By Poornima H

India Ratings and Research (Ind-Ra) has upgraded Venus Denim’s (VD) Long-Term Issuer Rating to 'IND BB+' from ‘IND BB(ISSUER NOT COOPERATING)’. The Outlook is Stable. 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 limit

-

-

-

 

INR350

IND BB+/Stable/ IND A4+

Long term rating Upgraded/short term rating affirmed

Non-fund based working capital limit

-

-

-

INR29.96 (reduced from INR40)

IND A4+

Affirmed

Term loan

-

-

September 2026

INR438.88 (reduced  from INR758.40)

IND BB+/Stable

Upgrade

The upgrade reflects VD’s revenue growth in FY20, supported by increased orders, capacity utilisation and improved realisations. The ratings also factor in Ind-Ra expected improvement in operating profitability, leading to an improvement in credit metrics in FY21. Ind-Ra also draws comfort from the likely improvement in VD’s free cash flows as the firm is expected to receive subsidies annually under the Gujarat Textile Policy for the next seven years. 

KEY RATING DRIVERS

The upgrade reflects growth in VD’s large scale of operations. The firm posted revenue growth of 10% yoy to INR5,118.6 million in FY20, supported by increased orders, capacity utilisation and improvement in realisation to INR179.57 per metre (FY19: INR173.47 per metre). As per the 10MFY21 financials, the firm reported revenue of INR2,706.51 million and the agency estimates it to degrow to INR3,650 million on an annualised basis for 12MFY21. The degrowth is on account of production shutdown in 1QFY21 as a result of COVID-19 pandemic and the ensued nation-wide lock down. However, the agency expects the export and domestic demand to improve in FY22, leading to a strong improvement in sales volumes.

The upgrade also reflects Ind-Ra’s expectation of an expansion in VD’s modest EBITDA margin to 6%-8% in FY21 (FY20: 4.93%) backed by an improved EBITDA of INR207.84 million in 10MFY21 (INR252.57 million) coupled with improved realisations of EBITDA per  metre of INR13.45 (FY20: INR8.8) and reduction in other administration expenses. During FY20, the operating profitability reduced due to a decline in the realisation of EBITDA per metre, along with an increase in the cost of production. The margins remain modest with a return on capital employed of 6% in FY20 (FY19: 11%).

The upgrade also factors in an agency-expected improvement in the credit metrics in FY21. The agency estimates the firm’s net leverage (total adjusted net debt/operating EBITDA) to have reduced below 3.5x in FY21 (FY20: 3.62x; FY19: 3.55x) and the gross interest coverage (operating EBITDA/gross interest expense) to be unchanged (1.76x; 2.25x) on account of a likely reduction in debt as a result of annual scheduled repayment of term loans and a simultaneous improvement in the absolute EBITDA. In FY20, the credit metrics deteriorated mainly on account of a yoy decline in the operating EBITDA to INR252.57 million in FY20 (FY19: INR346.48 million) despite reduction in the total debt to INR915.85million (INR1,229.54 million) and decrease in the interest expense to INR143.223 million (INR154.28 million). Ind-Ra expects the firm’s credit metrics to improve over the medium term on the back of unsecured debt of INR204.49 million being subordinated to the bank till the maturity of all the term loans.

Liquidity Indicator- Stretched: The firm’s cash and cash equivalents were low at INR0.36 million at FYE20 (FYE19: INR1.25 million) against the scheduled repayment obligations of INR90.6 million, INR161.05 million and INR169.08 million in FY21, FY22 and FY23 respectively. The repayment of term loans are met through internal accruals. The fund-based working capital limits have been fully utilised over the last 12-months ending February 2021. The firm’s cash flow from operations turned positive to INR104.91 million in FY20 (FY19: negative INR74.54 million) due to an improvement in the inventory holding period to eight days (24 days) and favourable working capital changes. Resultantly, the free cash flow also turned positive to INR53.3 million in FY20 (FY19: negative INR150.99 million); Ind-Ra expects the same to remain positive due to the annual receipt of subsidies and the absence of major capex in FY21. The net working capital cycle marginally elongated to 39 days in FY20 (FY19: 37 days) due to a stretch in debtor days to 81 (76) and a reduction in creditor days to 50 (63). The company availed of the Reserve Bank of India-prescribed moratorium over March-August 2020.


The ratings are also constrained by the firm’s partnership nature of business, owing to the inherent risk of withdrawal of capital during any personal contingency. The ratings are also constrained by VD’s high customer concentration with the key customers contributing over 85% to the total revenue, as on 10MFY21. The firm’s key customer is its sister firm- Vedant Denim.

The ratings, however, are also supported by the promoter’s over two decades of experience in the textile industry coupled with its group entities having direct presence in weaving, dyeing and manufacturing of yarn in the textile value chain. VD procures nearly 70% of its yarn requirements from its sister firms/entities. It has an in-house yarn manufacturing facilities for denim, used for captive consumption. The firm also sources yarn from local markets for a variety of denim products. 


RATING SENSITIVITIES

Negative: Further substantial deterioration in the working capital cycle, or the liquidity, or the interest coverage reducing below 1.75x, on a sustained basis, could lead to a negative rating action.

Positive: Improvement in the liquidity, while maintaining the scale of operations and operating profitability along with the interest coverage exceeding 2.25x, with availability of financials of key customers could lead to a positive rating action.


COMPANY PROFILE

Incorporated in March 2015, VD is promoted by Balvantrai Agarwal and his family members.  The firm commenced commercial production in 2016 and manufactures polyester denim fabrics with capacity of 36 million meters per annum. VD is a part of the Kumar Group. The group has direct presence in weaving, dyeing and manufacturing of yarn in the textile value chain. 

 

FINANCIAL SUMMARY

Particulars

10MFY21

FY20

FY19

Revenue (INR million)

2,706.51

5,118.66

4,654.63

EBITDA (INR million)

207.84

252.57

346.48

EBITDA margin (%)

8.00

4.93

7.44

Gross interest coverage (x)

1.39

1.76

2.25

Net leverage (x)

3.64

3.62

3.55

Source: VD; Ind-Ra

 


RATING HISTORY

Instrument Type

Rating Type

Rated Limits (million)

Current Ratings

Historical Rating/Outlook

10 July 2020

13 November 2019

19 December 2018

Long Term Issuer Rating

Long Term

-

IND BB+/Stable

IND BB(ISSUER NOT COOPERATING)

IND BBB-(ISSUER NOT COOPERATING)

IND BBB-/Stable

Fund-based working capital limit

Long Term

INR 350

IND BB+/Stable/IND A4+

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

IND BBB-(ISSUER NOT COOPERATING)/ IND A3(ISSUER NOT COOPERATING)

IND BBB-/Stable/ IND A3

Term loan

Long Term

INR438.88

IND BB+/ Stable

IND BB(ISSUER NOT COOPERATING)

IND BBB-(ISSUER NOT COOPERATING)

IND BBB-/Stable

Non-fund based working capital limit

Short Term

INR 29.96

IND A4+

IND A4+(ISSUER NOT COOPERATING)

IND A3(ISSUER NOT COOPERATING)

IND A3


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital limit

Low

Non-fund based working capital limit

Low

Term loan

Low

 

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. 

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

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Poornima H

    Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai 600 017
    +91 44 43401723

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121