By Ankita Shere

India Ratings and Research (Ind-Ra) has affirmed AHP Garments Private Limited’s (AHP) 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 (million)

Rating/Outlook

Rating Action

Term loan

-

-

March 2025

INR307.8 (reduced from INR659.1)

IND AA-/ Stable

Affirmed

Term loan

-

-

December 2025

INR185.5

IND AA-/Stable

Assigned

Analytical Approach: Ind-Ra continues to take a consolidated view AHP and its 100% parent Shahi Exports Pvt Ltd  and its 100% subsidiaries AHP Apparels Private Limited (AHPA; ‘IND AA-’/Stable); HSA Apparels Pvt. Ltd (HSAA; ‘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 Linkages: AHP has strong legal, operational and strategic linkages with its parent Shahi. The parent has provided tangible support to AHP in the form of 100% equity stake, bank subordinated interest free unsecured loans, and an unconditional and irrevocable corporate guarantee (INR2.2 billion) for the latter’s bank facilities. AHP has notified Ind-Ra that Shahi’s management has provided an undertaking to AHP’s lenders to ensure timely debt repayments. Also, a common treasury enables Shahi to commit and ensure timely payments for AHP‘s loans. Subsequent borrowings are also likely to be guaranteed by Shahi. AHP is in same line of business as Shahi and its board of directors with other key management support across functions are also completely managed by Shahi. Although AHP’s size is small (10% of Shahi), Ind-Ra expects the subsidiary would be instrumental in providing new garmenting capacities for group’s growth. 

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.

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.

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%).

Improved Standalone Financial Profile : AHP recorded revenue of INR2,953 million in FY21 (FY20: INR1,486 million) and EBITDA of INR593 million  (INR200 million). The company’s interest coverage improved to 13.86x in FY21 (FY20: 2.73x) due to the rise in the EBITDA. Its adjusted net leverage reduced to 13.8x in FY21 (FY20: 2.73x). The agency believes the leverage could elevate to 14.9x in FY22 due to a rise in debt with the new capex under process for which the company has taken new debt of INR185.5 million. However, Ind-Ra expects the margins to improve over FY22 and FY23 as the management has started considering the revenue and expenses on a job-work basis, which leads to reduction in operating expenses.

AHP's standalone debt repayments are INR36 million and INR87 million over FY22 and FY23, respectively. The agency expects the company to have comfortable debt service coverage ratio in the range of 2x-4x for FY22-FY23 .  AHP has not availed of any working capital limits and the management plans to use Shahi’s trade payables/ unsecured loans to support its working capital. If some of the large buyers are directly tied up to AHP, there could be increased requirements on debtors, which are expected to be supported by payables from Shahi, loans from Shahi or additional working capital limits from banks may also be tied up. 


RATING SENSITIVITIES

Positive: An upgrade of the parent, along with the continuation of strong parent-subsidiary linkages could lead to a positive rating action for AHP.

Negative: A negative rating action for AHP could result from Shahi’s downgrade or any weakening of the parent-subsidiary linkages.


COMPANY PROFILE

AHP is a subsidiary of Shahi with a garmenting capacity of about 17.5 million garments per annum operating out of 11 different locations in India at end-March 2020 These projects are entitled to a capital subsidy under the government’s Amended Technology Upgradation Fund Scheme.  

STANDALONE FINANCIAL SUMMARY

Particulars (INR million)

FY21 (Provisional)

FY20

Revenue

2,953

1,486

EBITDA

593

200

EBITDA margin (%)

20.1

13.4

Interest coverage (x)

13.86

2.73

Net leverage (x)

3.33

9.73

Source: Ind-Ra, AHP

 

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)


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 July 2020

3 July 2019

16 May 2018

Issuer Rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

Term loans

Long-term

INR493.3

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

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. 

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Applicable Criteria

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