(The following was released by the rating agency)
MUMBAI/SINGAPORE, August 10 (Fitch) Fitch Ratings has revised India-based grey cotton cloth manufacturer Navnitlal Pvt Ltd's (NPL) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch B(ind)'. A list of additional rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's view that NPL's interest coverage (operating EBITDA/gross interest expense) will remain below 1x in FY13 (year end March) considering its deteriorating credit metrics due to raw material price volatility and slowing demand. FY12 results indicate interest coverage declining to 0.6x from 2.04x in FY11 and net financial leverage (total adjusted net debt/operating EBITDAR) increasing to 15.3x from 4.8x as a result of a sharp decline in EBITDA margins to 2.9% from 10.1%.
The ratings reflect NPL's tight liquidity position as reflected in its high working capital utilisation (93%) in FY12, and a low revenue base of INR630.3m in FY12 (FY11: INR608.4m).
The ratings, however, supported by NPL's over 14-year-long operating track record and 15 years of experience of its founders in grey cotton cloth manufacturing. Also, founders have in the past provided financial support to NPL through unsecured loans.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may lead to negative rating action include EBITDA interest coverage ratio of below 1.1x on a sustained basis on account of a fall in margins.
Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, an improvement in revenue and operating margins leading to EBITDA interest coverage of above 1.1x on a sustained basis would lead to a change in the Outlook back to Stable.
Rating actions on NPL's instruments:
- INR57.7m outstanding term loans: affirmed at National Long-Term 'Fitch B(ind)'
- INR170m fund-based limits: affirmed at National Long-Term 'Fitch B(ind)'