Fitch Ratings has today assigned India's fabric manufacturer, Subhlaxmi Syntex Ltd (SSL), a National Long-term 'BB-(BB minus)(ind)' rating with a Stable Outlook. Fitch has also assigned a rating of 'BB-(BB minus)(ind)' to its INR93.5m long-term bank loans and its INR75m fund-based limits and 'F4(ind)' to its INR7.5m non-fund based limits.
The ratings reflect SSL's small scale of operations and relatively high borrowings in relation to its operating cash flows. The ratings are also constrained by the company's negative free cash flows over the last three years as a result of capital spending in FY07 and high working capital requirements, especially in maintaining inventories. Fitch has also factored in the negative demand outlook for weavers and processors although this is partially offset by the fact that SSL caters to the smaller budget segment of the suit industry where demand is less volatile. SSL has managed volatility in raw material prices in the past but may find it difficult to maintain stability in its margins on account of increasing competition. Fitch also notes that the company has generated negligible net income in the last three years with high interest costs on new loans and higher depreciation on the new machinery.
The ratings reflect the company's long operational track record and credit history, and stable profitability. The ratings also consider the strong, long-standing relationships that SSL enjoys with its agents and dealers. The ratings also take into account prudent management of capacity expansions and efficiencies, which is reflected in stable operating EBITDA margin of 10.1% - 11.9% in the past five years. The debt repayment schedule of the company is well spread out.
Achievement of projected sales or improvement in efficiency and margins leading to an improved liquidity position could act as a positive rating trigger. Conversely, any significant increase in working capital requirements, which raises leverage, or any greater-than-expected decline in end-market demand, which affects margins, could lead to negative rating pressure.
Established in 1987, SSL is a manufacturer of finished bottom wear fabrics situated in Bhilwara, Rajasthan. In FY08, SSL's net revenues grew 18.2% to INR300m, with an EBITDA margin of 10% (11.7% in FY07). The company's net debt/EBITDA has remained at 5.8x (5.7x in FY07) but interest coverage has deteriorated to 1.8x (2.8x in FY07). SSL reported negative free cash flows for FY08, which Fitch expects to reverse in FY09 since there is no significant capex in the pipeline, although working capital requirements are expected to remain high. For the nine months ended December 2008, SSL reported net revenues of INR219m, an EBITDA margin of 12.2% and a EBITDA/interest of 1.8x.
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.
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