CARE REVISES THE RATING ASSIGNED TO BANK FACILITIES AND CP/STD OF BOMBAY RAYON FASHIONS LTD. Amount

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1 July 31, 2012 Press Release CARE REVISES THE RATING ASSIGNED TO BANK FACILITIES AND CP/STD OF BOMBAY RAYON FASHIONS LTD. Facilities/Instruments Long-term Bank Facilities Amount Ratings 1 (Rs. crore) 3, CARE BBB- [Triple B Minus] Remarks Revised from CARE A [Single A] Short-term Bank Facilities CARE A3 [A Three] Total Facilities 3, CP/STD (carved out) ^ CARE A3 (reduced from Rs crore) [A Three] Total Instruments ^Outstanding as on July 11, Revised from CARE A1 [A One] Revised from CARE A1 [A One] Rating Rationale The revision in the ratings of Bombay Rayon Fashions Ltd. (BRFL) takes into account the overall deterioration in the financial risk profile with decline in profitability margins and elongated working capital cycle resulting in tight liquidity position. The ratings derive strength from experience of the promoters in textile business, integrated operations with economies of scale, growth in operations and continuous infusion of equity in the past few years. The ratings are however constrained by moderate gearing levels, significant exposure to subsidiaries and declining liquid investments. The ability of the company to optimally utilize the expanded capacities, maintain healthy profitability margins, reduce its working capital cycle, ability to withstand aggressive competition and also garner sufficient revenues from its subsidiaries and thereby reduce its exposure shall be key rating sensitivities for the company. Background Incorporated in 1992, Bombay Rayon Fashions Limited (BRFL) is a textile company promoted by Mr Janardhan Agrawal. BRFL started as a fabric manufacturing company and has now grown multifold in the past few years with operations spanning a wide range of fabrics and garments. BRFL s manufacturing facilities are spread across various locations in Maharashtra, Karnataka, Tamilnadu and Kerala. Credit Risk Assessment Improved operational performance yet decline in profitability BRFL s total income on standalone basis grew by 20.66% in provisional FY12 (refers to the period April 1 to March 31) vis-à-vis FY11 & at the CAGR of 26.83% over FY09-FY12. The company has witnessed traction across all the business segments due to increase in volumes (on account of capacity augmentation undertaken) coupled with increase in realizations. 1 Complete definition of the ratings assigned are available at and in other CARE publications

2 Furthermore BRFL also has healthy operating margin of 26.77% in FY12 (provisional; increased from 23.99% in FY11) mainly due reduction in raw material cost (due to decline in cotton prices coupled with lower cost of production, due to synergistic benefit from manufacturing of yarn at its subsidiary, STI India Ltd.). Despite the growth in operating profitability, PAT margins on standalone basis (declined from 10.05% in FY11 to 7.55% in provisional FY12) declined on account of higher interest outflow (due to higher interest rate, capitalisation of assets and increase in working capital requirement) coupled with increase in depreciation. Profitability has also declined on consolidated basis due to the same. During FY12 (provisional), BRFL posted PAT of Rs crore (vis-à-vis a PAT of Rs crore in FY11) on total income of Rs crore (vis-à-vis Rs crore in FY11) on consolidated basis. Tight liquidity position The working capital cycle for BRFL continues to remain high in provisional FY12 (with an operating cycle of 270 days in FY12 vis-à-vis 239 days in FY11) mainly on account of higher inventory days. The company has carried higher inventory to support increased capacities, resulting in higher inventory carrying period. Furthermore to support its elongated working capital cycle, the company s reliance on working capital borrowings has also been persistently high (average working capital utilization for the 12 months ending June 2012 is at 97.94% on sanctioned limit of Rs.1,495 crore). Besides the higher working capital utilization, the overall liquid investments and cash balance available with the company on standalone basis has also reduced over a period of time from Rs crore as on March 31, 2010 to Rs crore as on March 31, 2012 (provisional), mainly utilized towards financing its capital expenditure and meeting its working capital requirement. Moderate capital structure Despite the increase in debt to meet its working capital requirements and capital expenditure, the overall gearing on standalone basis for BRFL has improved to 1.08x as on March 31, 2012 (provisional) vis-à-vis 1.14x as on March 31, 2011 (excluding acceptances) on the account of infusion of equity due to conversion of warrants (amounting to Rs crore) and accretion of profits. The overall gearing, however is moderately high at 1.31x as on March 31, 2012 (provisional; vis-à-vis 1.40x as on March 31, 2011) after excluding interest free advances to loss-making subsidiaries from networth. Furthermore in the first quarter of FY13, the company was likely to receive funds via conversion of warrants amounting to Rs crore; however the option for conversion for these warrants has not been exercised by the allottee (B.R. Machine Tools Pvt. Ltd.) within the prescribed period of 18 months ending on April 4, Thus due to non-conversion of warrants, the company may have to further rely on debt to support its operations, which shall be critical from credit perspective. Significant support to subsidiary companies As on March 31, 2012 (provisional), the interest-free advances to the subsidiaries amounted to Rs crore (vis-à-vis Rs crore as on March 31, 2011); which amounted to 17.60% of the overall networth of the company on standalone basis as on March 31, 2012 (provisional). BRFL has granted these interest-free advances to its subsidiaries to meet their operational requirements. Out of the above loans and advances, majority of the loans and advances has been provided to BRFL Italia (BI; including loans transferred from BRHL) which is still at nascent stage of operations and has been incurring cash losses. Therefore ability of BI to successfully turnaround its operations and also reduce its reliance on BRFL to meet the payments for its operations, amidst overall economic slowdown in Euro-zone shall be critical from credit perspective. Furthermore the other subsidiaries also have lower capitalization, thus are expected to be dependent on BRFL to meet its operational requirement.

3 Deteriorating performance of its subsidiary, STI India Ltd. In FY11, BRFL acquired stake in STI India Ltd. (STI; wherein BRFL holds 73.72% stake, as on March 31, 2012) to backward integrate into spinning. STI s performance in FY12 has deteriorated and its total income and profitability declined due to fluctuation in cotton prices. In FY12, STI posted PAT of Rs.0.15 crore (vis-à-vis PAT of Rs crore in FY11) on total income of Rs crore (vis-à-vis Rs crore in FY11). Therefore going forward, ability of STI to generate sufficient accruals and also mitigate risk on account of raw material price fluctuation shall be critical for BRFL credit profile. Furthermore BRFL also has significant amount of contingent liability in STI, thus if any liability arises on the account of the same, STI shall require support from BRFL to meet the payments. Volatility in raw material prices For BRFL, the cost of raw materials (includes cotton & polyester) constitutes around 50.73% of the total income in FY12 (provisional). In past, the prices of raw material (majorly cotton) have been volatile. BRFL in past has demonstrated the ability to pass on such cost increases to customer, with a time lag, thereby impacting its margins marginally. However, any major movement in raw material cost may put strain on the margins of BRFL. Demand squeeze across segment BRFL operates under two segments viz Garments and Fabric. Fabric produced by the company is majorly used for captive consumption and sold in domestic markets while garments are majorly exported to the US, the UK and European markets. Furthermore, due to BRFLs presence in the value-added segment, the company is vulnerable, on account of demand being cyclical in nature. Furthermore with uncertain economic environment in the domestic market as well export market, ability of BRFL to meet increase in scale of operations and effectively utilize its capacity addition as envisaged shall be critical for its credit profile. Analyst Contact Name: Mr. Pulkit Agarwal Tel # Board # pulkit.agarwal@careratings.com CARE has classified instruments rated by it on the basis of complexity. This classification is available at Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications.

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