SHREE GANESH JEWELLERY HOUSE (I) LIMITED

Transcription

1 Ratings SHREE GANESH JEWELLERY HOUSE (I) LIMITED Facilities/Instruments Amount (Rs. crore) Ratings 1 Remarks Long-term Bank Facilities 150 CARE BBB+ Short-term Bank Facilities 3695 CARE A3+ (A Three Plus) Long-term / Short-term Bank Facilities Total Bank Facilities 4,100 Short-term Debt (including Commercial Paper) Non-convertible debenture (Series I Tranche I) (Series I Tranche II) (Series I Tranche III) (Series II) 255 CARE BBB+ / CARE A3+ (Triple B Plus / A Three Plus ) 400 CARE A3+ (A Three Plus) 50 CARE BBB+ 50 CARE BBB+ 150 CARE BBB+ 100 CARE BBB+ Revised from CARE A1+ (A One Plus) / CARE A1+ (Single A Plus / A One Plus) Revised from CARE A1 (A One) Rating rationale The revision in the ratings of Shree Ganesh Jewellery House (I) Ltd (SGJHIL) is in view of rising level of debtors and collection period in FY13 (refers to the period April 1 to March 31) and decline in profitability in FY13 & Q1FY14 (refers to the period April 1 to June 30). Further, the revision also takes into account the ongoing uncertainty relating to import of gold. The aforesaid ratings, however, continue to derive strength from the experience of the promoters, strategic location of manufacturing units with skilled craftsmen base and moderate financial risk profile. The abovementioned strengths are partially offset by counter-party payment risk, foreign exchange fluctuation risks, geographical & customer concentration risks, working capital intensive nature of operations and significant exposure to group entities. Ability of the company to improve profitability & debt protection indicators, reduction in collection period and overall prospects of the gem & jewellery (G&J) sector against the backdrop of heightened government regulations in the sector would remain the key rating sensitivities. Background SGJHIL, incorporated in August 2002, belongs to Shree Ganesh Group of Kolkata which is engaged in trading and manufacturing & export of handcrafted/machine-made plain & studded gold jewellery and diamond jewellery. The company markets its jewellery products under the brand name, GAJA. It is one of the largest exporters of the handcrafted gold jewellery from India. The current promoter of the group is duo of brothers - Mr Nilesh Parekh and Mr Umesh Parekh who have more than two decades of experience in gold jewellery business. 1 Complete definitions of the ratings assigned are available at and in other CARE publications 1

2 Credit Risk Assessment Experienced promoters SGJHIL has a satisfactory track record of nearly a decade in trading & manufacturing of gold products and with advent of time the company has emerged as one of the largest exporter of handcrafted gold jewellery from eastern India. Currently, Mr Nilesh Parekh, Chairman & Mr Umesh Parekh, Managing Director, are at the helm of affairs of the company. Both the promoters have an experience of more than two decades in the gold industry. Further, Credit Suisse PE Asia Investments (Mauritius) Limited is having strategic investment with 4.4% equity stake in SGJHIL as on Mar.31, Strategic location of manufacturing units with skilled craftsmen base SGJHIL has its operations spread across three locations within West Bengal (four units at Manikanchan SEZ, one unit each at Mondalpara & Domjur). The manufacturing units at Manikanchan SEZ (Kolkata, West Bengal) are entitled to direct and indirect taxation benefits (three units are 100% income tax free & one unit is 50% income tax free) and expeditious custom clearances. These benefits reduce costs substantially and consequently allow the company to price its products more competitively. However, as per Union Budget , MAT has been made applicable on units operating at SEZs. This apart, as the manufacturing units are located in West Bengal (where skilled labour & craftsmen for manufacture of handcrafted jewellery are abundantly available), SGJHIL is able to employ skilled craftsmen at cheaper cost with vast traditional knowledge & expertise, resulting in its competitive advantage in terms of quality. High degree of ongoing uncertainty pertaining to import of gold The import duty over the last year and a half has increased to its current level of 10% from 2%. Besides, as per the latest guidelines, all nominated banks/nominated agencies are to ensure that at least one fifth of every lot of import of gold (in any form/purity including import of gold coins/dore) is exclusively made available for the purpose of export. In other words, nominated banks/nominated agencies would be required to retain 20% of the imported quantity in the customs bonded warehouses and fresh imports of gold would be permitted only after the exports have taken place to the extent of at least 75% of gold remaining in the customs bonded warehouse. These guidelines supersede previous guidelines issued in May and June that limited import of gold on consignment basis only for export purpose. Thus, the frequent changes in regulations have led to high degree of uncertainty, which in turn, is leading to adverse supply scenario in the gems and jewellery segment. Foreign exchange fluctuation risk SGJHIL has a decent presence in export market, since substantial portion (about 80%) of its revenues are generated from overseas clientele. The company also imports nearly 90% of its raw material requirement in the same currency of its sales, which, imparts a substantial degree of natural hedging to the foreign exchange exposure of SGJHIL. However, the timing difference in regard to the actual dollar receivables and payables exposes SGJHIL to currency risks. Counter-party payment risk Counter party payment risk assumes more significance since majority of its sales are in the export market (about 81% of total turnover in FY13) and payment is received after the despatch of consignment. Further the bills are not backed by L/Cs. As the credit profile of these export customers is moderate, SGJHIL continues to face counter-party risk. However, the group is in this line of business over the last seven decades and has long term relationship with majority of them. Majority of the customers are large wholesalers based in Middle East with whom the group has been dealing for a long period. Geographical and customer concentration risk Majority of the total sales (about 60% in FY13) of SGJHIL is to Middle East countries (mainly UAE) and hence, a slump in the demand from this region might significantly impact the revenue of the company. However, the company is expanding its marketing network and accessing new markets (such as Hong Kong, Singapore, USA, UK) to diversify. Moreover, the company is exposed to customer concentration risk as well in view of top ten customers contributing about 63% total revenue in FY13. However, the same has reduced considerably over FY12 (from about 70% in FY12 and about 88% in FY11) in view of the company s strategy to diversify its business territories. Working capital intensiveness Working capital requirement for the wholesale players like SGJHIL is high due to relatively longer processing period for hand made gold jewellery, on one hand, and longer debtor cycle, on other hand. However, for better liquidity management, the company enters into bill discounting with banks on with recourse basis. However, the banks generally levy higher discounting 2

3 charges, as these bills are not backed by L/Cs & have longer credit period. This exposes the company to high leveraging and the consequential high interest cost. This apart incremental working capital requirements on account of increased scale of operations has led to higher utilisation of working capital limits at about 92% for 12 months period. Increase in level of debtors and collection period SGJHIL s average collection period has been increasing over the last three years from 120 days in FY11 to 146 days in FY12 and 162 days in FY13) mainly on account of change in product mix from gold jewellery to studded jewellery. The company has to offer higher credit period of about days (in line with the industry practice) for studded jewellery as compared to about 120 days in case of sale of gold jewellery. In view of the above, the level of debtors (including bills discounted) has increased to Rs.5,042.8 crore as on March 31, 2013 from Rs.3,129.9 crore as on March 31, On the other hand, the company also gets similar credit from its suppliers of gemstones resulting in higher level of creditors. Substantial exposure to group companies SGJHIL s fund based exposure to the subsidiary/associate companies (in the form of investments and loans & advances) stood at Rs crore as on March 31, 2013 accounting for around 11.7% of its tangible net worth as on the even date (as against Rs crore as on Mar.31, 2012, accounting for 9.7% of net worth). Further, SGJHIL also had receivables aggregating Rs crore (as on Mar.31, 2013) from Shree Ganesh Jewellery House FZE (FZE), on account of supply of semi-finished gold jewellery for further value addition at its Dubai factory. This apart, SGJHIL has also extended corporate guarantees in respect of various bank facilities availed by its different subsidiary/associate companies and as on March 31, 2013 outstanding in respect thereof was Rs crore (increased from Rs crore as on Mar.31, 2012). Furthermore, SGJHIL has also proposed to extend corporate guarantee amounting to Rs.150 crore to banks for bank facilities of Veeyu India Pvt Ltd. Moderate financial risk profile Net sales grew by about 40% in FY13 over FY12 on account of higher sale quantum (in both the export and domestic market) coupled with substantial increase in the gold prices. However, PBILDT margin declined to 4.96% in FY13 from 6.65% in FY12 as making charges as a percentage of total sales value declined since gold prices continued to witness an increasing trend while making charges being a function of total man hours required/intricacy of design continued to remain stable. Reported PAT decreased during the even period due to relatively lower increase in PBILDT level coupled with higher capital charge. The capital structure of SGJHIL continued to remain moderate despite improvement in overall gearing ratio to 1.95x as on March 31, 2013 from 2.38x as on March 31, 2012 mainly due to accretion of profits to reserves. Moreover, on considering corporate guarantees extended to its subsidiaries/associate as debt, the overall gearing deteriorates to 2.23x as on March 31, Furthermore, during Q1FY14, the company has achieved a turnover of about Rs crore and PBT of Rs crore. Financial results (Rs. crore) For the period ended / as at Mar.31, Audited Audited Audited Working Results Net Sales Total Operating income PBILDT Depreciation Interest PBT Reported PAT (after deferred tax) Adjusted PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Share Capital Networth

4 For the period ended / as at Mar.31, Audited Audited Audited Total capital employed Key Ratios Growth Growth in Total operating income (%) Growth in PAT (after deferred tax) (%) Profitability PBILDT / Total operating income (%) PAT (after deferred tax) / Total income (%) ROCE (%) Solvency Debt equity ratio Overall gearing ratio (incl. acceptances) Interest coverage (PBIDT/Interest) Term debt/gca Total debt/gca Liquidity Current ratio (times) Quick ratio (times) Turnover Average collection period (days) Average inventory period (days) Average creditors period (days) Working capital cycle (days) Adjustments Outstanding bill discounted, shown as contingent liability, has been added to bank borrowings and sundry debtors for the above analysis Foreign exchange gain to the tune of Rs crore (being unrealized) is being subtracted from income, reserves and matching amount has been subtracted from current assets for the purpose of this analysis in FY12. Since the abovementioned notional gain has been completely realized during FY13, the entire amount has now been added to the networth and corresponding current assets. (This follows our brief rational for entity published on 8 October 2013) 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 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. 4

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