By Brazil Gonsalves

India Ratings and Research (Ind-Ra) has downgraded Firestar International Private Limited’s (FIPL) Long-Term Issuer Rating to ‘IND C’ from ‘IND A-’ while resolving the Rating Watch Negative (RWN). The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital facilities

-

-

-

INR17,132

IND C/IND A4

Downgraded; Off RWN

Non-fund-based working capital facilities

-

-

-

INR2,272

IND A4

Downgraded; Off RWN

Proposed working capital facilities

-

-

-

INR5,197

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

KEY RATING DRIVERS

The rating action follows the determination that the ongoing investigation into the financial irregularities at common promoter companies would lead to a substantial disruption in FIPL’s operations. Freezing of FIPL’s accounts by banks and seizing of inventories by enforcement agencies, as well as absence of key management personnel have impacted the operations of FIPL and its subsidiaries.


On 14 February 2018, Punjab National Bank (PNB; ‘IND AAA’/RWN) reported fraudulent transactions worth USD1,771.7 million (around INR114 billion). This amount included the alleged fraud of INR2,807 million reported by PNB, for which an FIR was registered by the Central Bureau of Investigation on behalf of PNB against Solar Exports, Stellar Diamonds and Diamonds R US, all companies of the Nirav Modi group, and referred the matter to enforcement agencies. Subsequently, Ind-Ra placed FIPL’s ratings on RWN on 15 February 2018.
 

FIPL’s consolidated fund flow from operations was INR5.87 billion in FY17 (FY16: INR4.98 billion, FY15: INR2.75 billion), while cash flow from operations margin stood at 1.8% (FY16: 0.2%, FY15: negative 3.3%). Fixed charge coverage (operating EBITDAR/gross interest expense + rent) was 2.73x in FY17 (FY16: 2.70x, FY15:2.16x) and adjusted net leverage (net debt/EBITDAR) was 3.5x (3.9x, 4.8x). Net working capital cycle was 149 days in FY17 (FY16: 162 days, FY15: 179 days).

 

The company changed its auditors to a Big Four in 2015-2016, which audited FY16, FY17 and 1HFY18 financials. The agency noted that FY16 and FY17 auditor’s reports mentioned there were no defaults on bank dues and no material fraud by the company or by its officers.

 

As per the audited standalone 1HFY18 financials (end-September 2017), FIPL reported EBITDA margins of 8.8% (1HFY17: 4%) and EBITDA gross interest cover of 2.4x (1.6x).

 

FIPL did not have material transaction with the entities in question as per the audited FY16, FY17 and 1HFY18 financials, nor were these entities part of the material customer or supplier list provided to the agency, except for corporate guarantee extended by Diamonds R US to FIPL’s lenders.

 

FIPL’s total adjusted consolidated debt stood at INR40.8 billion at FYE17 (FYE16: INR39.9 billion; FYE15: INR36.9 billion) and included contingent liabilities in the standalone financials relating to the guaranteed debt of subsidiaries (INR23 billion at FYE17). Other contingent liabilities were immaterial.

 
Note: FY15 and FY16 ratios above are as restated under Ind-AS reported in FY17 audited financials. These may therefore vary from those in Ind-Ra’s rationale published on 17 March 2017. FY15 balance sheet data is as on 1 April 2015 as reported by the company in its FY17 annual report.


RATING SENSITIVITIES

Positive: An improvement in the operating environment of FIPL and its subsidiaries through smooth functioning of operations with banks could result in a positive 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, 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; other units are located in Jaipur, Moscow, Armenia and South Africa.

 

FINANCIAL SUMMARY


Particulars

FY17

FY16

Revenue (INR million)

147,004

125,109

EBITDA (INR million)

7,883

7,302

EBITDA margin (%)

5.4

5.8

Interest coverage (x)

3.2

3.3

Net leverage (x)

3.8

4.3

Source: FIPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (million)

Rating

15 February 2018

17 March 2017

29 January 2016

 

Issuer rating

Long-term

-

IND C

IND A-/RWN

IND A-/Stable

IND A-/Stable

 

Fund-based working capital facilities

Long-term/Short-term

INR17,132

IND C/IND A4

IND A-/RWN/IND A2+/RWN

IND A-/Stable/IND A2+

IND A-/Stable/IND A2+

 

Non-fund-based working capital facility

Short-term

INR2,272

IND A4

IND A2+/RWN

IND A2+

IND A2+

 

Proposed working capital facility

Long-term/Short-term

INR5,197

WD

Provisional IND A-/RWN/Provisional IND A2+/RWN

Provisional IND A-/Stable/Provisional IND A2+

Provisional IND A-/Stable/Provisional IND A2+

 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity level of the instruments, please 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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Brazil Gonsalves

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001764

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121