ICRA – a leading credit rating agency and an associate of Moody’s Investors Service – in it’s Credit Perspective report on Raymond UCO Denim Private Limited (RUDPL) has made several key observations regarding it’s performance and prospects while outlining the profile of the Company. We are giving below extracts from this report in the form of RUDPL’s Company Profile through the courtesy of ICRA.
Raymond UCO Denim Private Limited (RUDPL) was incorporated in August 2006 as 50:50 joint venture between Raymond Limited and European denim major, UCO NV (Belgium). RUDPL is engaged in the manufacturing and marketing of denim fabrics. It manufactures and sells specialty ring colour and stretch denim and is a leading supplier of premium denim fabric in the global market. It has a current combined fabric capacity of 47 million meters per annum (India – 40 million meters and Romania – 7 million meters) reduced from 80 million meters per annum (with the closure of the US plant with 15 million meters and the Belgium plant with 20 million meters).
UCO NV, the joint venture partner, is a Belgian textile group, with executive headquarters in Belgium, has interests in denim, flat, filament fabric and yarns. It produces and sells a diversified collection of denim for leisure wear. UCO NV is a leading denim player in Europe, specially known for colour denim with a 70% share. In 2006, RUDPL also marked its entry into garmenting by entering into a business conducting agreement with Raymond Limited’s subsidiary Everblue Apparel Limited (EBAL) for the use of its denim garmenting facility at Bangalore.
Scale, Diversification and Market Position
Raymond Limited made an entry in the denim fabric space in 1996, with the set up of a 10 million meter per annum capacity at Yavatmal, Maharashtra, and gradually expanded the same to 40 million meters by 2005-06. In August 2006, Raymond Limited entered into 50:50 joint venture with European denim major, UCO NV (Belgium), to form a global denim powerhouse – Raymond UCO Denim Private Limited (RUDPL). Until December 2008, RUDPL had manufacturing facilities at India (40 million meters), Romania (5 million meters), US (15 million meters) and Belgium (20 million meters). However, witnessing operational losses at the US and Belgium locations on account of their high cost of manufacturing, RUDPL closed down those units in December 2008. With the closure of these units, RUDPL’s current denim fabric manufacturing capacity stands reduced to 47 million meters per annum (40 million meters in India and 7 million meters in Romania) from the initial 80 million meters per annum, thereby slipping RUDPL’s position to the third (after Arvind Limited and Aarvee Denim) in India in terms of denim fabric manufacturing capacity.
The last three years have witnessed healthy growth in the demand as well as consumption of denim-wear in the Indian sub-continent resulting in constant and consistent capacity expansion for denim fabric and
garmenting. The Indian denim industry has been growing steadily with a total capacity of ~780-800 million meters per annum as on March 2012 which is further expected to increase by the end of 2013. The domestic denim market grew by ~10% during FY2012 over FY2011, while the growth in exports market was in the range of 10-15% due to increase in export demand on account of rupee depreciation. The growth in exports is further fuelled by the decrease in manufacturing capacities in China, world’s largest denim manufacturer and exporter, on account of its declining competitiveness stemming from increase in power and labour cost and appreciation in the value of Chinese Yuan.
In FY2012, the company increased focus on the domestic operations, on account of better price realisations in the segment as compared to the past and an increasing demand. As a result, the domestic sales reported a 39% y-o-y growth and the exports reported an 11% y-o-y growth for FY2012. However, the depreciation in the Indian rupee coupled post H2, FY2012 resulted in widening the gap between exports and domestic sales and as a result, for H1, FY2013, the contribution from exports increased to 49% of the overall sales as against 39% for FY2012.
While RUDPL is largely a denim fabric manufacturer, it also ventured into garmenting in 2006. RUDPL added two new sewing lines at the garmenting unit, which commenced commercial production in FY2011, to debottleneck its production capacity. This segment contributed to 12% of the overall revenues of the company for FY2012.
The company plans to undertake capacity expansion of ~Rs. 150 crore over the next two years on account of the rise in demand coupled with the impetus provided by the state government. This expansion is planned under two phases, first of which will include setting up of a lycra yarn manufacturing plant, which will aid the company to backward integrate and control costs and secondly to increase overall capacity of denim manufacturing by an additional 9 million meters per annum. The project will be funded primarily by debt and internal accruals.
- Continued support from the promoters; demonstrated through waiver of interests on its loans, facilitating settlements with the lenders to its subsidiaries’ thereby relieving RUDPL of all its obligations.
- One of the world’s largest denim producers backed by established promoters; planned capacity expansion is likely to further boost capacities in the medium term.
- Reputed brands as customers for Indian as well as overseas operations.
- Healthy growth in revenues coupled with an overall improvement in profitability for FY2012.
- Consolidated financial profile marked with stretched capital structure and weak coverage indicators.
- Operating margins susceptible to the fluctuation in cotton prices, as the same cannot be recouped easily through corresponding increase in sales realisations; however decline in cotton prices in FY2012 worked to the benefit of the company.
- Weak performance of subsidiary company impacting the overall performance of the company.
The rating reaffirmation takes into account the healthy growth in revenues achieved by the company in FY2012 coupled with an improvement in net profit margin driven primarily by better sales realizations in both the export and domestic markets. The decline in the cotton prices, key raw material for the company, coupled with depreciation of the rupee in FY2012, also worked to the advantage of the company resulting in an improvement to the bottom-line. However, the profitability of the company remains susceptible to the fluctuation in cotton prices as the company faces a time lag of ~three months to recoup the same. The ratings continue to favourably reflect the support from RUDPL’s promoters and the established relations of the company with reputed customers for both its Indian and overseas operations. The improvement in the Indian denim manufacturers competitiveness in the global industry coupled with the favourable demand from the export market is likely to boost growth in the future. However, the ratings are constrained by the consolidated entity’s stretched capital structure on account of the past losses and weak operating performance of the subsidiary companies. The coverage indicators of the company continue to remain weak on account of the overall high external borrowings of the company. The improvement in the company’s profitability in the future further impacting the coverage and leverage indicators will remain a key rating sensitivity.
Revenue Growth and Profitability
RUDPL’s standalone operations witnessed a 24% growth in revenues in FY2012 backed by the growth in denim demand in the domestic market with the entry of International brands and better sales realizations; the revenue for the consolidated entity witnessed a 25% growth in-line with the growth in standalone operations. The company’s performance witnessed an improvement in FY2012, with an increase in the operating profit margin from 8.1% in FY2011 to 9.9% for the consolidated operations and from 9.9% in FY2011 to 10.5% in FY2012 for the standalone operations. The price of cotton, which is the major raw material for the company, witnessed a decline in FY2012, and the recouping of prices with the customers is delayed in general for a period of three months, as a result benefiting the profit margins of the company. In addition, the company also undertook measures to reduce the power cost, which further resulted in improvement of the operating margins.
However, the company is exposed to fluctuations in cotton prices, which is an area of concern as the same is not supported by an immediate and corresponding increase in the sales realisation. While it is easier to recoup the increased raw material price in the domestic market through increased sales realisation, there is a lag of approximately two months between increase in costs and that in sales realisation in case of exports. RUDPL also reported a net profit of 1.1% as against a net loss of 1.8% for its consolidated operations for FY2012. However, for the standalone operations, the company reported a net loss on account of the write off of RS. 28.5 crore in its subsidiary UCO Raymond Denim Holdings NV (URDH). This write-off has resulted in a nil value of investment of the company. However, if the operations of the subsidiary companies witness an improvement in the future, RUDPL is likely to write back the investment value, which could result in an increase in the net profit margin in the future.
The anticipated synergies from the joint venture between Raymond Limited and UCO NV did not materialize owing to slowdown in the denim industry coupled with high cost of manufacturing at US and Belgium locations. Nonetheless, the JV has benefited to Raymond Limited in terms of access to UCO NV’s customers like Levis (for US and European markets), and gaining immediate knowledge of the market trend from the fashion industry.
Capital Structure and Coverage Indicators
The capital structure for the standalone operations for FY2012 was moderately stretched at 2.43 times. However, RUDPL has been operating at a very high leverage for the consolidated entity primarily on account of the erosion of the networth of the consolidated entity through operational losses of the overseas subsidiaries in the past. Till FY2008, RUDPL had an investment of Rs. 322.17 crore in URDH, a wholly-owned subsidiary of the company, and had also given corporate guarantee of Euro 33.00 million for loans taken by URDH and its subsidiaries (effective till September 15, 2010). The consolidated net worth of URDH has been substantially eroded due to operational losses of its subsidiaries (mainly USI, Belgium), and hence, RUDPL (India) has written off these investments. In FY2011, the company along with its subsidiaries entered into a Waiver cum Partial Release Agreement with the European banks, whereby the banks agreed to release the company and its subsidiaries from the dues outstanding (US$ 5.14 million and RON 22.473 million) after receiving the payment of Euro 6.0 million. This was funded through additional capital infusion of Rs. 21.32 crore each by Raymond Limited and UCO NV in FY2011.
The total severance cost, forming a part of the Belgium unit closure expenses, amounted to Euro 10 million, which has been funded by a loan (Euro 8 million drawn) from the KBC Bank. The repayment of this euro loan is due as a bullet payment in FY2014. RUDPL however services the interest for this loan, which amounts to ~Rs. 4 crore/annum.
The debt profile of the company apart from bank loans comprises of preference shares issued to the parent companies and unsecured loans and NCDs from Raymond Ltd. Raymond Limited has waived the interest on the above loans accrued up to March 31, 2012 and the management expects this to continue in the future as well. Hence, the capital structure of the company improves if the total debt is adjusted for these loans. In addition, an improvement in the performance of the offshore subsidiary of the company is likely to result in an improvement of the overall capital structure and coverage indicators in the future.
RUDPL reported a net profit of Rs.9.2 crore on a consolidated basis on an operating income of Rs. 807.1 crore for FY2012 as against a net loss of Rs.11.3 crore on an operating income of Rs.642.7 crore for FY 2011. The company reported a net profit of Rs. 19.5 crore on a consolidated basis an operating income of Rs. 436.8 crore for 6M, FY2013 as against a net profit of 12.3 crore on an operating income of Rs. 419.9 crore for H1, FY2012 December 2012.