India Ratings said that the consolidated net leverage stretched to 3.23x in FY23 (FY22: 2.48x; FY21: 4.7x) and the interest coverage (consolidated and standalone) reduced to 5.6x (6.44x; 2.51x), due to an increase in debt, leading to an increase in interest cost to Rs 53.9 crore (Rs 47.8 crore ; Rs 49.2 million).

The credit rating expects the consolidated net leverage to further stretch, while remaining comfortable, to around 4x during FY24 due to the significant debt-led capex and would likely to reduce to around 3.5x in FY25 due to the ramp-up of new capacities and repayments of term loans.

The company has earlier envisaged a capex of around Rs 300 crore at standalone level over FY22-FY23; however, it had increased the scope of capex and incurred Rs 519.7 crore during the same period. SIL has been increasing its capacity in a phase-wise manner by setting up a spinning unit, denim unit, and suiting fabrics unit. The capex has been funded through 75% debt (around Rs 462 crore) and the rest through internal accruals.

The enhanced capacities would increase the working capital requirements which will lead to an increase in short-term working capital loans. Moreover, SIL is likely to incur regular growth capex without straining the credit metrics.

The consolidated operating margins slightly dipped to 11.1% in FY23 due to a substantial increase in raw material and power costs. The EBITDA margins however had improved significantly to 12.6% in FY22 (FY21: 9.1%; FY20: 9%) due to the significant improvement in realisation and volume growth leading to better-fixed cost absorption.

The agency expects the EBITDA margins to remain in the range of 11%-11.5% in FY24 and improve from FY25, supported by increased capacities, adequate demand, and sustained elevated realisations.

India Ratings believes that the overall realisations of the blended yarn segment in FY24 will remain elevated, but slightly moderate after peaking in FY23. Also, the volumes are likely to marginally increase, despite the increase in capacities from October 2023 due to the weak export demand scenario.

The agency further added that an improved business profile with a higher level of scale, integration and value-added products, leading to a substantial improvement in the operating profitability and the net leverage reducing below 2.5x, all on a sustained basis, could result in a positive rating action.

However, deterioration in the profitability and/or any significant cost & time overrun in the planned capex, and/or higher-than-expected debt-led capex, leading to the net leverage exceeding 3.25x beyond FY24 on a sustained basis could lead to a negative rating action.

Sangam (India) is among the top three producers of polyester viscose (PV) dyed yarn in India with a total spindleage capacity of 273,312 spindles. The company has a 30 million metres per annum (mmpa) ready-to-stitch fabric manufacturing capacity, 72mmpa fabric processing capacity and 48mmpa denim fabric manufacturing capacity. Its flagship fabric brands are Sangam Suiting and Sangam Denim.

The company's consolidated net profit declined 43.62% to Rs 30.13 crore on a 7.24% fall in sales to Rs 684.70 crore in Q4 FY23 over Q4 FY22.