Paliwal Overseas Pvt. Ltd.

July 30, 2018

Summary of rated instruments

Instrument* Previous Rated Current Rated Rating Action
Amount (Rs. crore) Amount (Rs. crore)
[ICRA]A (Stable); Upgraded from
Fund-based bank facilities – Term Loan 26.54 36.07
[ICRA]A-(Stable)
[ICRA]A (Stable); Upgraded from
Non-fund-based bank facilities 13.17 13.17
[ICRA]A-(Stable)
[ICRA]A (Stable); Upgraded from
Unallocated bank facilities 23.55 13.93
[ICRA]A-(Stable)
Total 63.17 63.17
*Instrument details are provided in Annexure-1

Rating action
ICRA has upgraded the long-term rating for the Rs. 63.17-crore1 fund-based, non-fund-based and unallocated bank
facilities of Paliwal Overseas Pvt. Ltd. (POPL or the company) to [ICRA]A (pronounced ICRA A) from [ICRA]A- (pronounced
ICRA A minus) earlier. The outlook on the long-term rating continues to be Stable2.

Rationale
For arriving at the ratings, ICRA has considered the consolidated financial profile of the key operating entities of the Avinash
Paliwal Group (group), namely Abhitex International, Paliwal Overseas Private Limited (POPL) and Paliwal Infrastructure
Private Limited (PIPL), given the strong financial linkages (refer Analytical Approach for details) within the group entities.

The ratings upgrade takes into account the steady improvement in the group’s capitalisation and debt coverage metrics,
supported by steadily growing profits, reduction in working capital intensity and declining debt levels. While surplus
accrual-generation together with reduced working capital intensity has lowered the group’s reliance on working capital
borrowings over the years, term borrowings have also been consistently declining with progressive debt repayments. ICRA
expects the group’s capitalisation and debt coverage indicators to strengthen further in the medium term with scheduled
amortisation of debt and a significant decline in annual repayment obligations from FY2020 onwards. The extent of
improvement will, however, remain contingent upon scale of any debt-funded expansion in the textile business or
incremental acquisitions of commercial buildings, which the group may undertake.

The ratings also continue to derive strength from the promoters’ experience of more than four decades in the textile
industry and established relationships with reputed overseas clientele that have facilitated repeat business, thereby
supporting revenue growth over the years. Further, the segment benefits from favourable government policies in the form
of access to export incentives which have supported steady profitability over the years. The group’s real-estate operations,
on the other hand, benefit from prime locations and competitive rentals of the leased properties that have supported
timely renewal of lease agreements by reputed tenants, thereby resulting in high occupancy on a consistent basis. Further,
notwithstanding some moderation in PIPL’s standalone credit profile because of increased leveraging and high repayment

1 Rs. 1 crore = Rs. 100 lakh = Rs. 10 million

2 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications

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burden in the near term which may necessitate funding support from the group entities, the ratings continue to draw
comfort from the strong financial profile of the group.

The ratings, however, continue to be constrained by large investments made by the group towards, certain non-return
generating real estate assets which in turn has constrained the group’s return on capital employed (ROCE). The ratings also
continue to be constrained by high client as well as geographical concentration risks in both textiles as well as lease rental
businesses. Besides concentration of the group’s lease rental revenues on the top few clients, short-tenure of lease
contracts for most of the clients exposes the group to risks associated with timely renewal of leases at favourable rentals.
Moreover, notwithstanding the decline in inventory days in the textile business during the past few years, the inventory
holding continues to be high exposing the group to risk of volatility in prices.

Outlook: Stable
ICRA believes that the group would continue to benefit from the experience of its promoters in the home textiles sector
as well as the commercial real estate sector, its established relationships with overseas clientele and prime location of its
commercial properties thereby maintaining stable revenue growth and comfortable financial profile. The outlook may be
revised to Positive if the group is able to significantly grow the scale of its textile operations through enhanced geographic
presence, or if pace of deleveraging is faster-than-expected driven by monetisation of current investment portfolio or
limited outgo towards incremental non-core investments. The outlook may be revised to Negative in case there is a
significant pressure on profitability and working capital intensity, or if the group undertakes any large investment that
impacts its credit profile. Besides, the group’s ability to swiftly tie-up new leases for vacancies, if any, and the extent of
withdrawals by the partners from Abhitex, which is a partnership firm, will also remain key monitorable.

Key rating drivers

Credit strengths
Established experience of promoters in home textile and commercial real estate businesses – Operational since 1974,
textile arm of the group – Abhitex, has more than four-decade long track record in the sector. Further, the group ventured
into real estate in 2004 when POPL acquired the RMZ Titanium Tower in Bengaluru from RMZ Corporation, thus translating
into more than a decade’s experience in the commercial real estate market.
Strong relationship with overseas clientele including leading home furnishing retailers – Over the years, the group has
developed a strong client base in the export markets of the United Kingdom (UK) and the United States of America (USA),
who have been providing repeat business to the group. Abhitex derives almost its entire revenues from exports to these
renowned clients, comprising brands such as ASDA Stores, Denelm, Ralph Lauren in the UK and the USA.
Prime location of the commercial properties in high demand business districts which has facilitated consistently healthy
occupancy by reputed clients – The leased-out properties of the group - RMZ Futura and RMZ Titanium are located in the
Secondary Business Districts (SBD) of Madhapur (Hyderabad, Telangana) and Kodihalli (Bengaluru, Karnataka) respectively.
Located favourably, the properties, having a total leasable area of 0.6 million square feet, have enjoyed consistently
healthy occupancies over the years. The tenants include reputed companies like Deloitte group, Fair Isaac, GKN Aerospace
India, InterCall, CA technologies among others. Supported by the prime location of these properties, the group has been
able to renew the leases in a timely manner in the past, thereby mitigating the lease renewal risk to some extent.
Strong financial profile characterised by low gearing and comfortable debt coverage metrics – Healthy profits and cash
accruals facilitating reduced reliance on working capital borrowings, decline in working capital intensity together with
limited debt-funded capital expenditure has resulted in a consistent decline in the group’s borrowings over the years. As
a result, group’s capitalisation and debt-coverage indicators have reported a consistent improvement and stood
comfortable, as reflected in a Total Debt/Tangible Net Worth (TD/ TNW) ratio of 0.36 times, Total Debt/ Operating Profit

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before depreciation, interest, tax and amortisation (TD/ OPBDITA) of 1.71 times, OPBDITA/ Interest of 7.52 times and Net
Cash Accruals (NCA)/ Debt of 44% in FY2018, as per provisional estimates. While upgrading the ratings, ICRA has taken
note of a debt-funded investment by PIPL towards acquisition of a land parcel, that has added to its repayment burden in
the near term and may necessitate funding support from the group companies. Nevertheless, a strong consolidated
financial profile characterised by low gearing and comfortable debt coverage metrics, provides comfort.

Credit challenges
High export dependence with geographic concentration makes the group vulnerable to slowdown in the export markets
– Abhitex has a major portion of its client base in the export markets of the USA and the UK. These markets accounted for
51% and 40%, respectively, of the firms’ revenues in FY2018 (Provisional). High reliance on exports with concentrated
exposure to the two markets in-turn exposes Abhitex and the group to slowdown in these markets. Nevertheless, forex
fluctuation risk remains abated on account of the group’s prudent policy of hedging the forex exposure.

High working capital intensity owing to high inventory holding in the textile business - Although Abhitex’s inventory
holding has reduced over the years from 181 days in FY2015 to 111 days in FY2018 (Provisional), it continues to be high,
thereby exposing the profitability to volatility in commodity prices. The large inventory holding period, in-turn, emanates
from the requirement of large finished goods inventories for export orders besides raw material stock.
High reliance on export incentives provided by the government – The profitability of Abhitex, like other textile exporters,
is supported by export incentives, provided by the Government of India, that account for ~70%-80% of the operating profits
of Abhitex. Besides, these incentives have also been supporting growth in sales by making domestic textile manufacturers
competitive in the global market. This exposes the exporters’ profitability to any adverse changes in the policies.
Customer concentration in lease rental properties and short-tenure of lease contracts – The lease rental business of the
group has a high customer concentration as reflected by the tenant profile of RMZ Futura tower, wherein a single tenant
occupies over 90% of the area. Further, in the RMZ tower, top three tenants account for 75% of the lease rental income.
Besides concentration of the group’s lease rental revenues on the top few clients, short-tenure of lease contracts for most
of the clients exposes the group to risks associated with timely renewal of leases at favourable rentals.
Track record of aggressively deploying surplus accruals in non-return generating real estate investments of the Group –
Paliwal group has been deploying surpluses in non-return generating real estate assets, which in turn, constrain the return
indicators. Going forward, the quantum and timing of such investments will remain a rating sensitivity.

Analytical approach: For arriving at the ratings ICRA has taken into consideration the consolidated financial profile of the
key operating entities of the Avinash Paliwal Group, namely Abhitex International, Paliwal Overseas Private Limited (POPL)
and Paliwal Infrastructure Private Limited (PIPL), given the strong financial linkages. While Abhitex International is engaged
in the textile business, POPL and PIPL own leased commercial buildings in Bengaluru (Karnataka) and Hyderabad
(Telangana) respectively. Real estate investments account for ~25%3 of capital employed for the group. Further, ICRA has
applied its rating methodologies as indicated below.

Links to applicable criteria:

Corporate Credit Rating Methodology
Rating Methodology for Entities in the Indian Textiles Industry – Fabric Making
Rating Methodology for Debt Backed by Lease Rentals
Financial Consolidation and Rating Approach

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ICRA estimate

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About the company:
Paliwal Overseas Private Limited (POPL) was incorporated in 1985 by Mr. Avinash Paliwal to undertake operation in the
textile sector. POPL purchased the RMZ Titanium tower in Bengaluru from RMZ Corp in 2004 and has since been engaged
in the business of leasing commercial office space. RMZ Titanium is located in the Kodihalli, Bengaluru on Old Airport Road,
which is about 6 km from the central business district and 43 km from the international airport. RMZ Titanium, a six-storey
tower, is spread across 2.18 acres with a leasable area of 0.22 million square feet. The building presently has 100%
occupancy with leases to reputed companies. The company deploys surplus funds from the business towards other real
estate ventures of the Avinash Paliwal Group.

About the group:

POPL is a part of the Avinash Paliwal group of Panipat which has business interests in home textiles and real estate sectors.
The group is promoted by Mr. Avinash Paliwal, who has more than four-decade long experience in manufacturing and
export of textile products. The key operations of the group are carried out by three entities, namely –Abhitex International,
Paliwal Overseas Pvt. Ltd and Paliwal Infrastructure. While Abhitex operates in the home textiles space, POPL and PIPL
own leased commercial buildings.

Key financial indicators

Standalone - POPL Consolidated^ (Abhitex, POPL and PIPL)
FY2017 FY2018 FY2017 FY2018
(Audited) (Provisional) (Audited) (Provisional)
Operating Income (Rs. crore) 25.6 26.3 339.5 346.1
PAT (Rs. crore) 18.4 17.5 46.3 47.9
OPBDIT/OI (%) 87.0% 82.8% 23.9% 23.3%
RoCE (%) 13.0% 12.2% 14.7% 14.8%

Total Debt/TNW (times) 0.2 0.2 0.5 0.4

Total Debt/OPBDIT (times) 1.4 1.3 2.0 1.7
Interest coverage (times) 11.0 10.0 7.4 7.5
Note: OPBDIT: Operating Profit before Depreciation, Interest and Taxes; ROCE (Return on Capital Employed): Profit before Interest and
Tax (PBIT)/Avg (Total Debt + Tangible Net-Worth + Deferred Tax Liability - Capital Work - in Progress)
Source: Annual Reports of the group entities/ Provisional Financial Statements, ICRA research
^ ICRA estimates

Status of non-cooperation with previous CRA:

CRISIL had suspended its BBB-(Stable) rating for the bank facilities of POPL wide press release dated September 02,
2015.The suspension of rating was on account of non-cooperation by POPL.

Any other information: None

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Rating history for last three years:
Current Rating (FY2019) Chronology of Rating History for the Past 3
Years
Date & Date &
Date & Rating in Date & Rating in Rating in
Amount Amount Rating FY2018 FY2017 FY2016
Rated Outstanding June June
Instrument Type (Rs. crore) (Rs. crore) July 2018 2017 July 2016 2015
1 Fund-based Long 36.07 21.07 [ICRA]A [ICRA]A- [ICRA]BBB+(Stable) [ICRA]BBB
bank facilities – Term (Stable) (Stable) (Stable)
Term Loan
2 Non-fund-based Long 13.17 - [ICRA]A [ICRA]A- [ICRA]BBB+(Stable) [ICRA]BBB
bank facilities Term (Stable) (Stable) (Stable)
3 Unallocated Long 13.93 - [ICRA]A [ICRA]A- - -
bank facilities Term (Stable) (Stable)

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument Details
Instrument Date of Issuance Coupon Maturity Amount Rated Current Rating
ISIN No Name / Sanction Rate Date (Rs. crore) and Outlook
NA Term Loan 1 Dec-14 9.15% Dec-22 16.40 [ICRA]A (Stable)
NA Term Loan 2 Mar-17 9.15% Jul-19 4.67 [ICRA]A (Stable)
NA Term Loan 3 Oct-17 9.10% Jul-22 15.00 [ICRA]A (Stable)
NA Bank Guarantee - - - 13.17 [ICRA]A (Stable)
NA Unallocated - - - 13.93 [ICRA]A (Stable)
Paliwal Overseas Pvt. Ltd.

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ANALYST CONTACTS
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Nitin Kumar
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nitin.kumar2@icraindia.com

RELATIONSHIP CONTACT
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