Crisil downgrades Arvind Mills

The rating assigned to two NCDs for total value of Rs 72.72 crore and Rs 25.36 crore have been downgraded from quot;BBBquot; to quot;Cquot; due to substantial cost and time overruns in expansion and diversification projects as well, it said.

This along with stabilisation problems coinciding with ongoing downturn in denim industry led to reduction in internal accruals, it said adding slow progress in liquidation of investments in group companies has resulted in the overruns, predominantly debt funded.

The company8217;s financial position in 1999-00 is expected to worsen because capitalisation of projects would lead to an increase in fixed costs which would more than offset the advantage of lower power costs and higher capacity utilisation, cautions the rating agency.

AML8217;s expansion and diversification projects have suffered from substantial time and cost overruns as well as stabilisation problems which have coincided with the ongoing downturn in the denim industry. The consequent reduction in internal accruals and slow progress in liquidation of investments in group companies has resulted in the overruns being predominantly debt funded.

Depressed market conditions combined with project stabilisation problems have led to AML posting a large operating loss in 1998-99 with the bottomline being propped up by non-operating income. The debt funding of project over-runs have resulted in AML8217;s debt equity ratio including off-balance sheet debt rising to 2.18:1 as on March 31, 1999.

Poor accruals from operations and high debt equity ratio which makes additional borrowings difficult has resulted in liquidity pressures on AML, with the company delaying on payment of unrated debt which fell due in the first quarter of the current fiscal.

The company is currently talking to banks and institutions to reschedule its debt obligations so as to reduce repayment pressures in 1999-2000.

Some of the group companies are currently in the process of disposing of properties which is expected to lead to an inflow of funds in the short term. The company is also considering divesting a part of its stake in some of its operating divisions which is also expected to result in an inflow of funds in the short term.

Crisil suggests that AML8217;s ability to reschedule its maturing debt and liquidate investments in group companies would be crucial in relieving the liquidity pressures the company is currently facing. In the longer term, AML8217;s ability to increase the value-added products in its denim offerings, stabilise its knits facilities as well as ensure large volume orders and high capacity utilisation on its expanded capacities will be the key to determining the company8217;s profitability.

The mangement would also have to take significant measures to correct the company8217;s capital structure either by divesting certain divisions or by infusing fresh equity so as to retire debt and improve the overall debt servicing ability of AML, Crisil said.