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Any net costs incurred by WNEL beyond the USD 1.5m will be paid in accordance with the Joint Operating Agreement on a net working interest basis.
Raglan Group comprises of Raglan Infrastructure Limited (RIL) and Winner Nippon Electronics Limited (WNEL).
The ratings take into account WNEL's modest size of operations, short track record of its promoters in domestic synthetic textile business and low capacity utilisation in both its business segments - polypropylene (PP) spun bond non-woven cloth (48%) and polyurethane/polyvinyl chloride (PU/PVC) synthetic leather (4.9%) in fiscal 2010, Fitch explained.
This was offset to some extent by WNEL's moderate interest coverage of 2.36x in fiscal 2010 on the back of debt from Raglan being interest-free, the agency noted.
Fitch expects that WNEL's financial leverage will remain high over the short-term as its working capital debt is expected to rise along with the increase in its scale of operations.
The ratings are further constrained by WNEL's reliance on PP, which is highly commoditised, by the vulnerability to the input price fluctuations and the low entry barriers for the industry, the analysts added.
Nevertheless, the ratings are supported by WNEL's diversified customer base as well as from its comfortable operating EBITDA margins of 12.54% and net profit margins of 4.3% in fiscal 2010, thanks to the company's low tax outflow due to fiscal benefits it gets due to its presence in Baddi, Himachal Pradesh.
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