­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. 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 long-standing relationship with its key suppliers and customers. Acuite believes that established track record of operations and long-standing relationship with customers and suppliers will continue to  benefit the group over the medium term.

Improvement in profitability albeit decline in revenue:
SCM group registered revenue of Rs.445.26 Cr. in FY2024 reflecting a ~12.8 percent decline compared to previous year revenue of Rs.510.41 Cr. This decline in revenue in FY2024 was due to lower price realizations of yarn during the year. However, the decline in revenue was offset by lower raw material prices and cost savings from captive power, leading to improved operating profit margins. The EBITDA margin improved to 12.22 percent in FY2024 compared to 8.18 percent in FY2023. Consequently, despite higher depreciation and interest expenses, the PAT margin also improved for the year. During the first 6 months of FY2025, the group has registered revenue of Rs.259.52 Cr. and expected to close the year with the revenue in the range of Rs.470-490 Cr. Additionally, the group has registered operating profit of 14.67 percent during the 6MFY2025. The growth in revenue and operating profit margin is on account of better yarn realizations during the year.
Acuite believes that, the revenue of the group will improve further, supported by favourable market conditions, along with continued improvements in profitability driven by better realizations for yarn and savings from captive power.

Moderately intensive working capital operations:
The working capital operations of the group are moderately intensive as reflected by the gross current assets (GCA) days of 134 days during FY2024 against 103 days in FY2023. The elongation in GCA days is due to high inventory days of around 83 days in FY2024. The group generally maintains high  inventory levels required for 45-60 days with a view to ensure the quality of the cotton, resulting in higher inventory days. The debtor days of the group stood in the range of 25-40 days during past 3 years. The creditors days stood at 23 days in FY2024 as against 15 days in FY2023. The moderate working capital operations have led to moderate utilization of the fund based working capital operations at ~69 percent during the past 12 months ending February 2025.
Acuité believes that the working capital cycle will continue to remain in the similar range over the medium term on account of the nature of industry.

Moderate financial risk profile:
SCM group’s financial risk profile is moderate, marked by moderate net worth, moderate capital structure and debt protection metrics. The group’s net worth stood at Rs.139.47 Cr. as on March 31, 2024 as compared to Rs.133.32 Cr. as on March 31, 2023. The improvement in net worth is due to accretion of profits to reserves during the period. The SCM group’s leverage indicators have marginally deteriorated due to increase in overall debt levels to Rs.276.76 Cr. as on March 31, 2024 from Rs.248.76 Cr. as on March 31, 2023. The gearing and total outside liabilities to tangible net worth (TOL/TNW) levels stood at 1.98 times 2.26 times as of March 31, 2024 respectively compared to 1.87 times and 2.16 times as on March 31, 2023 respectively. The debt protection metrics stood moderate with DSCR and ICR of 1.02 times and 2.66 times respectively as on March 31, 2024 against 0.77 times and 2.48 times respectively as on March 31, 2023. Debt EBITDA also improved to 4.71 times as on March 31, 2024 from 5.43 times as on March 31, 2023. Acuite believes that the financial risk profile of the group will improve for FY2025 in absence of major debt funded capex.

Susceptibility to fluctuation in raw material prices:
SCM Group’s profitability 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 rainfall 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.