Rationale

The revision in outlook factors in the revival in demand for Nandan Denim Limited's (NDL) products and the expected improvement in the liquidity position, supported by the sanction of Emergency Credit Lines Guarantee Scheme (ECLGS) 2.0 from its lenders. ICRA also notes that given the improved access to funds, NDL would not be taking up the one-time restructuring of its facilities. Further, the reaffirmation continues to factor in NDL's strong market position as a leader in terms of denim capacity in the domestic denim industry, its diversified product profile and the extensive industry experience of its promoters. The ratings take comfort from NDL's proximity to the cotton growing belt and its higher backward integration within the denim value chain, which positions it better than other competitors and supports its cost structure. ICRA also notes NDL's eligibility to various government incentives on the capex undertaken in the past, which supports its profitability, though their timely receipt remain crucial. The ratings also take comfort from NDL's strong net worth base of Rs. 453.4 crore as on September 30, 2020, The ratings, however, remain constrained by the significantly weaker-than-expected performance in FY2020 and the current fiscal, which has weakened the company's return and coverage indicators. Owing to the weak demand scenario coupled with the detrimental effects of the pandemic on the company's operations and the damages due to the recent fire incident, the company's operating profitability moderated to 5.0% in 9MFY2021 from 7.7% in FY2020 and 11.0% in FY2019 (~14%-15% in the past years). Further, the ratings continue to be constrained by the inherent cyclicality associated with the textile sector, the prevalent over capacity in the domestic denim industry, and the stiff competition, which continues to pressurise the realisation. The ratings also factor in the vulnerability of the company's profitability to fluctuations in the raw material prices (majorly cotton) and the working capital intensive nature of the company's operations. The Stable outlook on [ICRA]BBB- reflects ICRA's opinion that the company is expected to maintain its business positioning in the denim industry