Fitch Ratings-Mumbai/Singapore-03 April 2009: Fitch Ratings has today assigned India's Bhadresh Trading Corporation Ltd (BTCL) a National Long-term 'BBB-(BBB minus)(ind)' rating with a Stable Outlook. Fitch has also assigned a rating of 'F3(ind)' to its INR1,400m fund-based working capital facilities.
The ratings reflect BTCL's position as India's leading cotton exporter, established and diversified customer relationships and moderate credit metrics. Despite a fall in India's total cotton exports, BTCL managed to increase its share in India's raw cotton exports to 22% in the financial year to December 2008 from 8.3% in FY08.
BTCL's export sales are concentrated in China although the company is seeking to diversify to other markets. Fitch also notes that the quality of buyers presents receivables risk although this is mitigated by the fact that most of the exports are backed by Letter of Credit (LCs) . The company is in the practice of discounting these LCs with its banks which finance a large part of its receivables and support liquidity. Once discounted, they are covered under the Export Credit Guarantee Corporation (ECGC) scheme of export credit guarantee, effectively making them non-recourse to BTCL. Although BTCL faces volatility in inventory price, this is partly offset by its policy of maintaining minimal inventories in excess of the order book.
The ratings are primarily constrained by the risk of policy changes related to domestic prices and international trade of cotton. BTCL's margins are relatively thin (2% - 3%), leaving the company exposed to adverse cotton price movements. These risks are partly mitigated by disciplined trading, wherein the company attempts to match cotton purchases with concrete orders rather than speculative purchases. BTCL is also affected by the seasonality of the cotton cycle and does not have a long track record of managing operations on a large scale. Although the current global recession in developed economies is expected to adversely affect cotton export volumes from India, Fitch believes that BTCL should be able to withstand a slowdown in revenues without significant deterioration in its credit metrics.
The ratings are also constrained by the working capital-intensive nature of this industry, in turn reflected in the relatively low operating cash flows. BTCL is also completely dependent on raw cotton, relative to peers who have a diversified presence in other commodities. Further working capital pressures or margin erosion leading to an increase in total debt/ EBITDA above 5x for a sustained period can lead to downward pressure on the ratings.
BTCL has been a trader and an exporter of raw cotton on a commission basis since 1993. The company reported revenues of around INR7.4bn in FY08 (a growth of 133% yoy) with corresponding EBITDA margins of 2.3% (3% in FY07). Debt levels, however, have increased to INR569m in FY08 (INR361m in FY07) due to higher working capital requirements. Its interest coverage improved to 1.8x (1.4x in FY07) and net debt/EBITDA remained at 3.1x in FY08.
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