solar panels and 8.90 MW of wind mills for its captive power consumption. In FY22, the group added additional 10 MW of ground mounted solar power panels. Such additions has helped to bring down the power cost of the group. Further, on account of prepayment of term loans and minimal reliance on bank limits, the finance cost of the group has reduced. Such savings in cost will help in improving the profitability of the company in the near to medium term. The PAT margins of the group stood at 9.67 percent in FY22 as against 8.20 percent in FY21.
Acuitè believes that the business risk profile of the group will be supported by established track record of operations and healthy relations with customers and suppliers.
Above average financial risk profile
The financial risk profile of the group remains above average marked healthy networth, low gearing and healthy debt protection metrics. The tangible net worth of the group stood at Rs. 248.45 crore as on March 31, 2022 as against Rs. 189.62 crore as on March 31, 2021. The total debt of the group stood at Rs. 59.60 crore as on March 31, 2022 as against Rs. 88.03 crore as on March 31, 2021. The total debt of the group includes Rs. 27.06 crore of long term loans, Rs. 24.66 crore of short term loans and 7.88 crore of unsecured loans. The group on account of healthy cash accruals has prepaid its long term loans and withdrawn the unsecured loans. The management of the group follows a conservative leverage policy which is reflected by its low gearing of 0.24 times as on March 31, 2022. The gearing (Debt/Equity) of the group improved from its peak gearing at 0.54 times as on March 31, 2020. The debt protection metrics of the company stood healthy marked by DSCR of 9.42 times in FY22 and ICR of 29.33 times in FY22.
Acuite believes that the financial risk profile of the group is likely to remain above average in the near to medium term on account of improvement in scale of operations and absence of any debt funded capital expenditure.
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| Moderate working capital operations
The working capital operations of the group are moderate with GCA day of 94 days in FY22 as against 179 days in FY21.The GCA days are driven by inventory holding period and the improvement in GCA days are driven by improvement in the inventory holding period. The season for cotton is between the month of October to March and the group stocks up cotton in the last quarter of the financial year. The inventory days of the group improved at 41 days in FY22 as against 112 days in FY21. The debtor collection period of the group also improved marginally at 40 days in FY22 as against 45 days in FY21. The group’s reliance on bank limits remains minimal reflected by average utilization of bank limits less than 10 percent for 7 months ended October 2022. The creditor days of the group stood at 30 days in FY22 as against 39 days in FY21.
Acuité believes that the working capital cycle will continue to look intensive over the medium term on account of the business cycle of the cotton industry.
Susceptibility of operating margins to volatility in raw material prices
The operating margins of cotton spinners are susceptible to changes in cotton prices, which are highly volatile and commoditized products. Any abrupt change in cotton prices due to the supply-demand scenario, carry-over stocks in the overseas market, and government regulations of changes in minimum support price (MSP) can lead to distortion in market prices and affect the profitability of players across the cotton value chain, including spinners.
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