Ratings K.P. CHACKO & SONS JUNE 30, 2017 Facilities Amount Rating 1 Long-term Bank Facilities 17 CARE B+; Stable (Single B Plus ; Outlook: Stable) Rating Action Assigned Total 17 (Rupees Seventeen crore only ) Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of K.P. Chacko and Sons (KPCS) is constrained by the modest scale of operations with fluctuating total operating income, leveraged capital structure and weak debt coverage indicators, thin and fluctuating profitability margins due to volatility associated with gold prices and presence in highly fragmented industry leading to intensive competition, working capital intensive nature of business due to elongated operating cycle and constitution of the entity as partnership firm with inheritance risk of withdrawal of capital. The rating, however, is underpinned by the vast experience of the promoter with long track record of the firm and stable demand outlook of jewellery business with scope of growth for certified and branded jewellery. Going forward, the firm s ability to increase its scale of operations, improve its profitability margins, capital structure and debt coverage indicators and manage working capital requirements efficiently would be key rating sensitivities. Detailed description of the key rating drivers Key Rating Weaknesses Modest scale of operations with fluctuating total operating income Despite long track record of the firm, the scale of operations are moderately marked by total operating income (TOI) of the firm increased from Rs. 53.49 crore in FY15 to Rs. 60.82 crore in FY16 at the back of increased amount of volumes coupled with increased prices of gold by the firm. However, TOI decreased by 7.52% to Rs. 56.26 crore during FY17 (CA certified) due to lower cash sales of the firm post October, 2016 due to demonetization effect Leveraged capital structure and weak debt coverage indicators The capital structure of the firm marked by overall gearing ratio remained leveraged at 2.36x as on March 31, 2017 (CA Certified Prov.) due to high working capital requirements to fund the operations. However, the overall gearing of the firm improved marginally to 2.36x as on March 31, 2017 (CA certified.) due to relatively lower outstanding balance of working capital borrowings as on account closing date. Furthermore, the debt coverage indicators of the firm have been weak due to thin profitability, low cash accruals and high debt levels. Total debt to GCA of the firm stood weak at 158.57x in FY15 majorly due to high level of debt with lower amount of cash accruals of the firm, however, the same improved y-o-y to 53.50x in FY17 (prov.) at the back of increase in gross cash accruals. Furthermore, PBILDT/Interest coverage ratio of the firm remained low at 1.16x in FY17 (CA certified). 1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited
Elongated working capital cycle with working capital intensive nature of business The firm s working capital cycle days stood on a higher side i.e. 130 days during FY15 and the same is seen increasing further y-o-y to 135 days and 161 days in FY16 and FY17 (CA Certified) respectively. Higher working capital cycle days of the firm are majorly due to higher level of inventory level of the firm to cater to the minimum display stock level of jewellery. The firm maintains an average inventory holding of 2-3 months to cater to the ready display of ornament jewellery for the walk-in customers of the firm. Thin and fluctuating profitability margins due to volatility associated with gold prices The firm is engaged in retailing of gold ornament jewellery, silver ornaments and sale of diamonds. Prices of gold and silver are highly volatile affected by international market and domestic demand forces. Such high volatile products of the firm resulted in fluctuating and thin profitability margins during the review period. KPCS has fluctuating and thin PBILDT margin during FY14-FY17 (CA certified.). in the range of around 2%-4% due to volatile bullion prices along with presence in highly fragmented industry leading to intensive competition. The PAT margin also stood low in the range of 0.10-0.88% during FY14-FY17 due to higher amount of interest costs of the firm. Presence in highly fragmented industry leading to intensive competition The firm operates in the Jewellery industry which is a fragmented industry with a high level of competition from both the organized and largely unorganized sector. Moreover, the global and domestic macroeconomic environment continues to remain uncertain and poses a major challenge for the companies operating in Jewellery industry Constitution of the entity as partnership firm with inherent risk of withdrawal of capital Constitution as a partnership has the inherent risk of possibility of withdrawal of the capital at the time of personal contingency which can adversely affect its capital structure. Furthermore, partnership firms have restricted access to external borrowings as credit worthiness of the partners would be key factors affecting credit decision for the lenders. Key Rating Strengths Vast experience of the promoters with long track record of the firm Mr. Jerald Jacob who is the Managing Partner of the firm has more than three decades of experience in retailing of jewellery. He belongs to the K.P Chacko family who are engaged in jewellery business for over 35 years and considered to be one of the established players in the jewellery business of Kerala. He handles the overall operations of the firm and is ably supported by his wife Mrs. Rajee Jerald. The firm was established in the year 1992 and since then is engaged in retailing of ornament jewellery. The firm is likely to be benefitted from the experienced promoters and long track record of the firm. Stable outlook of gold business with scope of growth for certified and branded jewellery In the past few years, the dynamics of consumption of gold and other jewellery has been changing. The preference for good quality, branded, certification and fashionable jewellery have been rising. KPCS being BIS hall Mark certificated has good opportunity to grow due to the changing dynamics. Analytical Approach: Standalone 2 CARE Ratings Limited
Applicable Criteria Criteria on assigning Outlook to Credit ratings CARE's Policy on Default Recognition Financial ratios Non-Financial Sector About the Company K.P. Chacko & Sons (KPCS) based at Kerala was established in the year 1992 as a partnership firm by Mr. Jerald Jacob and his wife Mrs. Rajee Jerald. The firm is mainly engaged in retailing of jewelry, ethnic gold and stone studded ornaments along with silver jewellery and gift articles. KPCS has its retail showroom located at Thodupuzha, Kerala in around 2000 sq. ft. area. Around 95% of the total revenues of the firm are generated from sale of gold and gold ornaments while balance of the sales is being done from sale of silver and silver articles. In FY17 [(CA. Certified Prov.), refers to period April 01 to March 31], KPS reported a PAT of Rs. 0.25 crore on a total operating income of Rs.56.26 crore, as against a PAT and TOI of Rs. 0.19 crore and Rs. 60.84 crore, respectively, in FY16. Status of non-cooperation with previous CRA: Not Applicable Any other information: Not applicable 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 www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact Name: Mr. Manish Kumar Tel: 040-6900 0504 Mobile: + 91 99495 47551 Email: manish.kumar@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com 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. 3 CARE Ratings Limited
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. Annexure-1: Details of Instruments/Facilities Name of the Instrument Fund-based - LT-Working Capital Demand loan Date of Issuance Coupon Rate Maturity Date Size of the Issue Rating assigned along with Rating Outlook - - - 17.00 CARE B+; Stable Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities 1. Fund-based - LT-Working Capital Demand loan Type Current Ratings Amount Outstanding Rating LT 17.00 CARE B+; Stable 2017-2018 Rating history 2016-2017 2015-2016 - - - - 2014-2015 4 CARE Ratings Limited
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