Indo Count Industries Ltd — Capital/Financing Update 2019

Sep 11, 2019

ai" September,2019

The National Stock Exchangeof India Ltd.	BSELimited
Listing Department	Department of Corporate Services
ExchangePlaza,	Floor 25, PhirozeJeejeebhoyTowers,
BandraKurlaComplex,Bandra(East),	Dalal Street,
Mumbai - 400051	Mumbai - 400001
Company Symbol: ICIL	ScripCode No.: 521016

Dear Sir/Madam,

Sub:Intimation of downgrade in credit rating under Regulation 30 of SEBI(Listing Obligations and DisclosureRequirements)Regulations,2015 ^I

Pursuant to Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirrments) Regulations, 2015, enclosed herewith is a press release dated io" September, 2019, tDyCARE ("RatingAgency") informing about downgrade in the ratings of the Company's credit faoilities as under:

• a) For the short term credit facilities from "CAREA1+" (A One Plus)to "CAREA1 (A ot)". The I said credit rating signifies very strong degreeof safety regarding timely servicing of financial obligations. Suchfacilities carry lowest credit risk.
• b) For long term credit facilities from "CAREAA-"(Oouble A Minus; Outlook: NegjtiVe) to "CAREA+" (SingleA Plus; Outlook: Stable).The said credit rating signifiesadequate dkgreeof safety regardingtimely servicingof financial obligations.Suchfacilities carry low credit 1iSk.

The Rating Agency has inter alia considered operational and financial performance for Fp9 and Q1 FY20and decline in profitability on accountof reduction in government export incentivesand forex losses due to fluctuation in foreign currency being primary reason for downgrading the Credit Rating.Thedetailed rational is provided in the PressReleaseof RatingAgency asenclosed.

Kindly take the above information on record.

Thanking you,

Yoursfaithfully,

ForIndo Count Industries Limited

t\A.(,~~ '~

Amruta Avasare Company Secretary& ComplianceOfficer

Encl: A/a

Indo Count Industries Ltd

Head Office: 301,Arcadia, 3rd Floor, Nariman Point, Mumbai - 400 021, Maharashtra, India;T: 0224341 9500, F: 02222823098 Marketing Office Dosti Imperia, 2nd floor, Manpada, Ghodbunder Road, Thane (w) - 400 607, Maharashtra. India;T: 0224151 1800.F: 0222172 0121 Home Textile Division: T3, Kagal- Hatkanangale Five Star, MIDC Ind. Area. Kolhapur - 416216, Maharashtra, India;T: 0231 662 79001F: 02316627979 Spinning Division: D1, MIDC, Gokul Shirgaon, Kolhapur - 416234, Maharashtra. India;T: 0231 2687400, F: 0231 267 ~161 Regd. Office' Office No.1, Plot No. 266, Village Alte, Kumbhoj Road,Taluka Hatkanangale. Dis!. Kolhapur - 416109, Maharashtra. India;T: 0230246310012461929 CIN: L72200PN1988PLC068972,E: info@indocount.com,W: www.indocount.com

Indo Count Industries Limited

September 10, 2019

Ratings
Facilities	Amount (Rs. crore)	Rating1	Rating Action
Long term Bank Facilities	71.44 (311.43)	CARE A+; Stable (Single A Plus; Outlook: Stable)	Revised from CARE AA-; Negative (Double A Minus; Outlook: Negative
Short term Bank Facilities	755.00 (755.00)	CARE A1 (Single A One)	Revised from CARE A1+ (A One Plus)
Total	826.44 (Rupees Eight hundred twenty six crore and forty four lakh only)

Details of instruments/facilities in Annexure-1

Detailed Rationale and Key Rating Drivers

The revision in ratings assigned to the bank facilities of Indo Count Industries Ltd (ICIL) is on account of weak operational performance, with revenues remaining flat and decline in profitability on account of reduction in export incentives and forex losses. ICIL's performance in the near term is expected to remain constrained despite the recent increase in export incentives. The payout towards refund of excess Merchandise Export from India Scheme benefits received by the company to the tune of Rs. 73.6 crore (excluding interest) would strain the company's liquidity and profitability in the near term.

These ratings are also tempered by risks of product/customer/geographic concentration, susceptibility to fluctuation in raw material prices and fluctuation in foreign exchange, both imparting volatility to profitability and cyclical and competitive nature of the Home Textile industry.

The ratings and the revision in outlook, continues to derive strength from its robust capital structure, comfortable, albeit declining debt coverage metrics, strong business profile – being one of India's leading Home Textile suppliers and exporters of Bed linen, experienced Promoters in Home Textiles segment, reputed clientele profile and government support through export incentives.

Any capex/merger/acquisition or unrelated diversification leading to an increase in debt levels and adversely impacting capital structure, any further increase in gross working capital cycle and decline in profitability remains key rating sensitivity.

Detailed description of the key rating drivers

Key Rating Strengths

Experienced Promoter in Home Textile segment: Indo Count Industries Ltd (ICIL) was established in 1988 by Mr. Anil Kumar Jain (Executive Chairman) who is a first generation entrepreneur and has experience of more than three decades in the Textile industry. He has been instrumental in establishing Indo Count Industries as one of the leading Home Textile Export House. Mr. Anil Kumar Jain, Executive Chairman, was honoured with "Business Today Best CEO (Textiles & Apparel)" Award for the year 2016 in December 2016. He is supported by his son, Mr. Mohit Jain (Executive Vice Chairman), and is assisted by a team of experienced professionals.

One of India's leading suppliers and exporters of bed linen: ICIL has emerged and established itself as one of India's top three suppliers and exporter of bed linen. It is amongst the leading bed sheet suppliers to USA. ICIL's product portfolio is spread across various products in the Home Textile market offering different qualities. It derives its competitive strength through expertise in designing and processing (printing/bleaching/dyeing) of bed linen. ICIL's wide range of product mix helps it to maintain its position as one of the leading players in the industry catering to large no of clients which includes top global Retailers and Renowned International brands.

Comfortable debt coverage metrics: ICIL's financial risk profile is driven by generation of comfortable cash-flows consequent into comfortable capital structure and strong debt coverage metrics. The company has extended corporate guarantee on behalf of its foreign subsidiary , adjusted overall gearing after factoring the guarantee improved from 0.46x as on March 31, 2018 to 0.41x as on March 31, 2019 on account of accretion of profits to reserves and scheduled debt repayment. During the same period, on account of lower profits, the company's interest coverage ratio and total debt to gross cash accruals deteriorated to 4.65x and 3.40x, however, remained comfortable.

¹ Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications.

Key Rating Weakness

Deterioration in operating margins: During FY19, despite volume growth of 3.34% and improvement in realisations by 4.05%, the total income remained flat at Rs. 1,944 crore as against Rs. 1,954 crore mainly on account of reduction in export incentives and adverse movement of forex rates.

Consequently, the company's operating margins dipped from 13.23% in FY18 to 8.51% in FY19. Subsequently, PAT margin also declined to 3.08% in FY19 from 6.41% in FY18.

Refund of excess export benefits to dent company's profitability and liquidity in the near term: The payout of refund of excess export benefits in the form of Merchandise Exports from India Scheme (MEIS) scripts for the period FY16 to FY18 to the extent of Rs. 73.62 crore and interest thereon totalling to Rs ~94 crore (as the matter is under adjudication process, the amount is not finalised) is expected to impact the company's liquidity and profitability in the near term.

Elongated working capital cycle: The working capital cycle of the company continues to be elongated on account of high inventory period as the company has to maintain adequate inventory of its Home Textiles products of different designs in order to meet customer demands in a timely manner. The ability of the company to efficiently manage working capital cycle would be a key monitorable. Average maximum working capital utilisation remained moderate at 60.58% during last 12 months ended July 2019.

Product/Customer/Geographic concentration risk: ICIL's revenue profile continues to be concentrated with top client contributing 33% and top three clients contributing nearly 50% of total sales in FY18. Furthermore, majority of the export revenues i.e. nearly 70% of total sales is being derived from USA.

The ability of the company to increase its sales outside USA and reduce its dependence on its top customers needs to be seen.

Susceptibility to fluctuation in raw material prices and forex rates: The company remains exposed to raw material movement and may have to absorb any adverse fluctuation in raw material prices. However the risk is mitigated to certain extent as it mainly follows order based production policy which minimizes raw material/inventory fluctuation risk.

ICIL is primarily engaged in the manufacturing and exports of Home Textile which contributed 97% of total operating income in FY19. Being a net exporter, ICIL is inherently exposed to foreign currency fluctuation risk. Given the sharp fluctuations in USD/INR rate, the company has changed its strategy to hedge forex exposure up to 12 months in the range of 60-65% against the earlier policy of hedging forex exposure up to 18 months and in the range of 75-85%. The company's margins remains exposed to forex rate fluctuation.

Competitive Industry: Global Home Textile market is mainly driven by demand from USA which is the largest Home Textile player. This demand is catered by countries like China, India, Pakistan, Vietnam, etc. The Indian export Home Textile market is dominated by few large players such as Welspun India, Indo Count, Himatsingka Siede, Trident, etc. These organised and larger players mainly cater to export demand from large global retailers and face competition from countries like China, Pakistan, Vietnam, etc.

Industry Outlook

The Indian textiles industry, currently estimated at around US\$ 120 billion, is expected to reach US\$ 230 billion by 2020. The Indian Textile Industry contributes approximately 4 per cent to India's Gross Domestic Product (GDP), and 14 per cent to the overall Index of Industrial Production (IIP). Indian exports of locally made retail and lifestyle products grew at a compound annual growth rate (CAGR) of 10 per cent from 2013 to 2016, mainly led by bedding bath and home decor products and textiles. The Indian government has come up with a number of export promotion policies for the textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under the automatic route. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market.

Liquidity Analysis

ICIL has an adequate liquidity profile with free cash of Rs. ~20 crore as on June 30, 2019 and is expected to generate GCA of Rs. 94.40 crore (post the payout towards refund of excess export benefits) in FY20. The same is sufficient to service scheduled debt repayments of Rs. 23.08 crore in FY20, of which the company has repaid Rs. 6.49 crore in Q1FY20. The company also has some headroom available on its working capital limits on account of moderate utilisation of 60.58% for last 12 months ended July 2019. However, the company's liquidity profile in the near term will remain strained on account of Rs. ~94 crore payout towards refund of excess of export incentives received.

Analytical approach

CARE has analysed ICIL's credit profile by considering the consolidated financial statements owing to financial and operational linkages between the parent and subsidiaries, common management and fungible cash flows, and corporate guarantee given by ICIL on behalf of its foreign subsidiary.

Applicable Criteria

Criteria on assigning Outlook to Credit Ratings CARE's Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology-Manufacturing Companies Financial ratios – Non-Financial Sector Rating Methodology for Cotton Yarn Industry

About the Company

Indo Count Industries Ltd (ICIL) was incorporated in 1988 by Mr. Anil Kumar Jain (Executive Chairman) with a view to set up a 100% export oriented combed cotton yarn spinning unit. Over the years ICIL has emerged and established itself as one of India's top three suppliers and exporter of bed linen. It is amongst the leading bed sheet suppliers to USA. ICIL derives its competitive strength through expertise in designing and processing (printing/bleaching/dyeing) of bed linen. Besides it also has presence in spinning (61,488 spindles), weaving (128 looms) and made-ups. ICIL's product portfolio includes Bed linens, Comforters, Quilts, Pillow cases, Duvet covers, etc. Over the years, the company expanded its processing capacity which currently stands at 90 million meters p.a. ICIL's manufacturing facility is located at Kolhapur (Maharashtra, India).

Brief Financials (Rs. crore)	FY18 (A)	FY19 (A)	Q1FY20 (UA)
Total operating income	1954.25	1943.82	518.46
PBILDT	258.59	165.37	71.37
PAT	125.28	59.84	34.67
Overall gearing (times)	0.40	0.34	-
Interest coverage (times)	7.44	4.65	7.98

A: Audited; UA: Unaudited

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities

Name of the Instrument	Date of Issuance	Coupon Rate	Maturity Date	Size of the Issue (Rs. crore)	Rating assigned along with Rating Outlook
Fund-based - LT-Term Loan	-	-	Jan 2024	71.44	CARE A+; Stable
Fund-based-Short Term	-	-	-	525.00	CARE A1
Non-fund-based - ST BG/LC	-	-	-	230.00	CARE A1

Annexure-2: Rating History of last three years

Sr.	Name of the	Current Ratings			Rating history
No.	Instrument/Bank	Type	Amount	Rating	Date(s) &	Date(s) &	Date(s) &	Date(s) & Rating(s)
	Facilities		Outstanding		Rating(s)	Rating(s)	Rating(s)	assigned in 2016-
			(Rs. crore)		assigned in	assigned in	assigned in	2017
					2019-2020	2018-2019	2017-2018
	1. Fund-based - LT-Term	LT	71.44	CARE A+;	-	1)CARE AA-;	1)CARE AA;	1)CARE AA-
	Loan			Stable		Negative	Stable	(17-Oct-16)
						(14-Nov-18)	(21-Aug-17)	2)CARE A
						2)CARE AA;		(14-Apr-16)
						Negative
						(05-Sep-18)
						3)CARE AA;
						Negative
						(15-May-18)
	2. Debentures-Non	LT	-	-	-	-	-	1)Withdrawn
	Convertible Debentures							(21-Jun-16)
								2)CARE A
								(14-Apr-16)
	3. Fund-based-Short Term	ST	525.00	CARE A1	-	1)CARE A1+	1)CARE A1+	1)CARE A1+
						(14-Nov-18)	(21-Aug-17)	(17-Oct-16)
						2)CARE A1+		2)CARE A1
						(05-Sep-18)		(14-Apr-16)
						3)CARE A1+
						(15-May-18)
	4. Non-fund-based - ST	ST	230.00	CARE A1	-	1)CARE A1+	1)CARE A1+	1)CARE A1+
	BG/LC					(14-Nov-18)	(21-Aug-17)	(17-Oct-16)
						2)CARE A1+		2)CARE A1
						(05-Sep-18)		(14-Apr-16)
						3)CARE A1+
						(15-May-18)

Annexure-3: Name of the companies consolidated with ICIL

Sr. No.	Companies
1	Pranavaditya Spinning Mills Limited
2	Indo Count Retail Ventures Pvt. Ltd.
3	Indo Count Global Inc., USA
4	Indo Count UK Limited
5	Indo Count Australia Pty Ltd
6	Indo Count Global DMCC (Formerly known as Hometex Global DMCC)

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications.

Contact us

Media Contact Mradul Mishra Contact no. – +91-22-6837 4424 Email ID – mradul.mishra@careratings.com

Analyst Contact

Pulkit Agarwal Contact no. – +91-22-6754 3505 Email ID: pulkit.agarwal@careratings.com

Relationship Contact

Meenal Sikchi Contact no. - +91-22-6754 3455 Email ID: meenal.sikchi@careratings.com

About CARE Ratings:

CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

Disclaimer

CARE's ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE's ratings do not convey suitability or price for the investor. CARE's ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE's rating.

Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

**For detailed Rationale Report and subscription information, please contact us at www.careratings.com