Rationale

 The ratings reaffirmation for the bank lines of Suryalakshmi Cotton Mills Limited (SCML) considers an expected improvement in the company’s operational and financial performance over the medium term on the back of its established market position in the denim and yarn segments, promoters’ long industry experience, a diversified product portfolio across the segments (denim and cotton spinning) and integrated nature of its operations. Post witnessing an improvement in FY2023, SCML’s revenues moderated by 8.1% in FY2024 owing to a tepid demand environment and unfavorable price realisations. While raw material prices moderated, an increase in power and labour costs and lower realisations resulted in a 30-bps contraction in operating margin to 7% in FY2024. This coupled with an increase in interest costs and a one-time write-off for ~Rs. 2.4 crore relating to bad debts impacted the net margins, however a recovery in earnings is expected aided by an anticipated recovery from H2 FY2025. The company has a lower principal part of debt repayment obligations of Rs. 5.6 crore and Rs. 7.1 crore in FY2025 and FY2026 against the expected cash profits of ~Rs. 25-27 crore. The ratings, however, continue to remain constrained by the moderate leverage indicators and increased working capital requirements given the seasonality associated with raw material availability. The debt funded capital expansion to increase its loom capacity, coupled with an increase in working capital utilization (towards year end stocking) led to a weakening of its debt coverage indicators in FY2024. Total debt to operating profits and interest cover ratios moderated to 4.1 times and 1.8 times in FY2024 compared to 3.2 times and 2.5 times in FY2023, respectively. Nevertheless, same is expected to improve over the medium term with a modest increase in operating margins and no major capital expansions planned by the entity. Further, the ratings consider the exposure of its earnings to volatile raw material prices with intense competition, limiting the pricing flexibility of industry players. The ratings continue to be constrained by the commoditised nature of the company’s products, which, coupled with the fragmented industry structure, results in limited pricing power, keeping profitability under check. ICRA will continue to monitor the performance of the company and take suitable rating actions. The Stable outlook on the long-term rating reflects ICRA’s expectation that SCML is likely to improve its revenues and operating metrics. Further, the outlook underlines ICRA’s expectation that the entity's incremental capex, if any, to further increase the capacity will be funded in a manner that it is able to durably maintain its debt protection metrics commensurate with the existing ratings.