Rating Rationale

Kanchan India Ltd.

20 March 2019

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of ₹ 652.15 Crs of
Kanchan India Ltd.

Particulars

Amount
Rating*
Facility (₹ Crs) Tenure

BWR A-
(Pronounced as BWR Single A
Fund based ** 645.23 Long Term
minus )
Outlook : Stable.

Fund Based 5.00 Short Term BWR A2+

(Pronounced as BWR Single A
Non Fund Based 1.92 Short Term two plus )

INR Six Hundred Fifty Two Crores

Total 652.15 and Fifteen Lakhs Only

*Please refer to BWR website ​www.brickworkratings.com/​ for definition of the ratings

** including proposed term loan of Rs 180 crores

Rationale/Description of Key Rating Drivers/Rating sensitivities:

BWR has principally relied upon Audited Financial results of FY 16-18, provisional financials for
31.12.2018, projected financials FY 19 and FY 2o, publicly available information and clarification
provided by company’s Management .

The ratings of Kanchan India Limited (KIL) derive strength from the experienced promoters of
FIL and their long track record of operations in the textile industry. The ratings also continue to
take comfort from the company’s established customer base and distribution network, and well
diversified portfolio, growth in the income and profitability of the company during FY18 and 9
M FY 2019 due to completion of the capacity enhancement / expansion programme in FY 17

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and FY 18 . These rating strengths, however, continue to remain constrained by relatively,
working capital intensive nature of business operations, susceptibility of profitability margins to
adverse movement in raw material prices. The strengths are further constrained by low pricing
power due to fragmented and competitive nature of industry , exposure to group company and
further debt funded expansion program

Going forward, the ability of the company to improve the scale of operations, profitability
margins and liquidity position and completion of the expansion program without time and cost
over run would remain the key rating sensitivities.

Description of Key Rating Drivers

Rating Strengths

Widely experienced and resourceful promoter group - The management of KIL comprises of the
Banger family which has vast experience in the textile industry. The board of KIL consists of
seven directors including two independent directors. Further, promoters have demonstrated
support by infusion of equity share capital in the past.

Established track record of operations- ​The company has a presence across the value chain of
textile business with integrated nature of operations and diversified product profile KIL was
incorporated in 1996 and has a track record of more than two decades with an established
presence in the domestic market. KIL’s product portfolio is diversified and includes PV yarn,
woolen/carpet yarn, finished synthetic fabrics as well as finished shirting and suiting denim
fabrics. The company broadly has presence in spinning, weaving and processing.

​Growing scale of operations and improving profitability margins ​The Operating

Income of the company increased by 12.23% in FY18 from the FY17 level due to capacity
enhancement /expansion (backward integration ) in 2017 by debt funded capital expenditure .
The company is doing further capacity expansion which will increase the scale of operations in
FY 20 . With a track record of successfully completing capacity enhancement / expansion done
in the past company’s operating profitability is expected to improve post the completion of
current expansion programme

Moderate capital structure and debt coverage indicators ​The capital structure of the
company stood moderate with overall gearing of 0.93 times as on March 31, 2018.. Tangible
Networth (analysed ) stood at Rs 466.63 crores in FY 18 . Debt coverage indicators improved

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20 March 2019
over the past financial year as indicated by interest coverage of 4.3 times in FY18 due to
improvement in operating margin from 9.26 % in FY 17 to 10.94 % in FY 18 .

Rating Weakness

Working capital intensive nature of operations ​The operations of the company are working
capital intensive in nature marked by high inventory period resulting in elongated operating
cycle. The key raw material for the company is synthetic fiber and raw cotton. Cash conversion
cycle of the company deteriorated from 72 days in FY17 to 79 days in FY18. Despite working
capital intensive nature of operations, average utilisation of fund based working capital limit is
85-90 % during the last 12 months ended December 2018.

Raw material price volatility ​- Inherent cyclicality associated with the textile industry along
with overcapacity in denim sector and volatile cotton prices may affect profitability margins

Future Expansion - The company plans to increase its spinning capacity inorder to meet its
requirement of cotton yarn for its denim unit . The company also plans to install recycle fibre
unit , finished goods of which will be used in own PV yarn manufacturing . The total project cost
would be Rs 243 crores to be funded by debt of Rs 180 crores and promoters contribution ,
internal accruals of Rs 63 crores . The company envisages completing the project by March
2020. Timely completion of the project without cost over run would be the key rating sensitivity

Exposure to related entity -KIL has exposure to its related entity namely Shri Rajlaxmi
Denim Limited (SDL) by way of corporate guarantee extended for its bank facilities.

Analytical Approach

For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria
detailed below (hyperlinks provided at the end of this rationale). Long Term Borrowings include Rs 10.93
crores of unsecured loans which are treated as quasi equity . The company has extended its corporate
Guarantee to the lenders of Shri Rajlaxmi Denim

Additional Disclosures

The company has a group company ​Shri Rajlaxmi Denim Limited which is part of this
group and has been rated at BWR BB+ (Aug 2018 ) .​The company has extended its
Corporate Guarantee to the lenders of Shri Rajlaxmi Denim Limited .

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20 March 2019
Liquidity - Working capital utilization is between 85-90%. Current ratio stood at 1.67 x in FY 18 .
Sources of Funds in the next year: Cash Accruals 139.06 Crores , Cash and Bank balance of Rs 31.48
crores , Usage of Funds in the next year : CPLTD of Rs 58.57 crores .

Rating Outlook: ​Stable

BWR believes the ​Kanchan India Ltd. ​business risk profile will be maintained over the medium term.
The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. The rating
outlook may be revised to 'Positive' in case the revenues and profit show sustained improvement. The
rating outlook may be revised to 'Negative' if the revenues go down and profit margins show lower than
expected figures.

About the Company

KIL was incorporated as Kanchan Wool-tex Private Limited in 1996 by Banger family. Later in
2008, the constitution was changed to Public Limited and company got its present name. Over
the past few years, KIL has also undertaken backward integration project by setting spinning unit
for manufacturing of polyester viscose (PV) and cotton yarn along with project for
manufacturing of denim fabrics as well as project for expansion of capacities and has become an
integrated player with presence in spinning, weaving and processing. . The capacity utilisation
for PV yarn is 90 % , Cotton Yarn is 80.1 % , PV Fabrics is 88 % , Denim Fabrics is 80.04
% , Processing is 88 %

The company has successfully completed two capacity enhancements/ expansion in the past .
During FY16, the company had undertaken projects for expansion of cotton spinning unit, PV
spinning unit and denim unit towards which it has envisaged total cost of Rs.252.96 crore
Furthermore, it has also undertaken another project for further expansion of cotton spinning unit
and denim unit towards which it had envisaged total cost of Rs.232.92. In the previous two
expansion , the company increased capacity of denim unit, PV spinning unit and established
new unit for cotton spinning. The company has broadly PC spindles of 125112, cotton spindles
of 29384 , Open end Rotors of 5712 , Denim Looms of 676.

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Key Financial Indicators

Key Parameters Units 2017 2018 Dec 2018

Result Type Audited Audited Provisional

Operating Revenue ₹ Cr 1344.64 1509.2 1270.16

EBITDA ₹ Cr 124.48 165.04 153.14
PAT ₹ Cr 40.33 30.25 53.11
Tangible Net worth (Analysed ) ₹ Cr 435.59 466.63 520.84

Total Debt/Tangible Net worth Times

(analysed ) 0.89 1.03 0.88

Current Ratio Times 1.63 1.67 1.86

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20 March 2019
Rating History for the last three years

Instrument
S.No Current Rating (2019 )
/Facility Rating History

Type
Amount
(Long Term/ Rating 2018 2017 2016
(₹ Crs)
Short Term)

Fund Based Long Term 645.23 BWR A- N.A N.A N.A

Fund Based Short Term 5.00 BWR A2+ N.A N.A N.A

Non Fund Based Short Term 1.92 BWR A2+ N.A N.A N.A

₹ ​INR Six Hundred Fifty Two Crores

Total 652.15 and Fifteen Lakhs Only
Only

Status of non-cooperation with previous CRA

CARE Ratings has moved the rating to Non Cooperation vide press release dated 13 March 2019

Any other information - Not Applicable.

Hyperlink/Reference to applicable Criteria

● General Criteria

● Approach to Financial Ratios

● Manufacturing​ ​ Sector

● Short Term Debt

For any other criteria obtain hyperlinks from website

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 Analytical Contacts Media

RK Sharma media@brickworkratings.com
Senior Director-Ratings
Relationship Contact
analyst@brickworkratings.com bd@brickworkratings.com

Phone: 1-860-425-2742

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DISCLAIMER

Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources,
which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine
the precision or completeness of the information obtained. And hence, the information in this report is presented “as is” without
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