Business Standard

Fitch Assigns 'BB-(ind)'/'F4(ind) to Bannari Amman Apparel; Outlook Stable

Image

Announcement Banking

Fitch Ratings has today assigned India's Bannari Amman Apparel Private Ltd (BAA) a National Long-term Rating of 'BB-(ind)' (BB minus(ind)). The Outlook is Stable. Fitch has also assigned ratings to BAA's bank loans, as follows:

Term loans totaling INR576m: 'BB-(ind)' (BB minus(ind));
Fund based working capital limits totaling INR140m: 'BB-(ind)' (BB minus(ind)); and

Non fund based limits totaling INR150m: 'BB-(ind)' (BB minus(ind))/'F4(ind)' (wherever interchangeable).

The ratings reflect the challenges BAA would face in its initial years of operations and the likely financial, operational and marketing support its promoters will have to provide till it has a profitable and stable operational track record.

 

BAA is a JV between the Bannari Amman Group and US-based Brandot International. BAA has recently set up production facilities near Chennai to manufacture and export undergarments for select US-based apparel brands and other developed countries. Bannari Amman Group is a mid-sized diversified group operating out of Tamil Nadu with interests in sugar, spinning and automotive distribution. While assigning the ratings, Fitch first took a view of the project - which became operational towards the end of FY08 - on a standalone basis ('B(ind)') and then notched it up for Group support. Fitch believes that the promoters of the company would be in a position to support BAA till the project reaches self-sustainability. To a considerable extent, the JV partners' strengths in marketing and operations are expected to counter some of the adverse economic conditions prevailing in the developed markets which are addressable markets for the company.

There are several challenges faced by BAA. While India's low labour cost advantages would likely ensure business opportunities in apparel over the medium term, BAA would most likely face stiff competition from China and more recently, from Bangladesh and Vietnam. Also, BAA needs to conform to low tolerance levels in the apparel segment in which it operates and therefore, training of its employees is of utmost importance. Penetration into high-value brands and products, where margins are relatively higher, will also remain a challenge.

The current economic downturn in countries like the US where BAA's potential customers sell their products could result in lower discretionary spending by the ultimate buyers; this could potentially result in delay in procurement of orders by BAA leading to lower sales and margins and increase in receivables. Currently, while BAA has orders for four months of production, it faces significant competition from other players in small towns in India with a concentration of apparel manufacturers.

Positive rating triggers are the establishment of a profitable operational track record and significant improvement in financial leverage. Negative rating triggers would be continued losses, interest coverage coming under stress and any delays in debt service. However, Fitch believes that the current sponsors would support BAA out of any such temporary liquidity issues. As proof, beyond the initial contribution of INR120m till FY08 towards capital, the partners have infused a further INR160m in FY09.

In FY08, when operations began on a small scale, BAA's revenues were INR23m with an operational loss of INR11m; at end-March 2008, BAA's debt was INR390m and net worth was INR111m. In the first nine months of FY09, BAA's revenues were INR223m on which it recorded an operating loss of INR91m.

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings is one of the three large global credit rating agencies. Fitch rates 6000 financial institutions, including some 3,200 banks and 2,400 insurance companies, more than 1,700 corporates and 100 sovereigns as well as public finance, sub-sovereigns and structured finance transactions.

Fitch India has four rating offices located at Mumbai, Delhi, Chennai and Kolkata. Fitch is recognised by Reserve Bank of India, Securities Exchange Board of India (SEBI) and National Housing Bank.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Apr 23 2009 | 8:28 PM IST

Explore News