By Neelam Agrawal

India Ratings and Research (Ind-Ra) has assigned Firestar International Private Limited (FIPL) a Long-Term Issuer Rating of ‘IND A-’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

The ratings reflect the company’s integrated business model, geographical reach, diverse end-consumer market, brand recognition and economies of scale. The ratings are constrained by FIPL’s elongated working capital cycle, concentrated customer base and industry cyclicality. FIPL has generated positive funds flow from operations in the two years ended FY15 and has moderate credit metrics. Ind-Ra has relied on proforma consolidated financials provided by the company.

KEY RATING DRIVERS

Margin Resiliency: FIPL’s consolidated revenues grew 18% yoy in FY15 to INR104bn, whereas its EBITDA margins remained stable at 6%. This is mainly due to order backed operations in its major segments - wholesale diamond jewellery manufacturing segment and cut and polished diamond trading business segment. These segments garnered stable margins of about 5% and 2%, respectively, in the last two years. The retail jewellery segment catering to the ultra-high net worth consumer segment being high margin and less price sensitive is unlikely to impact margins adversely in the event of a slowdown, thus providing margin resiliency.

Integrated Business Model: FIPL is present across the diamond jewellery value chain. In FY15, cut and polished diamond trading accounted for around 50% of revenues, wholesale jewellery manufacturing business accounted for about 45% and retail jewellery sales accounted for nearly 5%. The company caters to a diverse end-consumer market including diamond industry participants and mid and HNIs consumers in the diamond jewellery market. Also, it benefits from a diverse geographical presence enabling strong market access for both sourcing and sales.

Higher Mix of Retail Sales: The agency expects the margins to improve with a higher proportion of exquisite retail jewellery in the sales mix. Retail sales garner higher margins than wholesale jewellery and cut and polished diamond trading operations. FIPL has four stores and plans to add four to five stores in the next 12 months.

Brand and Track Record: FIPL’s brand Nirav Modi is internationally recognised for diamond jewellery, catering to the ultra-high net worth consumer segment. Promoter Nirav Modi being a third generation player in the diamond industry has garnered trust of market participants enabling the Firestar brand to penetrate into the wholesale diamond jewellery segment as well. FIPL’s wholesale jewellery manufacturing segment caters to the customised diamond jewellery requirements of established retail brands such as Zales, Costco, J.C Penny thus reaching the upper mid-market segment in the competitive US retail jewellery market. It also owns patents relating to specific diamond cutting and setting styles.

Moderate Credit Metrics: FIPL’s FY15 EBITDAR gross interest coverage was comfortable at 3.4x (FY14: 3.8x) and adjusted net debt/EBITDA was 4.62x (4.99x). The company has posted operating EBITDA interest cover of 1.67x for 1HFY16 on a standalone basis. Ind-Ra expects improved realisations from incremental retail sales to marginally improve credit metrics from the FY15 levels, despite higher debt exposure on account of retail expansion.

Adequate Liquidity:
FIPL’s average utilisation of the working capital limits (on a standalone level) for the 12 months ended March 2015 was 93%. FIPL’s fund flow from operations improved to INR1,045m in FY15 from INR895m in FY14 on a standalone basis, supported by the improvement in margins to 5.2% from 4.8%. At a consolidated level, FIPL’s working capital cycle remained stretched at 178 days at FYE15 mainly due to an increase in the receivable days to 159 days from 142 days at FYE14 due to subdued demand and a longer credit period. The agency believes the working capital cycle will remain stretched due to the planned expansion of retail stores.

Rating Constraints: FIPL has a concentrated customer base with the top five clients contributing 50% to sales in FY14 and FY15. The company’s branded jewellery business (about 5% of revenues) caters to a small consumer segment of ultra-high net worth individuals capping retail growth. Moreover, realisations from the jewellery manufacturing business are capped at 5% due to a higher proportion of wholesale jewellery sales (around 45% of revenues). Tight supply of rough diamonds, cyclicality in the polished diamonds prices and price competition in branded jewellery could negatively impact the operating margins.


RATING SENSITIVITIES

Positive: An improvement in the working capital cycle, leading to an improvement in the liquidity, and EBITDAR net interest coverage improving above 4.5x on a sustained basis could lead to a positive rating action.

Negative: A further stretch in the working capital cycle and deterioration in the liquidity situation, a substantial decline in hedging positions of gross exposure, and/or EBITDAR net interest coverage below 2.5x on a sustained basis could lead to a negative rating action.


COMPANY PROFILE

FIPL, founded by Nirav Modi, is a global diamond and jewellery company with vertically integrated operations that span the value chain. Headquartered in Mumbai, the company operates in global diamond markets of Hong Kong, UAE and US and has offices in New York, Hong Kong, Antwerp and Dubai. Its manufacturing units located in Mumbai and Surat are largest, and other units are located in Moscow, Armenia and South Africa.

FIPL’s ratings:

- Long-Term Issuer Rating: assigned ‘IND A-’; Outlook Stable
- INR21.5bn fund-based working capital facilities: assigned ‘IND A-’/Stable/ ‘IND A2+’
- INR3.1bn non-fund-based facilities: assigned ‘IND A2+’



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Neelam Agrawal

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356115

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121