By Akash Krishnatry

India Ratings and Research (Ind-Ra) has affirmed Trident Limited’s commercial paper (CP) programme as follows: 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

-

up to 360 days

INR500

IND A1+

Affirmed

The CP has been carved out of Trident’s working capital limits and will be used to meet working capital requirements.
 

KEY RATING DRIVERS

Healthy Business Profile: Trident has a healthy scale of operations and a diversified product mix comprising yarn, terry towels, bed linen, paper and chemicals. It caters to leading global retailers, thus lowering the counterparty risk. TL has vertically integrated home textile facilities (cotton-to-bed and bath linen), and thus can capture a greater share of the textile value chain. Moreover, its paper segment diversifies its overall earnings base. In FY20, bed and bath linen, yarn and paper contributed 54% (FY19: 51% FY18: 48%); 26% (30%, 33% ) and 20% (19% ,18%), respectively, to the revenues. The company’s business profile is benefited due to the company’s  flexibility to consume yarn internally or sell externally depending upon the yarn market supply and demand dynamics.

Significant Deleveraging to Strengthen Balance Sheet: TL’s net adjusted debt fell sharply by INR7.4 billion to INR16.7 billion during FY20, driven by healthy operating EBITDA of INR8.4 billion (FY19:  INR9.8 billion) and a significant improvement in working capital through lowering of debtors to INR2.8 billion (INR6.6 billion). Additionally, the company spent limited amount of capex at INR1.64 billion during FY20 (FY19: INR1.43 billion) which resulted in limited additional debt drawdown. The decline in the debtors was a result of i) lower sales in March 2020 hence lower outstanding collections, ii) increasing use of non-recourse receivable financing facilities for its few export customers started in FY20 and iii) dealer financing facilities being initiated by the company in FY20 to cover eligible domestic yarn, paper and home textile dealers of the company.

The management is focused on becoming net debt free through its internal cash accruals. Given the decline in debt and healthy EBITDA, the net adjusted leverage (net adjusted debt/operating EBITDA) improved to 2.0x in FY20 (FY19: 2.5x, FY18: 3.3x). Ind-Ra expects a further gross debt decline of around INR2 billion in FY21. However, the leverage ratio could increase intermittently in FY21 due to an expected lower EBITDA despite the debt reduction envisaged. However, it is likely to stabilise below 2.0x from FY22, led by improved EBITDA and reduced debt. Ind-Ra also highlights that textile industry-level debt is usually high at year-end due to a build-up of cotton inventories.

Operating Performance to Decline in 1HFY21; Recover in 2HFY21:  Trident's revenue declined to INR47.0 billion in FY20 (FY19: INR52.2 billion) due to COVID-19 led market sluggishness in 4Q. The textile revenues declined 11% to INR37.8 billion while the paper revenues declined 7% to INR9.2 billion in FY20. Terry towel capacity utilisation reduced to 48% yoy in FY20 after it increased  to 49% in FY19 (FY18: 45%). Trident could not ramp-up its terry towel and bed linen capacities in FY20 as expected because the global retailers faced lockdowns starting from February 2020 while there was a strong pick-up in online platform sales, which  partially offset the volume declines. Bed linen capacity use was also slightly impacted at 60% in FY20 (FY19: 63%, FY18: 44%). Segmental volumes for both paper and textile remained impacted during April-May 2020. Ind-Ra expects Trident to ramp-up its terry towel and bed linen production volumes steadily over 2HFY21-FY22, driven by the strong retail sales being reported by US and Europe retailers. Moreover, US plans to diversify their imports from China has strengthened post COVID which could support volume growth for home textile producers. Ind-Ra expects the textile segment revenues and profitability to decline by 25% yoy in FY21. The textile segment reported EBIT of INR3.0 billion in FY20 (FY19: INR3.4 billion) while paper reported EBIT of INR3.1 billion (INR3.7 billion).

Capex under Reassessment: Trident’s plan for  yarn expansion and paper debottlenecking-cum-expansion projects have been put on hold and being reviewed  amid the sluggish yarn demand and COVID-19 led issues. Ind-Ra notes that this shall help the company to deleverage its balance sheet steadily than earlier expected. The management is reassessing the implementation schedule and viability in view of the changed economic scenario while the projects already have complete financial closure in place with debt-to-equity in the ratio of 3:1 and 2:1 for yarn and paper projects, respectively. Ind-Ra believes capex execution and stabilisation risk will be low to moderate, considering the track record of the company in these segments and captive yarn offtake. Moreover, the yarn projects will be benefited from the Madhya Pradesh state interest subsidy scheme and it will further enhance backward integration in the home textile segment. Ind-Ra factors in the company's total capex plans of about INR15 billion now to be spread over FY21-FY23 instead of earlier execution over FY20-FY21.  

Exceptional  Paper Business  Margins Witness Correction:  Trident’s paper business has consistently exhibited strong, industry-leading  EBITDA margins of above 36% and EBITDA/kg of INR20, supported by its strong competitive position, high capacity utilisation of above 85% and healthy net sales realisation of above INR55/kg over FY17-FY20. Ind-Ra expects TL’s paper margins to remain healthy in FY21, though would be transiently impacted amid a severe demand slowdown and weak global prices, exerting increased pressure on  India's domestic prices. Ind-Ra expects the margins could intermittently fall around to EBITDA of INR15/kg (FY20: INR22/kg) and margin to 28%-30% in FY21 (FY20: 36%), but shall gradually improve back to its earlier strong levels. Ind-Ra expects industry revenue and EBITDA to decline about 30% and 40%, respectively, in FY21, led by COVID-19 disruption.  Trident’s historical and projected EBITDA/kg have been arrived by Ind-Ra using the company’s historical production volume data and Ind-Ra’s paper industry estimates. 

Liquidity Indicator - Adequate: Trident’s average utilisation of the available fund-based working capital was comfortable at 79% during the 12 months ended June 2020. It had unrestricted cash and equivalents (including liquid instruments) of INR3.18 billion at end-FY20 (FY19: INR0.76 billion, FY18: INR0.58 billion). Its interest coverage (operating EBITDA/interest expenses) is likely to remain strong in FY21 above 7.5x (FY20: 7.6x, FY19: 8.3x) and improve  further over 8x in FY22 on account of healthy EBITDA and a low average cost of debt (4.9% as of March 2020). Trident generated strong cash flow from operations (CFO) of INR11.2 billion in FY20 (FY19: INR5.5 billion), led by a shorter collection cycle. Ind-Ra expects CFO to decline but remain healthy in the range of INR5 billion-7 billion over FY21-FY23, however free cash flow may turn modest (FY20: INR7.9 billion) amid the ongoing capex. 

Ind-Ra expects Trident’s debt service coverage ratio to remain comfortable above 1.5x over FY21-FY22 with the scheduled repayments of INR3.6 billion annually. The management had taken moratorium in March 2020 for some of its term loans, however it has later prepaid its high-cost term loans of over INR2.1 billion in 1QFY21 from its surplus liquidity. Trident has increased financial flexibility due to its healthy operations and improved balance sheet position, substantiated by the introduction of new lenders, use of commercial papers and proposed non-convertible debentures. Trident’s dividend outflows (including dividend distribution taxes) increased to INR0.25 billion in FY20 (FY19: INR0.16 billion, FY18: INR0.09 billion).

Support from Fiscal Incentives: Trident benefits from cumulative interest subsidies in the range of 7%-8% under the textile sector-related fiscal incentives. Hence Trident’s average cost of total debt has remained low around 5% over the years. New capex projects in spinning would also qualify under state subsidy schemes; hence, Ind-Ra assumes the company’s average cost of debt would remain superior.

Moreover, Trident’s home textile segment’s market competitiveness and margins are also supported by the government through the duty drawback scheme and Rebate of State and Central Taxes and Levies with export incentives of 2.6% and 8.2%. The government has also introduced benefits under Remission of Duties or Taxes on Export Product scheme for the textile industry which may provide additional impetus to the business and margin profile.

Trident received export related incentives of INR1.99 billion in FY20 (FY19: INR1.94 billion) for its textile business, any adverse changes in the government’s export incentives schemes could be a risk to its textile segment profitability. Trident’s export incentives/other receivables from government authorities were at INR0.98 billion in FY20 (FY19: INR0.93 billion).

Exposure to Price and Forex Risks: Trident is vulnerable to volatile raw cotton prices and fluctuations in foreign currency. These factors can impact margins in a competitive export market. However, Trident has built strong supplier and customer relations, enabling it to revise prices periodically. Also, Trident hedges around 50% of its annual budgeted home textile sales using forward covers, while  yarn and paper divisions hedge sales on order basis. As on 31 March 2020, only negligible amount of INR75 million of trade receivables and INR100 million of trade and capital payables were unhedged. Trident reported a forex gain (including mark to market) of INR192 million in FY20 (FY19: loss of INR665 million).

Other Industry Risks: Domestic and global players from China and ASEAN countries compete closely in the global home textile space. Moreover, the company’s global presence makes it vulnerable to an economic slowdown in these regions or changes in import policies which could impact business flow from these regions. Also, as the home textile division’s leading customers account for a large share of its revenue, Trident's order book is exposed to any changes in their sourcing policies. It has been growing its home textile business domestically and other geographies to mitigate risks from any global market specific headwinds. 

The paper industry is also cyclical in nature and incumbents are exposed to volatility in raw material prices as well as threat of imports. However, Trident's wheat straw based plant and land-locked market presence partially mitigate industry risks. Lumpy capacity additions that are not commensurate with the demand growth could simultaneously exert upward pressure on raw material prices and downward pressure on finished product prices, leading to a weakening of the profit margins.


RATING SENSITIVITIES

Negative: Net leverage exceeding 3.5x and/or deterioration in the liquidity position on a sustained basis could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1990 as Abhishek Industries Ltd, Trident is promoted by Rajinder Gupta. Headquartered in Ludhiana (Punjab), the company was renamed Trident Limited in 2011. 

Trident manufactures cotton yarn, terry towels, bed linen and paper. It has manufacturing facilities in Barnala (Punjab) and Budhni (Madhya Pradesh). On 31 March 2020, the facilities collectively held 555,964 spindles, 5,504 rotors, 688 looms (terry towels) and 500 looms (bed sheets). The company also has a paper manufacturing capacity of 175,000 tonnes per annum. 

FINANCIAL SUMMARY

Particulars

FY20

FY19

Revenue* (INR billion)

47.0

52.2

EBITDA margin (%)

17.9

18.8

Interest coverage (x)

7.6

8.3

Net adjusted leverage (x)

2.0

2.4

*Net of excise & other income except forex
Source: Trident, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

28 August 2019

6 July 2018

11 April 2017

CP

Short-term

INR500

IND A1+

IND A1+

IND A1+

IND A1+


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.

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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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Akash Krishnatry

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687263

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121