India Ratings Affirms India Dyeing Mills at 'IND A'; Outlook Stable

India Ratings and Research (Ind-Ra) has affirmed India Dyeing Mills's (IDMPL) Long-Term Issuer Rating at 'IND A'. The Outlook is Stable. Instrument wise rating actions are given below: Instrument Type Date of issuance Coupon Rate Maturity Date Size of the issue (million) Rating/Outlook Rating ActionTerm loans - - - INR259.8 (increased from INR221) IND A/Stable AffirmedFund-based working capital - - - INR50 IND A/Stable AffirmedFund-based working capital - - - INR50 IND A1 AffirmedNon-fund-based working capital - - - INR91.9 (increased from INR70) IND A1 Affirmed

Key Rating Drivers

Strong Linkages with Eastman Group: The affirmation continues to reflect IDMPL's assured business with Eastman Exports Global Clothing (EEGCPL; 'IND A'; Outlook Stable), which contributes around 80% to the company's revenue. Since IDMPL was set up as a backward integration for EEGCPL, the company's strategy and operations are closely guided by those of EEGCPL, thus reflecting strong operational linkages. Hence, the ratings will continue to move in tandem with EEGCPL.

 

Comfortable Credit Metrics: Net adjusted leverage improved to 1x in FY16 (FY15: 1.2x) and interest cover to 10x (9.4x), owing to an increase in revenue, coupled with a fairly stable EBITDA margin and a marginal decline in debt. Ind-Ra expects revenue to grow at a moderate pace in the near term, with EBITDA margin sustaining at the current level. Additionally, debt which comprises primarily of term loans is likely to decline with no significant debt-funded capex on the anvil. These factors are likely to aid in a gradual improvement in the credit metrics during FY17-FY19.

Adequate Liquidity: IDMPL has consistently generated positive cash flow from operations, despite an increase in working capital cycle. The company's working capital cycle increased to 29 days in FY16 (FY15: 22 days) on account of stretched payments from EEGCPL. However, free cash flow turned positive to INR44 million (FY15: negative INR178 million) on the back of higher EBITDA and moderate capex. Ind-Ra expects the free cash flow to be positive over the medium term given the absence of major capex and strong cash flow from operations.

Strong Track Record: The ratings continue to be supported by IDMPL's founders' over 30-year-long track record in the textile business. Strong pollution control system in IDMPL's dyeing facility, which makes it attractive to exporters, also continues to be a positive factor.

Rating Sensitivities

Positive: Future developments that could lead to a positive rating action include an upgrade in EEGCPL's ratings, coupled with IDMPL maintaining the current credit profile.

Negative: Future developments that could, individually or collectively, lead to a negative rating action include:

· - any substantial debt-financed capex or margin reduction leading to the financial leverage exceeding 2x

· - a downgrade of EEGCPL's ratings

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