By Ankita Shere

India Ratings and Research (Ind-Ra) has affirmed Shahi Exports Private Limited’s (SEPL) Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR15.10 (increased from INR12.70)

IND AA-

/Stable/IND A1+

Affirmed

Term loans

-

-

February 2024

INR2.73 (reduced from INR3.82)

IND AA-/Stable

Affirmed

Non-fund-based limits

-

-

-

INR0.75 (reduced from INR3.50)

IND AA-/Stable

/IND A1+

Affirmed

Analytical Approach: Ind-Ra continues to take a consolidated view of Shahi and its 100% subsidiaries AHP Garments Private Limited (AHPG; ‘IND AA-’/Stable); AHP Apparels Pvt. Ltd (AHPA; ‘IND AA-’/Stable) and HSA Apparels Pvt. Ltd. (‘IND AA-’/Stable) to arrive at the ratings in view of the strong legal, operational and strategic linkages among them. Shahi has provided tangible support to all its subsidiaries in the form of 100% equity stake; interest-free unsecured loans, and unconditional and irrevocable corporate guarantees (INR4.1 billion in all) for their bank facilities. All the subsidiaries are in the same line of business as Shahi and their management roles are supported by Shahi. Although individually their scale of operations is small (together accounting for about 8% of Shahi), the subsidiaries work as an extension for Shahi. Ind-Ra expects the subsidiaries to be instrumental in providing new garmenting capacities for the group’s growth. 

KEY RATING DRIVERS

Strong Business Profile: The affirmation reflects Shahi’s strong business profile, supported by its strong market position; large customer base and diversified garment products. With its operational track record of over four decades, the company has longstanding ties and preferred vendor status with large international brands, namely Gap, Kohls, Walmart, Benind and H&M. Shahi’s large scale of operations is evidenced by the fact that it has more than 65 manufacturing units at multiple locations, coupled with an employee base of 120,000.

Further Shahi’s backward integration (in the form of manufacturing fabric by spinning, weaving) and the processing for both knitted and woven garments have augmented its ability to offer shorter lead times. Moreover, it also has solar power capacity, which provides an inexpensive, secure and environmental-friendly solution to the captive power requirements of Shahi’s Shimoga plant (contributes over half of the company’s total power requirements). The company has a strong market share in apparel exports market, followed by the other players with the revenue being around 8% of  the revenue of Shahi.

Improving Operational Performance: Shahi's consolidated revenue has been improving over FY17-FY20, though it declined 14.6% yoy to INR61.3 billion in FY21 (FY20: INR71.8 billion; FY19: INR66.9 billion) mainly due to COVID-19 led operational shutdown and poor demand in 1HFY21. Despite the decline in FY21 revenue, Shahi has been able to maintain its operating margin at 12.2% in FY21, aided by a rise in demand and realisation, coupled with cost control in 2HFY21. FY21 financials are provisional in nature.

The company’s consolidated margin has ranged between 10.5% and 12% over FY18-FY21. The agency expects moderate margin to sustain in FY22 and  gradually expand over FY23-FY24 with the completion of the undergoing capex in subsidiaries, leading to an increase in scale. The company has completed most of the capex in its subsidiaries.

Ind-Ra expects the revenue to surge around 20% in FY22 on back of a lower base in FY21 and a strong order book of INR28.250 billion (0.46x of FY21 revenue) for over the next four months. The agency further expects the revenue to increase gradually over FY23-FY24 with improved revenue visibility, aided by a rise in demand, led by importing nations shifting to China-plus-one strategy for the diversification of supply.

Moreover, Shahi’s market competitiveness and margins are also supported by the various government-announced incentive schemes such as the duty drawback, Rebate of State & Central Taxes and Levies (RoSCTL) and Remission of Duties and Taxes on Exported Products (RoDTEP) accounting for 6.8% of the export revenue. Shahi reported lower export-related incentives of INR2,675 million in FY21 (FY20: INR5,675 million). post the government’s notification on the RoDTEP rates and the restoration of the RoSCTL in late FY21, the agency expects the company to claim the FY21’s balance as well as the complete incentive for FY22,

Sustained Strong Financial Credit Profile: Shahi maintains a strong financial profile on the back of low debt, interest cost and high cash balance reflected in its low net leverage and high interest coverage.

Shahi’s consolidated interest coverage (operating EBITDA/gross interest expense) improved to 15.8x in FY21 (FY20: 7.8x) driven by sustained low average interest costs of 7% and an increase in the absolute EBITDA to INR7.4 billion (INR7.29 billion). Despite a rise in net debt to INR12.10 billion in FY21 (FY20: INR11.5 billion), due to the capex in subsidiaries being partially funded by bank loans, Shahi's consolidated net leverage (total adjusted net debt/operating EBITDAR) remained comfortable and flat at 0.6x, owing to an improvement in operating profit and the maintenance of high cash balance and scheduled repayments of debt during FY20-FY21. The agency expects the net leverage to remain below 1x over FY22-FY23, with scheduled repayments and rise in operating profits.

Shahi’s standalone interest coverage improved to around 17x in FY21 (FY20: 8.7x; FY19:11.9x ), and net leverage (total adjusted net debt/operating EBITDAR) remained comfortable at 0.84x (0.67x ; 1.47x) due to reduced long-term debt and lower working capital utilisation, leading to lower interest expenses. Ind-Ra expects the metrics to remain comfortable in FY22-FY23 with low debt and improved operating profits with a rise in volumes.

Liquidity Indicator- Adequate: Shahi had healthy cash and equivalents (including liquid investments) of INR8.1 billion at FY21 (FY20: INR5.4 billion; FY19: INR3.6 billion). The average utilisation of the fund-based working capital limits was comfortable around 34% during the 12 months ended September 2021.

Shahi's standalone capex was completed in FY19. The current capex that is being undertaken on subsidiary level is minor in scale and Shahi does not have any major capex plans in the near future. Hence,  the agency expects the company’s consolidated free cash flows from operations to remain positive at INR40 billion-41 billion in FY22 (FY21: INR26.9 billion; FY20: INR38 billion). 

With scheduled repayments of INR1 billion, INR0.9 billion and INR0.9 billion in FY22, FY23 and FY24, respectively, Ind-Ra expects Shahi’s debt service coverage ratio to remain comfortable around 4x in FY22-FY23. Shahi will continue to incur normal capex of INR1 billion annually towards the replacement and modernisation of existing units.

Elongated Working Capital Cycle: Shahi's net working capital cycle elongated to 138 days in FY21 (FY20: 90 days; FY19: 105 days), majorly due to an increase in inventory days; the company’s inventory rose in FY21 due to COVID-19 led operational disruptions as well as the backward integration into spinning, weaving and processing. Further Shahi's receivable days also increased to 93 days in FY21 (FY20: 59 days; FY19: 62 days) due to a delay in collections Ind-Ra expects the working capital cycle for FY22-FY23 to be in line with FY19-FY20 with the collection of receivables, but the inventory days to be similar as per FY21 due to an increase in volumes, with the completion of capex in all subsidiaries.

Labour Risks; Geographic and Customer Concentration: Labour unrest and attrition are the key risks faced by the garment industry, though Shahi has been able to mitigate the same in the past. Amid the COVID-19 outbreak, health and safety risks have accentuated and the company needs to thereby follow stringent guidelines, which have increased its operational costs. Shahi, however, has managed the situation supported by its team of professionals, guidance from established consultants and experience in handling labour-related issues. Shahi's strategy to move its manufacturing locations to semi-urban areas from urban areas has helped it control attrition as well as costs (FY21: employee cost accounted for 29% of revenue; FY20: 28%; FY16: 31%). 

Shahi’s sales to US-based customers accounted for about 60% of the total sales at FY21 (FY20: 60% ; FY19: 65%). The company is putting efforts to increase its exposure towards Europe/other geographies to improve diversification. Moreover, the top three buyers accounted for a reduced 22% (approximate) of Shahi's revenue in FY21 (FY20: 39.8% ; FY19: 30%).


RATING SENSITIVITIES

Positive: An improvement in business risk profile exemplified by 14% increase in operating EBITDA margins to sustain, while maintaining current credit metrics and/or any further simplification of group structure and/or enhancement of financial monitoring process.

Negative: Severe or longer-than-agency-expected impact on revenue and profitability amid the pandemic and economic slowdown or for any other reasons, leading to a sustained deterioration in the credit risk profile and the net adjusted leverage exceeding 1.25x on a sustained basis will result in a negative rating action.


COMPANY PROFILE

Formed in 1974, Shahi is a leading garment exporter in India with 65 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 pieces (70% woven garments and 30% knits). 

CONSOLIDATED FINANCIAL SUMMARY

Particulars (INR billion)

FY21 (Provisional)

FY20

Revenue

61

72

EBITDA

7.5

7.3

EBITDA Margin

12.2

10.1

Interest coverage ratio (x)

15.8

7.8

Net leverage(x)*

0.62

0.63

Source: Ind-Ra, Shahi

*
net adjusted debt (excluding promoters’ subordinate unsecured loans as debt)

 

STANDALONE FINANCIAL SUMMARY 

Particulars (INR billion)

FY21 (Provisional)

FY20

Revenue

57.0

69.4

EBITDA

6.4

7.1

EBITDA margin (%)

11.3

10.2

Interest coverage (x)

17.03

8.75

Net leverage (x)

1.75

1.44

Source: Ind-Ra, Shahi


RATING HISTORY

Instrument Type

 

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

16 July 2020

5 July 2019

8 May 2019

14 March 2018

Issuer rating

Long-Term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

IND AA-/Positive

IND AA-/Positive

Fund-based working capital limits

Long Term/Short Term

INR15.10

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Positive/IND A1+

IND AA-/Positive/IND A1+

IND AA-/Positive/IND A1+

Term loans

Long Term

INR2.73

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

IND AA-/Positive

IND AA-/Positive

Non-fund-based limits

Long Term / Short Term

INR 0.75

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Positive/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

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

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. 

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. 

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Analyst Names

  • Primary Analyst

    Ankita Shere

    Senior Research Associate
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121