By Abhishek Rathi

India Ratings and Research (Ind-Ra) has upgraded Welspun India Limited’s (WIL) Long-Term Issuer Rating to ‘IND AA’ from ‘IND AA-’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loan

-

-

FY26

INR3.6 (reduced from INR10.3)

IND AA/Stable

Upgraded

Fund-based limits

-

-

-

INR11.7 (increased from INR10.9)

IND AA/Stable

Upgraded

Non-fund-based limits

-

-

-

INR3.7 (reduced from INR4.1)

IND A1+

Affirmed

Commercial paper (CP)*

-

-

7-365 days

INR3.0

IND A1+

Affirmed

* to be carved out of working capital limits


Analytical Approach: Ind-Ra continues to take a consolidated view of WIL and its subsidiaries including Welspun Global Brands Limited (WGBL; IND AA’/Stable) and Welspun Floorings Limited (WFL), to arrive at the ratings. WIL represents the consolidated profile, unless stated otherwise. WIL owns 98% of WGBL, and the two entities (including WFL) have strong operational and strategic linkages between them as WGBL sells WIL’s textile products. WFL is a 100% subsidiary of WIL.

The upgrade reflects WIL’s better-than-Ind-Ra-expected balance sheet deleveraging through a strong operational performance including capacity utilisations, sales and operating margins post the unlocking of economic activities, as well as improved working capital management. The agency expects the deleveraging to continue along with strengthening of its business profile through emerging business and de-concentration of its home textiles segment, which could aid in combatting the inherent cyclical volatility in home textiles business. Furthermore, a low balance sheet leverage is likely to provide headroom towards foraying and spending on growth areas.

KEY RATING DRIVERS

Continued Improvement in Credit Metrics: WIL’s consolidated net leverage (total adjusted net debt/operating EBITDAR) improved to around 1.9x in 9MFY21 (FY20: 2.5x, FY19: 2.8x) despite its capex intensity, owing to an improvement in operating cash flows and prepayment of debt during FY20-FY21. The agency expects the net leverage to remain below 2.0x in FY21, due to a likely debt prepayment of INR3.7 billion in March 2021. The agency expects the net leverage to remain below 2.0x in FY22 as well, on account of a likely reduction in the debt to around INR26 billion (FYE20: INR30 billion, FYE19: INR31 billion), coupled with increased  consumer demand for homebody and wellbeing economics. Ind-Ra also highlights that textile industry-level debt is usually high at year-end due to cotton inventory build-up. The management is focused on becoming net long-term debt free through its strong internal cash accruals.

Furthermore, Ind-Ra expects the consolidated interest coverage (operating EBITDA/gross interest expense) to remain comfortable at around 7.0x over FY21-FY22 (FY20: 6.8x, FY19: 6.7x), driven by a sustained low average interest costs of 5%-6%. WIL also benefits from cumulative interest subsidies of 7%-8% under the textile sector-related fiscal incentives. Hence, WIL’s average cost of total debt has remained low at around 5.5% over the years. New capex projects would also qualify under state/central subsidy schemes; hence, Ind-Ra assumes the company’s average cost of debt would remain superior.

Strong Operating Performance: 
WIL operated bed linen, terry towels along with rugs and carpets at around 100% capacity during 3QFY21, led by a structural shift towards Indian home textile players and economic stimulus-led consumer demand uptick in the US and European markets. A move towards dual supply sourcing and the plan of key players in the US to diversify their imports away from China post COVID-19 outbreak, should structurally support volume growth for home textile producers. Ind-Ra also observes the increasing demand push due to increased stay-at-home working conditions and increased focus on hygiene. WIL also continued to focus on innovation product portfolio, registering growth of 61% qoq and 36% yoy, with an overall contribution to the top line increasing 400bp yoy to 34%.

During 2QFY21-3QFY21, WIL recovered from the production disruptions led by COVID-19 during 1QFY21, with the top line rising 8% and 30%, respectively, led by an increase in volumes in bath linen (17% yoy), bed linen (43% yoy), and rugs & carpets (28% yoy) segments in 3QFY21. Ind-Ra expects the volumes to rise 4%-6% yoy in FY21, led by healthy orders from export markets, despite COVID-19-led disruptions, on account of a quick turnaround. During FY20, consolidated revenue was marginally higher at INR67 billion (FY19: INR65 billion), led by higher realisations despite volumes declining in terry towel and bed sheets segments 5% yoy and 9% yoy, respectively, while 9MFY21 revenue remained stable at INR42 billion on a year-on-year basis. The agency expects with an organic growth in the home textiles over 4QFY21-3QFY22, volumes will surge over FY22-FY23, leading to an incremental top line of 20%-25%.

Continued Growth in Emerging Business: 
WIL’s emerging business portfolio comprising flooring, retail and advanced textiles witnessed strong demand over 2QFY21-3QFY21, contributing 9% to the top line in 3QFY21 (3QFY20: 6%). The retail business recovered led by a fall in COVID-19 cases and festive demand, leading to a 16% yoy growth to INR0.82 billion in 3QFY21. Furthermore, advanced textiles increased 20% yoy led by strong demand for the non-woven categories, better quality products and healthy clientele during the same period. WIL is in capex mode under the advanced textile segment for wet wipes and spunlace, which management expects will create a top line potential of INR6 billion over the next three years. While soft flooring continued to gain momentum at a slower pace, hard flooring capacity utilisation increased to 74% in 3QFY21 (2QFY21: 30%) due to additional geographies (European Union, South-East Asia and Australia region), coupled with additional customers and higher ticket size. This led to a 3.0x yoy increase in the flooring business; the agency expects the flooring business to contribute around 10% to the top line in the medium term. While the flooring business continues to contribute negatively to the consolidated operating cash flows, an improvement in volumes could lead to a gradual reduction in the same over the near term. Ind-Ra believes the emerging businesses will drive the company’s revenue growth in the medium-to-long term.

Resilient Operating Margins to Remain Healthy:
Ind-Ra expects WIL to report consolidated EBITDA margins of 18%-19% over FY21-FY22, aided by steady domestic raw material prices, the partial impact of lower incentives on account of remission of duties and taxes on export product (RoDTEP) in place of rebate of state and central taxes and levies (RoSCTL), along with the introduction of basic customs duty on imported cotton from 1QFY22. Consolidated EBITDA margins improved 170bp to 18% in FY20, and further to 19.4% in 9MFY21, led by rupee appreciation and higher volumes. On a standalone basis, the core EBITDA margin increased to 22.1%, reflecting a 48% yoy growth, coupled with higher gross margins and lower overheads during 9MFY21. 

Moreover, WIL’s home textile segment’s market competitiveness and margins are also supported by the government through the duty drawback scheme and RoSCTL with export incentives of 2.6% and 8.2%, respectively. The government has replaced RoSCTL by RoDTEP scheme for the textile industry, which could have some impact on the margins, which is likely to sustain in the medium term. WIL received export-related incentives of INR4.7 billion in FY20 (FY19: INR4 billion). Therefore, any adverse changes in the government’s export incentives schemes could be a risk to its profitability. WIL’s export incentives/other receivables from government authorities were INR4.5 billion in FY20 (FY19: INR3 billion) and reduced to less than INR4 billion on 31 December 2020.

Liquidity Indicator - Adequate:
 Ind-Ra expects WIL to maintain adequate liquidity in FY22 on the back of improved operating profit and lower working capital requirements. The agency further expects the free cash flow to turn positive in FY21 (FY20: negative INR959 million; FY19: negative INR490 million) on improved profitability and lower operating capex, although, turn negative in FY22, led by higher working capital requirements, due to higher volumes and capex plans. WIL had cash and bank balances, and liquid investments of INR6.3 billion on 31 December 2020. The average utilisation of the fund-based and the non-fund-based working capital limits was around 85% and 82%, respectively, during the 12 months ended February 2021. Cash flow from operations declined to INR5.8 billion in FY20 (FY19: INR7.7 billion, FY18: INR4.3 billion), due to higher working capital requirements on account of COVID-19-led disruptions. Furthermore, WIL’s approved fund-raising plan of USD100 million would aid the capex and refinancing plans with an extended tenor. Ind-Ra expects WIL’s debt service coverage ratio to remain comfortable at above 3.0x in FY22-FY24, for scheduled repayments of INR1.4 billion, INR1.7 billion and INR1.8 billion in FY22, FY23 and FY24, respectively. WIL is likely to have repaid debt of INR2.6 billion during 9MFY21.

Strong Business Position:
 The integrated nature of WIL’s home textile business strengthens its business profile. The company has a strong market position, diversified product profile and marquee customers. WIL is the largest home textiles company in Asia and among the top two textile companies worldwide. The company has been India’s largest exporter of home textile products and exports to 17 of the top 30 global retailers, thus lowering the counterparty risk. WIL has a healthy scale of operations and a diversified product mix comprising terry towels, bed linen. Furthermore, with WIL’s environmental, social and governance risks risk being categorised as low reflects a healthy and sustainable business profile.

Penetration in Domestic Markets: 
Ind-Ra expects WIL’s strategy to penetrate into the domestic market would lead to improved diversification and reduce its dependence on export geographies. WIL has been focusing on brands SPACES and SPUN to tap the underpenetrated domestic market, which is being catered by unorganised players. As of 9MFY21, WIL had over 2,300 outlets in more than 400 cities. It has been licensed by Wimbledon, Disney, Marvel, Minions for domestic use. WIL has also invested in outdoor advertising, including television commercials and as brand sponsors in Indian Premier League, along with an extensive towel campaign at Kumbh Mela to create a domestic brand presence. As of March 2020, WIL had domestic sales of 4%; the company expects it to increase to around 10% in FY22.

Capex to Create Opportunities: 
WIL announced capex of INR6 billion in FY22, including existing capex in advanced textiles along with incremental capex for home textiles and flooring segments. During FY21, WIL plans to incur capex of INR5 billion (including part of home textiles capex) towards augmenting hygiene, personal protective equipment products, non-woven and bleached cotton capabilities. Management expects it to generate an internal rate of return of 18%-20%. Of the announced capex, WIL spent INR2.9 billion during 9MFY21, which management believes is within the capex guidance for FY21. Furthermore, the agency expects this capex to augment capacities for spunlace and wet wipes, owing to increased demand from femcare and babycare segments globally.

With the proposed capex in FY22, WIL aims at de-bottlenecking its home textiles segment, with capacities likely to improve by 7%, 20% and 80% in terry towels, bed linen, and rugs & carpets, respectively. WIL is doubling its hard flooring capacity to 10.8 million square metres by 2QFY22, led by strong demand in newer geographies coupled with a shift in global sourcing strategy. Ind-Ra believes the execution risk to be moderate, as the company has an established track record of executing similar large projects with standard technology. The agency expects the offtake risks to be moderate, given the potential and optimum utilisation of its existing capacities, coupled with a substantial improvement in domestic and export demand. 

Price, Forex, Customer Concentration Risks:
 WIL is vulnerable to volatility in raw cotton prices and fluctuations in foreign currency that can impact margins in a competitive export market. It hedges 50%-70% of its forex exposure for the next nine to 12 months on a rolling basis. Moreover, WIL has built strong supplier and customer relations, which enable it to revise prices periodically and mitigate the price risks to some extent. Its top five customers contributed over 50% to the total sales in FY20 and about two-thirds of its sales are from the US markets.


RATING SENSITIVITIES

Positive: A sustained increase in the scale of operations, led by a higher share in emerging and innovative business, leading to an improvement in the credit metrics would be positive for the ratings. 

Negative: Any large debt-funded capex/inorganic acquisition, decline in liquidity buffers and/or a significant reduction in profitability, leading to the net leverage exceeding 2.0x on a sustained basis would be negative for the ratings.


COMPANY PROFILE

Promoted by B.K. Goenka, WIL is among the largest manufacturers and exporters of home textiles, including bed and bath textile products and flooring solutions. The company has its manufacturing facilities at Anjar and Vapi, in Gujarat. WIL manufacturers terry towels, bed linen and rugs and carpets.


CONSOLIDATED FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Gross revenue (INR billion)

52.0

68.4

65.3

Operating EBITDA (INR billion)

10.1

13.0

10.6

Operating EBITDA margin (%)

19.4

19.1

16.3

Interest coverage (x)

6.5

7.3

6.7

Net leverage (x)

1.9

2.5

2.9

Source: WIL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

24 March 2020

8 March 2019

15 December 2017

Issuer rating

Long-term

-

IND AA/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

Term loan

Long-term

INR3.6

IND AA/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

Fund-based limits

Long-term

INR11.7

IND AA/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

Non-fund-based limits

Short-term

INR3.7

IND A1+

IND A1+

IND A1+

IND A1+

CP

Short-term

INR3

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital limits

Low

Non-fund-based working capital limits

Low

Term loan

Low

CP

Low

 

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

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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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Analyst Names

  • Primary Analyst

    Abhishek Rathi

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356110

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121