India Ratings Upgrades Sutlej to ‘IND AA-’/Stable; Limits Enhanced

Ind-Ra-Mumbai-9 July 2015: India Ratings and Research (Ind-Ra) has upgraded Sutlej Textiles & Industries Limited’s (Sutlej) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Improved Ability of Handling Downside Risk: In a declining price and subdued economic scenario, Sutlej’s volumes declined only marginally on like-for-like basis, excluding contribution from new cotton melange capacity commercialised in November 2014. The increasing proportion of value-added products and better management of inventories have helped it mitigate the pressure on margins in FY15. The agency expects per ton EBITDA (excluding Birla Textile Mills (BTM) EBITDA contribution) to improve in FY16 with full-year contribution from a new high-margin cotton melange capacity. Including BTM, which is in grey cotton yarn, blended per ton EBITDA is also likely to improve in FY16 though marginally from FY15 levels.

Robust Credit Metrics: Sutlej’s higher margin product mix will continue to underpin strong credit metrics in FY16 and FY17. Net leverage, having improved significantly to 2.8x in FY15 from 3.5x in FY13, is likely to increase marginally in FY16 due to the INR2.3bn debt-funded acquisition of Birla Textile Mills and INR2.4bn cotton melange capacity expansion programme at Rajasthan, before trending downwards. The capacity expansion is likely to improve Sutlej’s business profile in the medium term. The net interest coverage remained strong at 6.7x in FY15.

Strong Liquidity; Positive Free Cash Flow: Sutlej’s use of the working capital limits was 57% of the sanction limit and 64% of the drawing power on average in the 12 months ended May 2015. Also, its net working capital cycle improved to 95 days at end-FY15 from 114 days at end-FY14. The company had positive free cash flow in the three years ended FY15, backed by robust operational cash flow (9% of sales). The agency expects the debt service coverage ratio to remain comfortable at over 1.5x during FY16-FY18 with well spread out repayments.

Moving Away from Commoditised Offering: STIL has a broad ranged product portfolio in dyed polyester, cotton and blended yarn, with 30% of them being value-added products. In FY15, the contribution of value-added product revenue increased to about 32% from about 25% in FY13. Starting from FY16, the agency expects the home furnishing division to contribute positive operating profits with the elimination of the loss-making (at net profit level) fabric division. Sutlej has a better operating environment than pure cotton or grey yarn manufacturers.

Capex to Benefit Product Diversification: Increased exposure to cotton melange yarn will help Sutlej diversify its raw material price volatility risk to an extent. Sutlej has plans to incur capex of INR2.4bn for adding 31,104 spindles for the production of cotton melange yarn. This will improve the value-added sales mix by about 3%-5% in FY18. The company is well positioned to grow its scale of operation. Sutlej maintained spindleage efficiency above 95% in FY15.

Limited Customer Concentration: Sutlej is a leading player in the value-added dyed yarn industry with clientele build over an operating track record of five decades. The industry has only a handful of players in the organised sector. Client acquisition is challenging due to the cost and time involved, creating a moderate entry barrier. The company’s customer base is well diversified as no single customer accounts for over 8% of the total sales. Its top five customers contributed 23% to FY15 revenue. The company’s top customers include Shivalik Prints Ltd, Page Industries Ltd., Siyaram Silk Mills Ltd etc.

Inherent Industry Risk: Sutlej’s fluctuating operating margins are due to volatile raw material prices in the context of high operating leverage. As the key end-industry (fabrics) for the company is consumer discretionary, it faces high price elasticity of demand. However, Sutlej with diversified exposure to cotton and blended yarn will be less affected than pure cotton yarn spinners, since synthetic fibre prices are less volatile than raw cotton prices.

RATING SENSITIVITIES

Positive: Demonstrated resilience in the operating margins with improved contribution from the new capacities in cotton melange and home textiles leading to the net leverage sustaining below 1.5x will be positive for the ratings.
Negative: Any additional debt-led capex before FY18 and before stabilising ongoing/announced capital expenditure leading to the net leverage being sustained above 3.0x will be negative for the ratings.

COMPANY PROFILE

Sutlej was created out of a corporate restructuring exercise in 2005 with the textile division of Sutlej Industries Ltd. and Damanganga Processors Ltd. being demerged and combined to operate as Sutlej Textiles and Industries Ltd. It is part of the multi-product conglomerate K K Birla Group.

According to the management, Sutlej is the biggest dyed yarn producer and is one of the largest exporters of value-added synthetic and blended dyed spun yarn in the country. It is also one of India’s prominent manufacturers of cotton and cotton blended dyed and melange yarn. At FYE15, the company’s manufacturing capacity comprised 293,736 spindles and 62 looms.

Sutlej’s ratings:
- Long-Term Issuer Rating: Upgraded to ‘IND AA-’ from ‘IND A+’; Outlook Stable
- INR5,061.4m term loans (reduced from INR5,234.8m): Upgraded to Long-Term ‘IND AA-’/Stable from ‘IND A+’
- INR5,000m fund-based working capital limits(increased from INR4,750m): Upgraded to Long-Term ‘IND AA-’/Stable from ‘IND A+’
- INR450m non-fund-based working capital limits (reduced from INR600m): Upgraded to Short-Term ‘IND A1+’ from ‘IND A1’
- Proposed INR3,410.9m term loans: assigned ‘Provisional IND AA-’/Stable

Contact:

Primary Analyst
Mahaveer Jain S
Senior Analyst
+91 22 4000 1768
India Ratings and Research Pvt Ltd
Wockhardt Tower, Level 4, West Wing
Bandra Kurla Complex, Bandra (East)
Mumbai 400 051

Secondary Analyst
Ankit Bhembre
Analyst
+91 22 4000 1774

Committee Chairperson
Rakesh Valecha
Senior Director
+91 22 4000 1740

Media Relations: Mihir Mukherjee, Mumbai, Tel: +91 22 4035 6121, Email: mihir.mukherjee@indiaratings.co.in.

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

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Applicable criteria, ‘Corporate Rating Methodology’, dated 12 September 2012, are available at
www.indiaratings.co.in

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