By Saumil Shah

India Ratings and Research (Ind-Ra) has revised Bhima Jewels Private Limited’s (BJPL) Outlook to Positive from Stable, while affirming its Long-Term Issuer Rating at 'IND BBB+'. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital limits

-

-

-

INR3,520

IND BBB+/Positive/IND A2

Affirmed; Outlook revised to Positive from Stable

Proposed fund-based working capital limits

-

-

-

INR230

IND BBB+/Positive/IND A2

Affirmed; Outlook revised to Positive from Stable

The Outlook revision reflects BJPL’s significantly better-than-expected sales and profitability margins in FY21 and the likelihood of revenue growth in FY22, supported by the company's plans to geographically diversify while maintaining its credit metrics at a comfortable level despite a slight moderation.

KEY RATING DRIVERS

Revenue Growth Supported by Recovery in 2HFY21: Despite the outbreak of COVID-19 and the resultant lockdown, BJPL revenue grew 14% yoy to INR24,162 million in FY21, surpassing Ind-Ra’s previous expectation of a 20%-25% decline yoy and the 10%-15% yoy declines witnessed by organised jewellery players over the same timeframe. FY21 financials are provisional in nature.

 

About 8% of the FY21 revenue growth was contributed by a one-time business-to-business sale. Excluding this, the revenue growth was about 6% yoy, driven by a sharp recovery in 3QFY21, backed by the festive season and pent-up wedding demand, and continued positive growth in 4QFY21 on account of the overall economic recovery and a moderation in gold prices.

 

Ind-Ra expects the company to witness further growth in its revenue in FY22, backed by the demand stimulated by a continued moderation in gold prices; a healthy demand from tier-2 and tier-3 cities; showroom expansion plans and a resilient demand from the wedding segment.

 

Industry-Surpassing Margins; Near-term Moderation Likely: Although moderated, BJPL's operating EBITDAR margin remained high at 6.9% in FY21 (FY20: 11%) on account of lower marketing and promotional expenses and inventory gains due to increased gold price in FY21 and higher making charges. The EBITDAR margins as per audited FY20 numbers stood at 11% (FY20 provisional: 7%), primarily due to the difference in inventory valuation, leading to significant inventory gains. Adjusting for the same, Ind-Ra believes the company’s margin would have been 5%-7%, in line with the industry.

 

However, the agency expects the company’s margins to moderate in the near term owing to the company’s plan to explore markets outside Kerala. The expansion will lead to low sales per square feet from the new showrooms in the medium term, resulting in the showrooms taking more time to reach the potential EBITDAR levels and thereby impacting the overall EBITDAR margins. Additionally, any moderation in gold prices could result in inventory losses.

 

Comfortable Credit Metrics; Moderation Likely BJPL's interest coverage ratio (EBITDAR/gross interest expense + rent), although deteriorated, remained comfortable at 5.6x in FY21 (FY20: 6.8x, FY19: 3.1x) on account of the above-mentioned operational performance and lower interest expenses basis lower interest rates. The moderation in the ratio was on account of lower inventory gains in FY21 over FY20 as the price of gold corrected. The net leverage (total adjusted net debt/EBITDAR) too deteriorated, but remained comfortable at 2.2x in FY21 (FY20: 1.4x, FY19: 3.0x) purely due to moderated-yet-high EBITDAR of INR1,660 million (FY20: INR2,333 million, FY19: INR1,049 million) and stable debt numbers.

 

However, Ind-Ra expects the company’s credit metrics to be impacted from FY22 as the company targets increasing its showrooms to 16 by FYE22 (FYE21: 11) and it envisages to take on debt of INR2.25 billion, to partially fund the large upfront inventory required for its new stores. The promoters are likely to arrange for an adequate amount of proportionate equity infusion, in case of further undisclosed capital expenditure. The culmination of the expansion in a single year (45% store count expansion and 62% expansion in store area) is likely to put pressure on the balance sheet and profitability metrics. However, the Positive Outlook reflects the agency’s expectation of the credit metrics remaining comfortable, despite any deterioration, while the company benefits from geographical diversification and increased scale of operations as new showrooms further support the revenue growth.

 

Revenue Scale up and Diversification Underway: BJPL is looking to increase its presence outside Kerala, where the company has nine showrooms out of the total 11. The company is planning to launch five showrooms in FY22 (four outside Kerala), to increase its scale of operations and decrease its dependence on Kerala to sub-80% by FY22-FY23 (FY20: 92%). BJPL’s aggregate showroom carpet area was 0.08 million square feet by end-FY21, which is likely to increase by another 0.05 million in FY22. The company is also looking at existing showroom relocation to better locations for increased footfalls. Although BJPL has a strong presence in Kerala, Ind-Ra will continue to monitor the company's ability to gain market share in other southern states outside Kerala, while maintaining equivalent returns. 

Liquidity Indicator - Adequate: Ind-Ra draws comfort from BJPL’s moderate working capital utilisation, which stood at 78% of its sanctioned limits/drawing power, whichever is lower for the 12 months ended February 2021. About 41% of its inventory in FY21 (FY20: 40%) was funded through working capital limits from banks and the remaining through equity. The company’s on-balance sheet cash balances remained low at INR41 million at FYE21 (FYE20: INR7 million, FYE19: INR65 million) as the company deposits daily cash receipts in its working capital accounts. The company’s liquidity is supported by readily-monetisable gold coin/bullion inventory of about 300kg. The working capital utilisation levels have also dropped post the availing of additional working capital term loans of INR481.1 million under the Emergency Credit Line Guarantee Scheme 2.0 for a tenure of five years with 12 months’ moratorium with repayment of INR29 million and INR140 million in FY22 and FY23, respectively. The company availed of the Reserve Bank of India-prescribed moratorium from March-May 2020 but did not avail of the second moratorium from June-August 2020. 

Working Capital Cycle Affected by Sharp Rise in Gold Prices:
BJPL’s working capital position is largely dependent on the inventory held by the company as the receivables are negligible and creditors remained low at 21 days during FY21 (FY20: 20 days). BJPL’s net working capital cycle remained stretched at 124 days in FY21 (FY20: 121 days; FY19: 83 days), primarily due to an increase in the inventory days to 144 (141; 90). Although the gold inventory in tonnage terms remained stable at 1.6 tonne at FY21 (FY20: 1.6 tonne; FY19: 1.4 tonne), the inventory carrying costs increased by about 59% over FY19-FY21 (March 2019-March 2021); this led to higher inventory carrying costs basis a sharp rise in gold prices, thus leading to higher inventory days. 

Ind-Ra expects the company’s working capital cycle to moderate in FY22, owing to a likely moderation in gold prices. Despite the strong operational performance, BJPL had negative cash flow from operations of INR5 million in FY21 (FY20: negative INR534 million) due to incremental funds locked in holding higher cost inventory. Ind-Ra expects the cash flows from operations to remain negative over FY22 as well due to the incremental inventory holding at newer showrooms. 

Established Brand; Experienced Promoters:
 BJPL is an established regional player, which is one of the five separate factions of the Bhima family, sharing a common brand name – Bhima. The family has nearly 95 years of experience in the jewellery business. B. Bindumadhav is a second-generation promoter and has over three decades of experience in the jewellery business. Since BPJL shares its brand name with other group entities and the branding is shared among all factions, any adverse events with any other factions may have an impact on the reputation of BJPL as well. 

Average Corporate Governance:
BJPL is a closely-held and promoter-run business by B. Bindumadhav and family. The board is completely a family-driven board. However, over the next two years, the company has plans to expand its board with inclusion of professionals or independent directors on the board. The management is implementing an Enterprise Resource Planning system to better manage the financial reporting. Additionally, the company procures its gold from either the customers through old jewellery (30%-35%) and the remaining from traders and suppliers. BJPL has no gold purchase under the gold metal loan from the banking system. The company has received a gold metal loan sanction from one of the banks which it intends to use in the near/medium term. Ind-Ra will continue to look at the company’s gold purchase patterns. 

To support its liquidity, the company has slump sale consideration and non-interested bearing unsecured loans from the promoters which are considered as equity. However, the net reduction in both put together was INR160 million in FY21 (FY20: INR284 million) thus indicating a withdrawal of funds by the promoters. The company plans to repay these funds over the medium term, in view of the yearly profit accumulation. Accordingly, the management plans to maintain a maximum debt-to-equity ratio of 1:1 over the next three years.


RATING SENSITIVITIES

Positive: A significant increase in the scale of operations, through geographical diversification and improvement in the operating profitability; cash flow from operations turning positive along with the interest coverage ratio remaining above 3.5x, all on a sustained basis, could be positive for the ratings. 

Outlook Revision to Stable:
A further elongation of the working capital cycle, a fall in the operating profitability and/or deterioration in the liquidity position, leading to the interest coverage reducing below 3.5x, on a sustained basis, would lead to the Outlook being revised back to Stable. 


COMPANY PROFILE

Established in 2011, BJPL is an entity under the Bhima family which has been around since 1925 and is a faction under the brand Bhima promoted by B. Bindumadhav. BJPL has 11 showrooms, all located in tier-2 and tier-3 cities in southern India. Nine out of the 11 showrooms are located in cities in Kerala and one each in Tamil Nadu and Karnataka. 

FINANCIAL SUMMARY
 

Particulars (INR million)

FY21 (Provisional)

FY20

FY19

Revenue

24,162

21,185

21,178

EBITDAR

1,660

2,333

1,048

EBITDAR margins (%)

6.9

11.0

4.9

Interest expense

241

268

269

Gross interest coverage (x)

5.6

6.8

3.1

Net leverage (x)

2.2

1.4

3.0

Source: BJPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

3 September 2020

Issuer rating

Long-term

-

IND BBB+/Positive

IND BBB+/Stable

Fund-based working capital limits

Long-term/ short-term

INR3,750

IND BBB+/Positive/IND A2

IND BBB+/Stable/IND A2


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital limits

Low

 

For details on the 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

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. 

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