| 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 of 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.
Subdued performance in FY23 due to industry headwinds; however, recovery is estimated in FY24.
The group’s total revenue declined to Rs. 361.82 Cr. in FY2023 from Rs. 608.39 Cr. in FY2022. The decline in revenue is due to a steep fall in cotton candy rates from an all-time high of Rs. 1,15,000 per candy to ~Rs. 55,000 per candy in the span of the last 3 quarters of FY2023 coupled with lower demand levels leading to lower volumes and lower price realisations. The operating profit margin also declined to 11.21 percent in FY23 against 16.13 percent in FY22. Cotton candy rates stabilised during FY2024, which were in the range of Rs. 52,000 per candy to Rs. 57,000 per candy throughout the year. This, coupled with improved demand levels, has resulted in growth in revenue in FY2024, which is estimated to be in the range of Rs. 390-400Cr, while operating profit margin is estimated to improve in FY24 compared to previous year. Going forward, the company’s revenue and operating profit margins are expected to improve due to improved realizations and savings from captive power.
Healthy financial risk profile:
The group’s financial risk profile remained healthy despite subdued operating performance in FY23, primarily marked by healthy net worth, low gearing level and healthy debt protection metrics. The net worth of the group has improved to Rs.268.47 Cr. as of March 31, 2023, from Rs.248.45 Cr. as of March 31, 2022, due to the accretion of profits to reserves for FY2023. The gearing remained healthy at 0.28 times as of March 31, 2023 against 0.24 times as of March 31, 2022. Marginal deterioration in gearing is due to increase in total debt to Rs.75.44 Cr. in FY2023, which consists of long-term debt of Rs.4.05 Cr, unsecured loans of Rs.13.41 Cr. and short-term debt of Rs.57.97Cr. Total outside Liabilities/Tangible Net Worth (TOL/TNW) remained healthy at 0.54 times as of March 31, 2023 against 0.52 times as of March 31, 2022. Interest coverage ratio (ICR) and debt service coverage ratio (DSCR) stood comfortable at 14.31 times and 4.11 times respectively, as of March 31, 2023 against 29.33 times and 9.42 times respectively, as of March 31, 2022. Debt to EBITDA stood comfortable at 1.71 times as of March 31, 2023 although it deteriorated from 0.60 times as of March 31, 2022 due to a decline in absolute EBITDA. Going forward, gearing and debt protection metrics are expected to remain healthy on account of healthy net worth and no plans for major debt-funded capex
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| Moderately intensive working capital operations:
Working capital operations of the group are moderately intensive, as evident from the gross current assets (GCA) of 188 days in FY2023 against 94 days in FY2022. The elongation in GCA days is due to the stretch in inventory days, which mostly consist of raw materials (cotton). The season for cotton is between the months of October and March, so the group stocks up cotton in the last quarter of the financial year, resulting in a higher inventory-holding period of 120 days in FY2023. Debtor days stood at 44 in FY2023, against 40 days in FY2022. The group’s reliance on bank limits remained minimal, as reflected by an average utilisation of 20 percent in the past 12 months ending March 2024. The creditor days of the group stood at 45 in FY2023, against 30 days in FY2022. Acuité believes that the working capital cycle will continue to remain at similar levels over the medium term due to cyclical nature 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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