October 12, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘BBB+/A-2’ (Triple B-Plus /A-Two) to Zephyr Textile Limited (ZTL).

As per the credit rating agency, the medium to long-term rating of ‘BBB+’ denotes adequate credit quality coupled with reasonable protection factors. Moreover, risk factors are considered variable if changes occur in the economy.

The short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Outlook on the assigned ratings is ‘Stable’.

According to the press release, the ratings assigned to ZTL take into account its moderate business risk profile emanating from a fairly diversified revenue stream within the textile industry and experienced senior management led by the sponsoring family.

ZTL is a weaving unit and primarily operates in three business segments, including grey fabric, towel and finished fabric. The company has been making a gradual shift towards value-added textile products, particularly towel and finished fabric, which fetch comparatively better profit margins.

Moreover, recent CAPEX in upgradation of production facilities is expected to reduce cost and improve efficiency. The ratings are constrained by comparatively high gearing indicators and limited scale of operations, leading to heightened competitive challenges for the company.

‘After three years of stagnation, ZTL witnessed a notable growth in net sales during FY18, driven largely by higher towel related sales and growth in finished fabric segment. Total towel dispatches declined marginally, but its sales exhibited a healthy growth on account of higher selling prices in the international market,’ the report added.

Finished fabric business more than doubled along with healthy margins, however, its impact on the bottom-line is currently limited due to low quantum. Capacity enhancement in towel and processing units along with the technology advancement is expected to boost sales.

Gross margins remained fairly stable as the impact of favorable prices was offset by increase in raw material costs, whereas operating margins notably improved with the rationalization of cost of operations.

“Going forward, overall profitability of the company is expected to improve steadily on account of increasing proportion of towel and finished fabric segments.”

Overall liquidity position remained at adequate levels with a notable growth in cash flows generation during the year. Funds from operations (FFO) augmented further. Thereby, FFO to total debt ratio improved marginally despite higher short-term borrowings, and the debt service coverage ratio stood higher at a comfortable level by end-FY18. The current ratio also improved to a comfortable level but the cash conversion cycle lengthened as a result of growing finished fabric business. The ongoing shift towards value-added textile is expected to have a positive impact on the company’s cash flows.

The equity base of ZTL augmented with the continued retention of profits during the year. Total outstanding debt remained largely stable as reduction in long-term debt was offset by higher utilization of short-term borrowings to finance the working capital requirements. By end-FY18, gearing indicator improved though considered to be on a higher side. The said indicators are expected to remain at these levels as the company plans to raise long-term debt during FY19. The ratings will remain dependent on the sustainability of profits margins and maintenance of adequate debt coverage ratios.

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