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 t rack 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 1,97,648 spindles and 3,030 rotors along with 31 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. The extensive experience of promoter is also reflected through significant increase in revenue in FY2022 on account of improved production and improved realization rates of cotton yarn. Average realization rates stood at Rs.465 per Kg in domestic market and Rs.296 per Kg in Export market compared to Rs.318 and Rs.219 for respectively in previous year. Operational Margin and PAT margins improved significantly in FY22 (Provisionals) to 19.60 percent and 10.30 percent from 13.24 & 5.17 percent respectively in  previous year. Acuite believes that established track record of operations and longstanding relationship with customers and suppliers is to benefit the group over the medium term.

Capex solar power and Modernization of spindles to 100% compact yarn manufacturing:

SCM group over the past financial year has been focused on upgradation of the machinery and as of August, 2022, the group has achieved 100% compact yarn production capacity from combed yarn production. The compact yarn is the highest quality of ring spun yarn in which the yarn is completely free from the short fibers, dirt, broken seeds etc. and has the highest strength. The margins in compact yarn is higher than the other yarn on account of the superior quality it offers to the end consumer. During the last FY, the group has done Capex to the tune of Rs. 180 Cr (Rs.132Cr Solar capex & Rs48Cr Compact, modernization and expansion of spindles capacity).The capex was completed and operational from August’ 2022. During FY 2023 and expecting unit generation of around 3.10 Crs units since it is operational only for 7 months. From FY 2024 onwards, this Capex would generate 5.55 Cr units annually. Since al the units generated are captively consumed, EBITDA margins are expected to improve from  FY23.

Above average Financial Risk profile

Moderate Working capital management:
SCM Group’s working capital management is moderately managed as reflected by its gross current asset (GCA) days of around 118 days as on March 31, 2022(Prov) against 143 days in previous year. The group was holding cotton inventory of ~RS.53Cr. The debtors’ days of the group ranges from 30-35 days. The group gets around 2-weeks credit period from its suppliers, leading to  moderate  level  of  dependence  on  working capital  limits.  Subburaaj  Group’s consolidated working capital limits over the last twelve months’ period through April,2021 was utilized at an average of 76 per cent.
Acuite believes that working capital management of the group will remain moderately intensive over the medium term.

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.