By Reshma Sankar

India Ratings and Research (Ind-Ra) has upgraded Ultra Denim Private Limited’s (UDPL) Long-Term Issuer Rating to ‘IND BBB-’ from IND BB-(ISSUER NOT-COOPERATING). The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR405 (increased from INR110)

IND BBB-/Stable/IND A3

Upgraded

Non-fund-based working capital limits

-

-

-

INR15 (reduced from INR25)

IND A3

Upgraded

Term loans

-

-

June 2024

INR433.35 (reduced from INR772.7)

IND BBB-/Stable

Upgraded

KEY RATING DRIVERS

Sustained Growth in Revenue: UDPL’s revenue grew at a CAGR of 15.1% to INR2,537.4 million over FY17-FY20 (FY19: INR2,524.6 million; FY18: INR2,028.8 million) owing to an increase in the installed capacity to 25.5 million metres per annum in FY18 (FY16: 9.5 million metres per annum) and capacity utilisation to 78.4% (69.9%, 62.9%). However, the revenue growth was muted in FY20, primarily on account of the COVID-19-led operational disruptions during the last week of March 2020. The revenue was impacted in 1QFY21 due to nationwide lockdown. As a result, Ind-Ra expects the revenue to decline in FY21. During 9MFY21, the company achieved revenue of INR1,151 million.


Established Presence in Domestic and Export Markets: The company has established strong relationships with its customers in the domestic as well as export markets, which enables it to secure repeat orders. UDPL’s revenue contribution from the export market has been increasing since FY18 supported by the addition of new customers (FY20: 51.0%, FY19: 42.8%, FY18: 22.5%). In FY20, it generated 49% of the revenue from the domestic market (FY19: 57.2%; FY18:77.5%). Ind-Ra expects the revenue contribution from the exports market to continue to increase over the medium term backed by increased demand for denim fabric.


Decline in Operating Profitability; Although Likely to Increase in FY21: The company’s operating profitability has been declining since FY17 on account of fluctuations in raw materials costs, employee costs and other variable overheads. During FY20, the operating profitability reduced to 9.1% (FY19: 9.9%, FY18: 10.5%) due to an increase in raw material prices, leading to lower sales realisation of INR130.5 per metre (INR135.9 per metre, FY18: INR131.3 per metre). Despite the likely decline in the revenue, Ind-Ra expects the operating profitability to increase in FY21 backed by better realisation from the export market. During 9MFY21, the company achieved operating profitability of 13.6%. The margins remain modest with a return on capital employed of 7% in FY20 (FY19: 8%).


Modest Credit Metrics: The credit metrics remained modest over FY17-FY20 on account of the high adjusted debt levels. Of the total adjusted debt of INR1,401.05 million at FYE20 (FYE19: INR1,442.5 million, FYE18: INR1,363.6 million) including corporate guarantee extended to the group company Ultra Denim Lifestyle Private Limited, INR386.76 million (INR408.9 million, INR354.4 million) was unsecured loan infused by the promoters. The unsecured loan will be retained in the business over the medium term as per the bank’s sanction terms; the interest accumulated on the same will be reinvested into the business as unsecured loan by the promoter. The interest coverage (operating EBITDA/gross interest expense) deteriorated to 2.1x in FY20 (FY19: 2.4x, FY18: 2.6x), mainly on account of a decline in the operating EBITDA to INR230.9 million (INR250.2 million, INR212.5 million) and an increase in the interest expense to INR108.8 million (INR103.1 million, INR82.3 million), of which INR46.2 million was interest towards the unsecured loan. However, the net leverage (total adjusted net debt/operating EBITDAR) improved to 5.3x in FY20 (FY19: 5.6x, FY18: 6.4x) because of the reduction in the total debt levels backed by the scheduled repayment of the term loans. Excluding the unsecured loan and its interest from the total debt, the interest coverage was 3.7x in FY20 (FY19: 4.3x) and the net leverage was 3.7x (4.1x). Ind-Ra expects, the company’s credit metrics to deteriorate marginally in FY21 on account of a likely reduction in the operating EBITDA, due to lower sales.


Liquidity Indicator - Stretched: UDPL’s average utilisation of the fund-based limits was 90.4% over the 12 months ended December 2020. The net cash conversion cycle ranged between 75 and 85 days over FY17-FY20. UDPL allows a credit period of 70-80 days to its customers and receives a credit period of 50-65 days from its suppliers. It has an inventory holding period of 60-70 days. Ind-Ra expects the net cash conversion cycle to be stretched in FY21 on account of a stretch in the receivables and inventory days. The cash flow from operations turned positive to INR168.7 million in FY20 (FY19: negative INR23.6 million) due to lower working capital requirement at the end of the year. The company has repayment obligation of INR77.9 million for FY21 and INR127.4 million for FY22, which is likely to be met from internal accruals. UDPL had availed the Reserve Bank of India-prescribed moratorium during March to August 2020 for its working capital limits and term loan. The accrued interest on the working capital limits has been converted to funded interest term loan, which is likely to be repaid by March 2021.

 

However, Ind-Ra draws comfort from UDPL’s ability to raise fund from the directors and group companies in the form of an unsecured loan without any fixed repayment schedule to meet its funding requirements.


RATING SENSITIVITIES

Positive: A significant growth in the revenue and operating EBITDA, along with an improvement in the liquidity position, leading to the net leverage (excluding subordinated unsecured loan) reducing below 3.5x on a sustained basis, will lead to a positive rating action.

Negative: 
Any decline in the revenue and operating EBITDA, along with a further stretch in the liquidity position and/or unplanned capex, leading to the net leverage (excluding subordinated unsecured loan) increasing above 4.5x on a sustained basis will lead to a negative rating action.


COMPANY PROFILE

UDPL was established in 2011 by Bhogibhai L Patel and commenced commercial operations in 2015. The company manufactures denim fabric.

FINANCIAL SUMMARY

Particulars

FY20

FY19

Revenue (INR million)

2,537.38

2,524.57

EBITDAR (INR million)

230.86

250.24

EBITDAR margin (%)

9.10

9.91

Gross interest coverage (x)

2.12

2.43

Net leverage (x)

6.07

5.62

Gross interest coverage (x)*

3.69

4.27

Gross leverage (x)*

3.66

4.13

Source: UDPL, Ind-Ra

*Excluding unsecured loan and its interest


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

23 November 2018

23 November 2017

 

14 November 2016

Issuer rating

 

Long-term

 

-

IND BBB-/Stable

IND BB-(ISSUER NOT COOPERATING)

IND BB-(ISSUER NOT COOPERATING)

IND BB-/Stable

Term loan

Long-term

 

INR433.35

IND BBB-/Stable

IND BB-(ISSUER NOT COOPERATING)

IND BB-(ISSUER NOT COOPERATING)

IND BB-/Stable

Fund-based working capital limits

Long-term/Short-term

INR405

IND BBB-/Stable/IND A3

IND BB-(ISSUER NOT COOPERATING)/IND A4+(ISSUER NOT COOPERATING)

IND BB-(ISSUER NOT COOPERATING)/IND A4+(ISSUER NOT COOPERATING)

IND BB-/Stable/IND A4+

Non-fund-based working capital limits

Short-term

INR15

IND A3

IND A4+(ISSUER NOT COOPERATING)

 

IND A4+(ISSUER NOT COOPERATING)

 

IND A4+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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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Applicable Criteria

Analyst Names

  • Primary Analyst

    Reshma Sankar

    Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai 600 017
    044 43401700

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121