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
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