By Tanu Sharma

India Ratings and Research (Ind-Ra) has revised Shahi Exports Private Limited’s (Shahi) Outlook to Positive from Stable while affirming the Long-Term Issuer Rating at ‘IND AA-’. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR6,000 (increased from INR4,500)

IND AA-/Positive/IND A1+

Rating affirmed; Outlook revised

Term loans

-

-

February 2024

INR10,960 (increased from INR3,450)

IND AA-/Positive

Rating affirmed; Outlook revised

KEY RATING DRIVERS

Outlook Revised: The Outlook revision to Positive reflects Shahi’s robust credit profile despite capex, comfortable liquidity, improving business profile with benefits of backward integration, continued growth, improving diversification and strong market position.

Strong Business Profile
: Shahi continues to be India’s leading readymade garment exporter. It has an operational track record of over four decades and longstanding ties and preferred vendor status with large international brands such as Gap, Kohls, Walmart, Benind and H&M. The company’s large scale of operations is evidenced by its more than 50 manufacturing units at multiple locations coupled with an employee base of 120,000. The backward integration for knitted garments and the ongoing project for woven garments step up its ability to offer shorter lead times. 

Robust Credit and Liquidity Profiles
: Shahi had surplus cash & equivalents and low debt in FY17, leading to generation of interest income and hence a robust net interest coverage ratio of 67x (FY16: 18x). The improving operational performance has resulted in the generation of positive free cash flows till FY17, which are being used for debt containment/ reduction/cash accumulation. Also, Shahi’s net debt/EBITDA improved to 0.23x in FY17 (FY16: 0.49x). Shahi has an ongoing capex for backward integration and power cost savings, which will lead to negative free cash flows and some increase in debt over FY18-FY19, however the metrics will remain comfortable for the rating category. 

Its peak use of the fund-based limits was 44% of the drawing power in the 12 months ended February 2018. Around two years of moratorium period has been extended in the newly availed loans for capex, leading to spread out term loan maturities. Average debt service coverage ratio is also comfortable at 3.8x for FY18-FY22. 

Sustained Revenue Growth; Margins Volatile
: Shahi’s revenue grew 8.3% yoy for FY17 and 6.7% yoy in 1HFY18, driven by healthy growth in volumes even as prices remained flat. EBITDA margins rose by 320bp yoy in FY17 due to the advantages of backward integration, lower raw material cost, improvement in efficiencies (employee cost and wages) and continued forex gains. EBITDA margin reduced by 400bp yoy in 1HFY18 due to higher raw material prices, reduced export incentive income and lower forex income

There are no long-term agreements with buyers but longstanding relationships translate into repeat business for the company, providing long-term revenue visibility. Revenue growth is likely to continue to be largely driven by volumes, as low bargaining power with customers and international competitions have kept the median garment pricing subdued. The company is adding one to two large customers every year and trying to increase exposure towards Europe/other geographies to improve diversification.

Margin Upside Limited; Backward Integration to Support Margins
: Garmenting is a low-margin business with limited upside due to the company’s low bargaining power with large international retailers, rising labour costs and volatility in cotton and forex rates. Garment manufacturers focus on cost control for improving margins. The successful implementation of backward integration in Shimoga, should lead to increasing operational efficiencies and ability to offer shorter lead times for larger orders, and hence more control on costs. Shahi expects to save nearly INR1.2 billion per year as envisaged. It has also planned a INR3.8 billion capex in FY19 towards setting up a 64MW AC/84MW DC solar power plant for captive usage, which will lead to power cost savings.

Key Business Risks
: Labour attrition is a key risk, which the company has managed better than its peers. Shahi has a long-term plan to move its manufacturing locations from metros to suburbs in a phased manner, to control absenteeism as well as costs (FY17: employee cost 31.3% of revenue: FY16: 34.7%). The company’s customer base is geographically concentrated towards the US, although it reduced to 60% in FY17 (FY16: 67%; FY13: 85%). Customer concentration risk also exists as the top three buyers accounted for 28% of Shahi’s revenue in FY17 and FY16 (FY15: 35%).

Low Leverage despite Capex
: Shahi has an ongoing INR7.3 billion capex project (INR3.07 billion for weaving and INR4.2 billion for processing), funded by an INR5 billion bank debt and INR2.3 billion by internal accruals. The company expects the project to be commercially operational by end-September 2018. Shahi will continue to incur normal capex of INR1 billion annually towards the replacement and modernisation of existing units. Continuous capex, though phased, is envisaged for setting up new garmenting units to cater to the growing business. Capex execution risks may be low, but stabilisation could be a concern especially on the first solar project.

Increasing Working Capital Requirements:
Shahi’s working capital requirements have increased after backward integration into spinning, necessitating a build-up of cotton inventory. The working capital outgo in FY17 was INR3.9 billion as against an inflow of INR1.7 billion in FY16. The requirement would further increase in FY19 due to the increase in backward integration into processing and weaving. 


RATING SENSITIVITIES

Positive: An improved operating EBITDA margin, maintaining a low debt profile and successful completion of the backward integration and solar capex could lead to a positive rating action. 

Negative:
 Low revenue visibility and/or profitability and/or sustained deterioration in the credit profile will result in a negative rating action. 


COMPANY PROFILE

Formed in 1974, Shahi is a leading garment exporter with 51 manufacturing facilities across Delhi, Noida, Faridabad, Ghaziabad, Bangalore (and suburbs), Tirupur, Mysore and Hyderabad. It has an integrated composite unit in Shimoga, Karnataka.

Shahi’s annual garment production capacity is 160 million (60% woven garments and 40% knits).

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Gross interest expense (INR billion)

360

487

Net debt/EBITDA (x)

0.23

0.46

Net interest coverage ratio (x)

66.7

18.4

Source: Shahi, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

28 December 2016

21 August 2015

2 April 2014

Issuer rating

Long-term

-

IND AA-/Positive

IND AA-/Stable

IND A+/Stable

IND A-/Stable

Fund-based working capital limits

Long-term/Short-term

INR6,000

IND AA-/Positive/IND A1+

IND AA-/Stable/IND A1+

IND A+/Stable/IND A1+

IND A-/IND A1

Term loans

Long-term

INR10,960

IND AA-/Positive

IND AA-/Stable

IND A+/Stable

IND A-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

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. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Tanu Sharma

    Associate Director
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567243

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121