By Neelam Agrawal

India Ratings and Research (Ind-Ra) has affirmed Firestar International Private Limited’s (FIPL) Long-Term Issuer Rating at ‘IND A-’. The Outlook is Stable. Instrument-wise rating actions are given below:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital facilities

-

-

-

INR17,132

(reduced from INR18,090)

IND A-/Stable/IND A2+

Affirmed

Non-fund-based working capital facilities

-

-

-

INR2,272

(increased from INR1,920)

IND A2+

Affirmed

Proposed working capital facilities*

-

-

-

INR5,197

(Increased from INR4,590)

Provisional IND A-/Stable/Provisional IND A2+

Affirmed

* The ratings are provisional and shall be confirmed upon the sanction and execution of loan documents for the above facilities by FIPL to the satisfaction of Ind-Ra.

Ind-Ra has taken a consolidated view of FIPL along with its key subsidiaries Firestar Diamond International Private Ltd; Firestar Diamond Ltd., Hong Kong; Firestar Diamond FZE and Firestar Diamond BVBA while arriving at the ratings. The business of all the entities is aligned with the parent’s core business and a majority of them are wholly-owned by the parent. 

KEY RATING DRIVERS

Moderate Financial Profile: The affirmation reflects FIPL’s financial performance in line with Ind-Ra’s expectation as indicated by a stable consolidated EBITDA margin of 5.8% in FY16 (FY15: 5.7%). The fixed charge coverage (operating EBITDAR/gross interest expense + rent) and net leverage (total debt net of cash/operating EBITDA) improved to 3.0x in FY16 (FY15: 2.2x) and 4.3x (5.0x), respectively, supported by growth in absolute EBITDA.

In 1HFY17, the company reported consolidated revenue of INR68.95billion and lower profitability margin of 4.4%. Consequently, gross interest coverage was low at 2.8x. Ind-Ra expects the company’s consolidated financial profile to remain moderate over FY17-FY18 with fixed charge coverage of around 3.0x.

Moderate Liquidity: The affirmation reflects improvement in fund flow from operations in line with Ind-Ra’s expectation (FY16: INR4.35 billion, FY15: INR2.75 billion). However, high working capital requirements to support a 21% yoy growth in revenue to INR125.1 billion in FY16 resulted in a negative cash flow from operations (FY16: INR0.25 billion, FY15: INR3.4 billion). Ind-Ra notes a rationalised receivable cycle (1HFY17: 120 days, FY16: 190 days) shall remain critical to maintaining liquidity in the medium term as ongoing retail expansion warrants increased inventory holding. 

FIPL’s management plans to increase its retail store count to 36 over FY17-FY20 from eight stores as of 9MFY17 (FY16: four stores). The parent company’s working capital limit utilisation of around 87% for the 12 months ended November 2016 indicated moderate liquidity.

Global Presence across the Value Chain: The agency notes that FIPL enjoys operational synergies between its B2B businesses - cut and polished diamond trading, and jewellery manufacturing and retail businesses, which provide ease of sourcing, distribution and economies of scale. Moreover, the company’s operations and facilities are strategically located to facilitate higher profitability in tax free region of the UAE, low cost manufacturing in India, access to global diamond industry participants and consumers in Hong Kong and the UAE markets, and quality diamond procurement from Belgium. A majority of the company’s sales and procurement are global; hence, unhedged receivables comfortably cover its unhedged payable position, thus maintaining a natural hedge on a standalone level. Ind-Ra expects FIPL’s global presence to facilitate in maintaining its operational performance as a consolidated entity.

Customer Concentration: FIPL’s top 10 clients accounted for around 79% of its revenue in FY16, indicating significant counterparty risk.

Industry Specific Risk: Given the relatively elastic diamond consumption demand, FIPL’s performance is tied to global GDP growth and is thus cyclical. Largely operating a B2B business model, the company is able to mitigate risk associated with inventory price fluctuation through industry down-cycle. The agency has not factored any adverse impact on account of weak internal controls of the company for determining net realisable value of its inventory.


RATING SENSITIVITIES

Positive: A positive rating action could result from:

·         An improvement in the working capital cycle, leading to an improvement in the liquidity position, and EBITDAR fixed charge coverage improving above 4.5x on a sustained basis, and

·         An improvement in internal controls particularly inventory valuation, and

·         Reduction in customer concentration, and

·         Substantial improvement in the cash flow from operations.

 

Negative: A negative rating action could result from:

·         A further stretch in the working capital cycle and deterioration in the liquidity position, a substantial decline in hedging position of gross exposure, and/or EBITDAR fixed charge coverage below 2.5x on a sustained basis, and/or

·         Continuing poor internal controls particularly inventory valuation, and/or

·         An increase in customer concentration, and/or

·         Substantial weakening of cash flow from operations.


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, the UAE and the US, and has offices in New York, Hong Kong, Antwerp and Dubai. Its manufacturing units located in Mumbai and Surat are the largest and other units are located in Jaipur, Moscow, Armenia and South Africa.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

29 January 2016

 

Issuer rating

Long-term

-

IND A-/Stable

IND A-/Stable

 

Fund-based working capital facilities

Long-term/Short-term

INR17,132

IND A-/Stable/IND A2+

IND A-/Stable/IND A2+

 

Non-fund-based working capital facility

Short-term

INR2,272

IND A2+

IND A2+

 

Proposed working capital facility

Long-term/Short-term

INR5,197

Provisional IND A-/Stable/Provisional IND A2+

Provisional IND A-/Stable/Provisional IND A2+

 


COMPLEXITY LEVEL OF INSTRUMENTS

Bank facilities are instruments with low complexity levels, where the relationship between the inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit https://www.indiaratings.co.in/complexity-indicators


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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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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