New Delhi : India Ratings & Research (Ind-Ra) has issued a sector-specific special report describing the credit factors the agency uses to analyse the Indian textile companies.

Ind-Ra believes the Indian textile sector in general and cotton textiles sector in particular is exposed to volatile raw material prices which is the largest cost variant and can affect a company’s finances. Price risk also emanates from the adverse impact of regulation and low pricing flexibility of end products. For synthetic textile players, raw material prices are correlated to the demand-supply situation, crude oil prices, movements of dollar/rupee and prices of cotton and chemical substitutes.

Textile operations are working-capital intensive due to long inventory periods and high debtor days. In the cotton industry, profitability is determined by the efficiency and the timing of cotton buying and inventory management. Ind-Ra gives rating advantage to companies which have a proven track record of managing the inventory risk.

The natural rating territory of the Ind-Ra-rated textile universe is ‘IND BBB’ and below. This is due to lower margins from a difficult operating environment on account of regulatory influence, raw material cyclicality and fragmentation. Players who demonstrate resilience to volatility, slowdown, adequate liquidity and financial flexibility qualify for higher rating categories. Companies with strong market position and distribution network as well as with brand recognition enjoy a comparative rating advantage.

The textile value chain is diverse and complex and every company’s business model can be unique depending upon the level of value addition, product sophistication and end-market exposure.  Ind-Ra looks at product quality and range, labour and power cost and availability and the level of technology and integration while assessing a company’s operational competencies and earnings capacity.

Business risks are different for cotton and synthetic textiles. Ind-Ra takes a positive note of companies which are diversified into both cotton and synthetic textiles, or have the flexibility to switch their primary raw material.

Finally, the agency examines a company’s financial risk profile based on earnings and cash flow, internal liquidity and access to external financing, leverage metrics, credit risk management and capex cycle. A track record of stable margins lends comfort, as it reflects the company’s tested capability to weather cyclical downturn. External funding is mainly through bank loans and therefore, the company’s ability to obtain timely bank funding for its increasing working capital needs is an another key indicator of liquidity.

When financial and business profiles indicate divergent rating categories, stronger financials cannot be viewed in isolation to arrive at a rating that would be substantially higher for the sector risk profile or business profile. On the contrary, weak financials or liquidity issues may cause the ratings to be significantly lower than those indicated by company-specific traits.

Source : Ghouse Mohd