­For arriving at this rating, Acuité has consolidated the business and financial risk profiles of Veebee Yarnntex Private Limited (VBYTPL) and Subburaaj Cotton Mill Private Limited (SCMPL) together referred to as the ‘SCM Group’. The consolidation is in the view of common management, strong operational and financial linkages between the entities

­Promoters’ extensive experience in cotton yarn manufacturing segment; established track record of operations in Tamil Nadu and Telangana.
Subburaaj Group is a family-owned business with the existence of more than four decades in the cotton yarn spinning industry. SCMPL was established with a spinning capacity of 12,000 spindles in 1980 by Mr. K. Venkatasamy as a partnership firm. In 2002, SCMPL was acquired by Mr. A. Saravanakumar (Grandson of Mr. K. Venkatasamy) in family settlement with nearly 20,000 spindles capacity. Over the years, Mr. Saravanakumar established the brand name of “Subburaaj” in both domestic and international markets and has actively taken part in the day-to-day operations of the group. The group exports to various countries namely Sri Lanka, Bangladesh, Myanmar, Singapore amongst others. The brand name “Subburaaj” is popular in the region of Sri Lanka and “Subburaaj Gold” in the region of Bangladesh. In 2004, Mr. Saravanakumar incorporated VBYTPL for production of cotton yarn of finer counts. With a long track record of operations in Rajapalayam, SCM Group is one of the renowned cotton yarn manufacturer with a total spinning capacity of 1,97,088 spindles and 3,030 rotors along with 39.26 megawatt (MW) solar power for captive consumption. The promoter's extensive industry experience and established existence has helped the SCM Group to establish a longstanding relationship with its key suppliers and customers. Acuite believes that established track record of operations and longstanding relationship with customers and suppliers is to benefit the group over the medium term.

Moderate working capital operations:
The working capital operation of the group are moderate as reflected by the gross current assets (GCA) days of 103 days during FY23. The group generally maintains high amounts of inventory required for 45-60 days with a view to ensure the quality of the cotton. The debtor days of the group stood in the range of 35-22 days during past 3 years. Timely receipts of funds from debtors has ensured upfront payment to its suppliers. Generally, the group gives advance amount to the supplier of the raw materials in the range of Rs30-40Cr however, during FY23 in order to maintain enough cushion in liquidity the group has reduced the advance amounts to Rs.7-10Cr leading to deterioration in current ratio to 1.08 times. The moderate working capital operations have led to moderate utilization of the fund based working capital operations at ~67 percent during the past 12 months ending October 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.

Decline in operating performance in FY2023, albeit recovery recorded in H1FY2024:
SCM group has reported revenue of Rs.510.41Cr during FY23 which was marginally declined by 1 percent against revenue of Rs.515.36Cr from previous year. The slight decline in revenue is on account of low realisations throughout the year. The EBITDA margin of the group has declined sharply to 8.18 percent during FY23 from all time high of 19.76 percent of previous year. The group has registered its highest EBITDA margin during FY22 around ~20 percent which is contributed by the better realisations for compact yarn during the year coupled by savings from captive power. However due demand and supply contraction raw material prices have sharply decline from Rs.1,10,000 per candy in Q3-Q4 of FY22 to Rs. 65,000 per candy in Q1-Q2 of FY23. This scenario has resulted in sharp decline in group’s EBITDA margin during FY23. The group has reported revenue of Rs.262Cr till September 2023 and expected to report revenue around Rs.540-550Cr by the end of FY23. EBITDA margin is expected to bounce back to historic levels of 11-13 percent on account of good realisation rates and savings from captive power.

Moderate financial risk profile
The Subburaaj group’s financial risk profile is moderate, marked by moderate networth, capital structure and debt protection metrics. Group’s net worth stood at Rs. 133.32 Cr as on March 31, 2023 as compared to Rs. 135.02 Cr as on March 31, 2022. Decline in networth is on account of net loss suffered by the group in FY23. The group’s capital structure is moderate marked with gearing and total outside liabilities to total net worth (TOL/TNW) of 1.87 times and 2.16 times respectively as on March 31, 2023 as against 1.89 times and 2.26 times as on March 31, 2023. Interest coverage ratio and Debt service coverage ratio (DSCR) has deteriorated to 2.48 times and 0.77 times in FY23 from 6.97 times and 2.52 times respectively of previous year owing to sharp decline in EBITDA during FY23. Further to this debt to EBITDA deteriorated to 5.43 times in FY23 against 2.45 times of previous year. Acuité believes that despite ongoing debt funded capex the financial risk profile of the group will improve over the medium term on account of expected improvement in EBITDA.

­Susceptibility to fluctuation in raw material prices: 
SCM Group’s profitable margins are susceptible to fluctuations in the prices of major raw materials such as domestic cotton (DCH 32, MCU 5) and Import cotton (Giza, Pima and Supima). Cotton being a seasonal crop, the production of the same is highly dependent upon the monsoon. Thus, inadequate rainfal affects the availability of cotton in adverse weather conditions. Furthermore, any abrupt change in cotton prices due to supply-demand scenario and government regulations of changes in Minimum Support Price (MSP) can lead to distortion of prices and affect the profitability of players across the cotton value chain. Acuité believes that the group’s business profile and financial profile can be adversely impacted on account of presence of inherent risk of susceptibility of volatility in raw cotton prices, since the industry is highly commoditized.