­Established track record of operations and experienced management in textile industry
SKML is engaged in manufacturing of cotton yarn and gloves for more than 45 years. SKML is presently managed by Mr K G Balakrishnan (Chairman), Mr B Sriramulu (Managing Director) and Mr B Srihari (Managing Director). Currently, SKML has 4 spinning units, 1 glove making unit 1 reeling and TFO unit and 1 weaving plant. The Major raw materials of the include Cotton, Waste cotton, Polyester and other man-made fibres. The company procures cotton and Cotton waste from suppliers in Tamil Nadu, Andhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra regions. Manmade fibres from Reliance, Grasim etc. Company has extensive relationship with its long term customers and suppliers to ensure steady raw material supply and repeat business. Company also has long term power purchase agreement (PPA) with private power suppliers to meets its power requirements at lower price per unit than power supplied by power utilities. Acuite believes that SKML may continue to benefit from its established track record of operations and longstanding relationship with its customers and suppliers.

Augmentation in business risk profile
The scale of operations of the company has improved significantly in FY 2022 to Rs 494 Cr from Rs 254 Cr in FY 2021. The increase in revenue is supported both by increase in number of volumes sold and better price realization. The volume sales for yarn and fabric segment has increased significantly to 147.31 Lakhs Kgs and 84.23 Lakhs Kgs respectively in FY 2022 against 93.73 Lakhs Kgs and 53 Lakhs Kgs respectively in FY 2021. Further, the company has already achieved a revenue of Rs 372.49 Cr till December 2022 and is expected to archive the turnover ranging between Rs. 505 Cr to Rs. 510 Cr in FY2023 maintaining the steady growth. The operating margins have also improved and stood at 14.03% in FY 2022 as against 11.78% in FY 2021 and 10.93% in FY 2020. Improvement in operating margin is primarily due to higher realisation rate during the year. However, considering the increase in raw material prices in current fiscal year, operating margins are expected to be in the range of 9.5-10% for FY 2023. Acuite believes that maintaining a stable growth in revenue while maintaining profitability is a key rating sensitivity.

Healthy financial risk profile
Healthy financial risk profile The financial risk profile of the company is healthy marked by healthy net worth, moderate gearing and healthy debt protection metrics despite the continuous debt laden capex. The networth stood at Rs. 114.69 Cr as on March 31st 2022 as against Rs. 89.28 Cr as on March 31st 2021. The increase in networth is majorly due to accretion of profits to reserves. The company follows the conservative financial policy reflected through its gearing(debt-equity) ratio which stood at 1.12 times as on March 31st 2022 as against 1.32 times as on March 31st 2021. The coverage indicators stood comfortable, marked by interest coverage ratio (ICR) at 3.45 times as on March 31st 2022 as against 1.54 times as on March 31st 2021. The DSCR stood at 1.58 times as on March 31st 2022 as against 1.09 times as on March 31 st 2021. The total outside liabilities to tangible networth (TOL/TNW) stood at 2.12 times as on March 31st 2022 as against 2.24 times as on March 31st 2021. Acuite however, believes that the financial risk profile will continue to remain above average despite routine capex supported by stable operating margins.

­Moderate working capital management
SKML operations are moderately working capital intensive marked by Gross Current Assets (GCA) days of 143 days in FY2022 as compared to 184 days in FY2021. The GCA days are mainly dominated by inventory holding period of 93 days in FY2022 as against 105 days in FY2021. The collection period was at 45 days in FY2022 as against 66 days in FY2021. Further, the company’s average bank limit utilisation stood at ~85 percent for the last 6 months ended as on January 2023. Acuite’ believes that working capital operations of the company may continue to remain moderate considering the nature of business.

Susceptible to volatility in raw material prices
SKML’s profitable margins are susceptible to fluctuations in the prices of major raw materials such as domestic and imported cotton, blent and polyester. The main raw material purchased by the company is cotton. Cotton being an agricultural commodity by nature, the margins are susceptible to changes in cotton prices. Cotton availability and price of the same is highly dependent on agro-climatic conditions. Despite the prevalence of Minimum Support Price (MSP), the purchase price depends on the prevailing demand-supply situation, which limits bargaining power with the suppliers as well. As a result, the business is exposed to fluctuations in the commodities prices.