TEXT-FICTH rates India's PVN Tex Industries B+(ind)

Thu Oct 7, 2010 10:36am IST

(The following was released by the rating agency)

Oct 07 - Fitch Ratings has today assigned India's PVN Tex Industries (PVN Tex) a National Long-term rating of 'B+(ind)'. The Outlook is Stable. The agency has also assigned ratings to PVN Tex's instruments, as follows:

- INR50m term loans: 'B+(ind)';

- INR60m cash credit limits: 'B+(ind)'; and

- INR40m non-fund based limits: 'F4(ind)'.

Fitch has taken a consolidated view of both PVN Tex and PVN Fabrics, reflecting strong strategic linkages between the entities since they manufacture similar line of products as well as both the firms are managed and controlled by the same sponsors. (For more details on PVN Fabrics, please refer to the rating action commentary, entitled "Fitch Rates India's PVN Fabrics 'B+(ind)'; Outlook Stable," dated 7 October 2010 and available on www.fitchratings.com).

PVN Tex's ratings benefit from the longstanding experience of its promoters in the more stable domestic woven sacks manufacturing market. The firm caters mainly to sugar, food and fertilizers industries, with the latter accounting for around 50% of total revenues. Owing to jute decontrol in FY10, there has been an increase in demand for polypropylene (PP) / high-density polyethylene (HDPE) woven sacks. This has led to an increase in the demand of PVN Tex' products, and thus has enabled the firm to build up its revenues. Fitch notes that the firm enjoys income tax and sales tax benefits and lower power costs as its manufacturing facilities are based in Daman.

The ratings are however constrained by the relatively small size of PVN Tex's operations and the commodity nature of its products, the latter exposes it to market forces such as fluctuations in the prices of raw materials (PP and HDPE) and finished goods. Though PVN Tex has established relationships with its customers, the large size of its customers and their bargaining power have resulted in lower margins. The ratings are also constrained by the INR103m capex that the company plans to undertake to set up additional manufacturing facilities. This will be funded through debt of INR50m and the sponsor's contribution (the Agarwal family), which would affect its liquidity in case of project execution delays. Fitch expects the capex is expected to positively benefit the firm over the long-term. Fitch notes that the firm's liquidity remained comfortable and was supported by the ad-hoc limits raised by the firm. The liquidity was further supported by the equity infusion by the sponsors of INR48.3m in FY10 for the expansion of its unit.

Fitch will continue to monitor the progress of PVN Tex's capex plans. Any delays in execution or cost overruns that materially impact its credit metrics could pressure PVN Tex's ratings. Negative rating triggers include PVN Tex's EBITDA margins of below 5% and debt/EBITDA levels of above 6x on a sustained basis. Furthermore, pressure on working capital requirements or any greater-than-expected decline of the company's operating margins due to adverse market conditions could also act as negative rating triggers. Positive rating triggers include successful completion of capex and demonstration of increased revenues and profitability, which would result in an improved liquidity position.

PVN Tex is a closely held partnership firm, owned and managed by the Poonamchand Agarwal and family. The Agarwal family has two other key ventures, namely PVN Fabrics and Kandui Industries Pvt. Ltd. PVN Tex has been involved in the manufacturing of woven sack manufacturing for the last 40 years. In FY10, it reported net sales of INR502m (FY09: INR512m), an EBITDA of INR18.8m (FY09: INR19.1m), debt/EBIDTA of 6.6x (FY09: 4.6x) and interest cover of 2.5x (FY09: 2.5x).

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