Avon Fitness Machines Private Limited January 07, 2019

Transcription

1 Ratings Facilities Avon Fitness Machines Private Limited January 07, 2019 Amount Ratings 1 Long term Bank Facilities CARE BBB-; Stable (Triple B Minus; Outlook: Stable) Total Facilities (Rupees Twenty crore only) Details of instruments/facilities in Annexure-1 Rating Action Assigned Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of Avon Fitness Machines Private Limited (AFM) derives strength from the experienced promoters, established brand name with diversified product profile along with operational linkages & financial support from the flagship company of the group- Avon Cycles Limited (ACL). The rating further derives strength from the healthy scale-up of operations, coupled with comfortable and improving PBILDT margins, comfortable overall solvency position and diversified customer base. The rating, however, remains constrained by its short track record of operations with small scale of operations, working capital intensive nature of operations, susceptibility of margins to foreign currency fluctuations and highly competitive & fragmented nature of the fitness equipment industry. Going forward, the ability of the company to profitably scale-up its operations and manage the working capital requirements efficiently will remain the key rating sensitivities. Furthermore, any new capex and funding mix for the same impacting the credit profile along with continuous need based financial support from ACL will also remain a key rating sensitivity. Detailed description of the key rating drivers Key Rating Strengths Experienced promoters with operational linkages and financial support from ACL: AFM is a part of the Avon group of Ludhiana. Mr. Onkar Singh Pahwa (Managing Director in ACL and AFM), has an overall industry experience of nearly three and a half decades. Other directors of the company include Mr. Mandeep Singh Pahwa (s/o of Mr. Onkar Singh Pahwa and also Executive Director in ACL) and Mr. Rishi Pahwa (s/o Mr. Onkar Singh Pahwa and also Joint Managing Director in ACL), each having an overall industry experience of more than a decade. The day-to-day operations of the company are managed by Mr. Santosh Kumar Motwani, Director, who has an experience of around 3 decades in the fitness industry through the companies promoted by him. The directors of the company are supported by a team of qualified professionals for various domains. The company is a part of 65 year old Avon Group which currently has business interests in the manufacturing of bicycles, e-bikes and solar & wind power generation through its flagship company- ACL. The operational linkages of AFM with ACL include usage of the common brand name-avon, to sell their products. Further, AFM also operates its office and warehouse from the premises of ACL. There has also been regular need based financial support provided by ACL to AFM in the form of infusion of unsecured loans. As on September 30, 2018, the same stood at Rs cr. Going forward, continuation of the need based financial support from ACL will remain a key rating sensitivity. Diversified product profile with established brand name in the market: AFM is engaged in trading of fitness machines from China and sells those products under the brand name, Avon in domestic market. The company offers a wide range of products (around 250) under its keep-fit and Hi-Power series for both personal (home use) and commercial usage (gyms and institutes), respectively. The company s product profile is well diversified with cross fit machines, Treadmills, massagers, leg press machines, benches, dumbbells, gym balls, etc. being offered. Diversified customer base: The company has a diversified customer base in terms of both number of customers catered to and the customer profile, with top-5 customers contributing ~23% of the total income in FY18 [(Audited; refers to the period from April 01 to March 31); ~21% in FY17)]. The company has been getting repetitive orders from its existing clients due to established relations of promoters with its clients on account of their long standing relationship with customers. 1 Complete definition of the ratings assigned are available at and other CARE publications. 1 CARE Ratings Limited

2 Comfortable and improving PBILDT margins and comfortable overall solvency position: The PBILDT margins of the company have remained at a comfortable level and have improved on a y-o-y basis in the last three years. This has been on the back of stabilization of operations, increase in volume sold which has led to procurement of fitness machines at favourable terms by AFM and trading under the brand name, Avon which assists the company in commanding higher margins in the market compared to its peers. The debt profile of the company comprised of working capital borrowings outstanding with no term loan obligations outstanding, as on March 31, The overall gearing ratio has remained comfortable at 0.94x, as on March Further, the debt coverage indicators remained comfortable as marked by total debt to GCA ratio of 3.79x, as on March 31, The interest coverage ratio also remained comfortable at 5.09x in FY18. In H1FY19 (Prov.), the company has achieved a total operating income of Rs cr., which increased by ~32% from Rs cr. realized in H1FY18 (Prov.). The PBILDT margins improved during the period to 17.64% from 10.33% achieved in H1FY18 on account of higher absorption of fixed nature of expenses with stabilization of operations and better procurement terms with its suppliers. Subsequently, the PAT margins improved substantially during the period to 10.50% (PY: 5.78%). The interest coverage ratio as marked by PBILDT interest coverage improved during the year to 5.97x (PY: 4.30x). Key Rating Weaknesses Short track record of operations with small scale of operations: AFM was established in August-2013 with operations of the company commencing in October-2014, and with a limited track record of ~4 year in the industry. FY16 was the first full year of operations of the company with scale of operations of the company remaining small at Rs cr. in FY18. However, the scale of operations of the company increased at a CAGR (Compounded Annual Growth Rate) of ~56% in the FY16-18 period with income increasing from Rs cr. in FY16 to Rs crore in FY18 (Rs cr. in FY17). This was on account of higher quantity sold during the period on a year-on-year (y-o-y) basis. Moderate liquidity position: The operations of the company remained working capital intensive in nature marked by elongated operating cycle of ~159 days as on March 31, 2018 (on account of high inventory holding days) and average cash credit limit utilization of ~85% in the 12 months period ended November However, AFM had no external term debt liability, as on March 31, 2018, hence, no repayment obligation during FY19. Further, ACL, the flagship company of the group, has infused unsecured loans, whenever required, to fund various business requirements of AFM. As on March 31, 2018, AFM had free cash & liquid investments of Rs.0.09 Cr. The current and quick ratios of AFM stood comfortable at 1.84x and 0.74x, respectively (Previous Year: 2.21x and 0.77x, respectively). Highly competitive and fragmented industry with susceptibility of margins to foreign exchange fluctuations: AFM s operates in a highly fragmented industry with minimal entry barriers while the demand for fitness products is spread across numerous organized and unorganized players in domestic as-well-as international market. It faces tough competition from countries like China that have been providing fitness products at lower costs. Additionally, the margins of AFM are vulnerable to the fluctuation in the foreign exchange rates with imports in FY18 accounting for ~92% of the costs of total goods traded in FY18 while the company is not engaged in exports. Since, the exposure of the company is not hedged (in the absence of natural hedging and entering into derivative contracts/other instruments), it exposes the profitability margins to any adverse fluctuations in the prices of imported goods. Analytical Approach: Standalone. However, synergy with the promoter group (Avon, in the form of common directors, common brand name and need based financial support) has been considered. Applicable Criteria Criteria on assigning Outlook to Credit Ratings Financial ratios Non-Financial Sector CARE s policy on default recognition CARE s methodology for wholesale trading Rating Methodology- Factoring linkages in rating Company Background Avon Fitness Machines Private Limited (AFM) is a subsidiary of Pahwa Estates and Holdings Private Limited (PEHPL) which holds ~80% of the shareholding of the company. AFM is engaged in the trading of fitness machines, equipment & spares in India. The company imports from China and then sells them in India through its own sales & marketing team to dealers and fitness centres, under the brand name, Avon. The company started its operations in October and initially utilized the distribution network of Avon Cycles Limited (ACL) to market its products across India. However, the company now also sells through its own network with total network of around 300 dealers spread across India. The company also has a retail outlet in Gurgaon, Haryana and display showroom at Ludhiana, Punjab. 2 CARE Ratings Limited

3 The company is a part of 65 year old Avon Group which currently has business interests in the manufacturing of bicycles, e-bikes and solar & wind power generation through its flagship company - ACL. There are three common directors with ACL (out of the four on the board of AFM). The bank facilities of AFM are backed by the personal guarantees of its directors- Mr. Onkar Singh Pahwa who is also the Managing Director of ACL and AFM (25.50% shareholding in ACL, as on March 31, 2018), Mr. Rishi Pahwa who is the Joint Managing Director of ACL and Director in AFM (18.97%), Mr. Mandeep Singh Pahwa who is the Executive Director of ACL and Director in AFM (18.97%), Mrs. Sarabjit Kaur Pahwa who is the Promoter Director of ACL (25.50%). Brief Financials FY17 (A) FY18 (A) Total operating income PBILDT PAT Overall gearing (times) Interest coverage (times) A: Audited Status of non-cooperation with previous CRA: NA Any other information: NA Rating History for last three years: Please refer Annexure-2 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 Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact: Name: Mr Sudeep Sanwal Tel: Cell: sudeep.sanwal@careratings.com **For detailed Rationale Report and subscription information, please contact us at 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 credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. 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. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is 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. 3 CARE Ratings Limited

4 Annexure-1: Details of Instruments/Facilities Name of the Instrument Fund-based - LT-Cash Credit Date of Issuance Coupon Rate Maturity Date Size of the Issue Rating assigned along with Rating Outlook CARE BBB-; Stable Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities Type Current Ratings Amount Outstanding 1. Fund-based - LT-Cash Credit Rating LT CARE BBB-; Stable Rating history CARE Ratings Limited

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