By Manish Basawante

India Ratings and Research (Ind-Ra) has upgraded Malabar Gold Private Limited’s (MGPL) Long-Term Issuer Rating to ‘IND A’ from ‘IND A-’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loan

-

-

FY23

INR250

IND A/Stable

Upgraded

Fund-based bank facilities

-

-

-

INR7,250 (increased from INR6,948)

IND A/Stable/ IND A1

Upgraded

Analytical Approach: Ind-Ra continues to consider the consolidated financials of MGPL and its subsidiaries, associates and joint ventures, to arrive at the ratings in view of the strong operational and strategic linkages among them.

The upgrade reflects MGPL’s stronger-than-expected operational performance in FY21, leading to an improvement in its credit metrics. The upgrade also reflects the likelihood of continued improvement in the company’s financial performance and improvement in the overall corporate governance.

KEY RATING DRIVERS

Stronger-than-Expected Performance in FY21: MGPL’s consolidated revenue grew by 18% yoy to INR189,717 million during the year, against Ind-Ra’s expectations of a decline in same in view of the pandemic-led disruptions. The revenue growth was led by a sharp increase in gold bullion sales and stable revenue from ornaments sales. MGPL’s consolidated revenue grew at a CAGR of 21% over FY17-FY21 driven by 15% CAGR growth in same-store sales, on the back of a rise in gold prices and incremental revenues from new stores. The revenue is likely to grow further in FY22, backed by its established brand of Malabar Gold and Diamonds, new showroom expansion and the successful implementation of its ‘One India, One Gold Price’ strategy to grow volumes sales in new locations across India.

The consolidated EBITDA margins rose to 5.1% in FY21 (FY20:  4.7%) due to the increase in gold prices over FY20-FY21. The group’s profitability margins are optically lower than those of industry peers because the wholesale business of jewellery manufacturing, which typically offers low margins of 1% or less, accounts for 60% of the consolidated revenue. MGPL’s retail jewellery division had reported EBITDA margins of more than 8% over FY20-FY21.

Improvement in Credit Metrics: MGPL’s credit metrics remained comfortable and improved in FY21 owing to a fall in debt on a yoy basis, as the company generated sufficient cash accruals to support its incremental working capital requirements as well as the investment requirements at the group level. MGPL’s interest coverage (EBITDAR/ (gross interest + rent)) was 6.5x in FY21 (FY20: 4.1x) and its net leverage (adjusted net debt/EBITDAR) was 1.1x (1.7x). Due to continued strong operational performance and the group’s ability to raise equity funding in various franchises, its reliance on external working capital debt remained low in FY21.

In order to support its showroom expansion plan, MGPL has already tied up incremental finance of INR2,500 million in FY22 and the group is planning to raise another INR2,500 million. Furthermore, MGPL intends to start a jewellery manufacturing-cum-gold refining unit in Telangana by FY24, for which it is likely to incur capex of INR7,500 million over FY22-FY24. Ind-Ra believes that the group has adequate ability to generate cash accruals and raise incremental funding for both the expansion plans. Furthermore, MGPL’s credit metrics might moderate because of the incremental debt but would remain comfortable over FY22-FY23 due to the likely improvement in its operational performance.

Geographical Diversification, Growth Plans amid Pandemic: Malabar Gold and Diamonds is among the most well-established brands in India, especially in the southern states, and is one of the largest retail gold jewellery chains in the country. With a vintage of 28 years in the retail jewellery business, the Malabar group had 132 showrooms across 14 states of India as of September 2021 (FYE21: 128, FYE20: 115), including 106 branches in five southern states. At the international level, the group has 270 showrooms across 10 countries.

Despite the disruptions caused by the pandemic, the Malabar group continued to expand its presence in the country in FY21, opening 14 new showrooms during the year. Furthermore, the group plans to launch 39 showrooms in FY22, of which seven have already been launched so far, and another 20 showroom locations are close to being opened up for business. The locations for the rest of the showrooms are yet to be identified. As a longer-term strategy, the Malabar group plans to expand its presence in India to 250 showrooms over three years. i.e. 40 showrooms per year over FY22-FY24.

Liquidity Position – Adequate: The company reported positive cash flows from operations as well as free cash flows over FY19-FY21, due to its strong operational performance, which could adequately fund its incremental working capital needs, capital expenditure, and dividend payments. The free cash flow might decline in FY22 due to the capital expenditure plans but would remain positive on the back of internal cash accruals. The company does not have any term loans apart from an ad-hoc demand loan of INR250 million that had been sanctioned under the Reserve Bank of India's COVID-19 relief package.

Considering the mix of retail and wholesale business in MGPL, its consolidated net working capital cycle remained short at 41 days in FY21 (FY20: 40 days). The wholesale business has a short working capital cycle of less than 25 days. Considering only the retail business, MGPL’s net working capital cycle was in line with the industry levels, ranging between 95-100 days during FY20-FY21. At the consolidated level, despite an incremental gold inventory volume of about 2,000kg for new showrooms in FY22, the group’s net working capital cycle is likely to remain stable because of the likely improvement in the operational performance during the year.

MGPL has a satisfactory repayment track record with all banks. Of the company’s total inventory in FY21, 41% (FY20: 45%) was funded through working capital limits from banks and the remaining through equity. Its average utilisation of fund-based working capital limits remained high at 94% over the 12 months ended September 2021. The company has current account balances, totaling to INR50 million-70 million, in various banks. In view of the sharp fluctuations in gold prices over FY21, MGPL has started availing gold metal loans for hedging against the gold price risk. Furthermore, the company is likely to save on its overall interest cost, as these loans entail lower interest rates than cash credit.

Franchisee-based Business Model; Significant Inter-group Transactions: MGPL, the flagship company of the Malabar group, is an operating-cum-holding company. The company directly operates 26 showrooms, while 67 franchisee-run showrooms are spread across four multi-showrooms operating entities under limited liability partnerships. The remaining 40 are single showroom operating entities under the private limited company structure. The overall group structure is complex, but the group plans to simplify the same over the near term.

The franchise model has helped the Malabar group improve its return on equity and limit its investments in the real estate required for the showrooms; this has given the group some amount of control on the overall gearing. Significant inter-group transactions take place as MGPL acts as an investing company as well as central gold manufacturing entity for the entire retail jewellery business of the Malabar group.

Improved-yet-Moderate Corporate Governance: MGPL has been able to improve its internal financial controls over the years, as reflected in the unmodified opinion on the internal financial controls in the FY20 auditor’s report as compared to the qualified opinion in FY19. The company has increased its manpower towards the ongoing implementation as well as operations of the enterprise resource planning software. Although the group has been providing data on a quarterly basis, the time required for statutory audit is longer due to the complex nature of the overall group structure.

There has not been any adverse update over the past two years regarding the processing initiated by Income Tax authorities on MGPL and some of the group companies during February 2019. The statutory auditor had maintained an ‘emphasis of matter’ in the auditor’s report for FY20 as the legal proceedings are pending and the resultant impact is not ascertainable at present. Furthermore, as per the management, in order to avoid protracted tax litigation, the company deposited INR126.4 million during March 2021 towards a settlement application to the income tax settlement commission.

Standalone Performance: MGPL’s standalone revenue grew sharply by 58% yoy to INR234,458 million in FY21 due to stable jewellery sales, a sharp increase in bullion sales, and a change in the accounting of old gold purchases along with the consequent sales. In FY21, MGPL started undertaking bullion sales to external parties such as jewellery manufacturers/smaller jewellers in addition to bullion sales through its own retail franchisee channel. MGPL's standalone revenue grew by 190% yoy to INR126,952 million in 1HFY22 because of a low-base effect as well as a growth in overall sales. The margins declined to 2.3% in 1HFY22 (FY21: 2.4%, FY20: 3.4%) due to lack of any inventory gains and the presence of low-margin bullion trade sales.


RATING SENSITIVITIES

Positive: The following factors, individually or collectively, could lead to a positive rating action:

·       a continued improvement in the operational performance while maintaining a comfortable liquidity position, leading to the net leverage remaining below 1.25x all on a sustained basis

·       any simplification in the group structure and/or any favourable development in internal financial control

Negative: Any deterioration in MGPL’s operating performance, or any undisclosed, debt-funded capex, or increased exposure to non-core businesses, leading to deterioration in the credit metrics and/or the liquidity position, on a sustained basis, could lead to a negative rating action.


COMPANY PROFILE

MGPL, a part of Malabar group, is one of the leading jewellery retailers of India. It started operations in 1993 as a partnership firm of M P Ahammed and his team of entrepreneurs. It manufactures jewellery for both the domestic retail and export segments.

FINANCIAL SUMMARY 

Consolidated

Particulars

FY21 (Estimates)

FY20

Revenue (INR million)

189,717

160,951

EBITDA (INR million)

9,689

7,635

EBITDA margin (%)

5.1%

4.7%

Interest expenses (INR million)

1,503

1,803

Interest cover (x)

6.5

4.1

Net leverage (x)

1.1

1.7

Source: MGPL, Ind-Ra

 
Standalone

Particulars

1HFY22

FY21 (Provisional)

FY20

Revenue (INR million)

126,952

234,458

148,805

EBITDA (INR million)

2,877

5,587

5,100

EBITDA margin (%)

2.3%

2.4%

3.4%

Interest expenses (INR million)

270

754

1,145

Interest cover (x)

10.7

5.6

4.3

Net leverage (x)

NA

1.6

1.3

Source: MGPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

25 September

2020

28 June 2019

Issuer rating

Long-term

-

IND A/Stable

IND A-/Stable

IND A-/Stable

Term loan

Long-term

INR250

IND A/Stable

IND A-/Stable

-

Fund-based bank facilities

Long-term/ short-term

INR7,250

IND A/Stable/ IND A1

IND A-/Stable/IND A2+

IND A-/Stable/IND A2+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Working capital facilities

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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Analyst Names

  • Primary Analyst

    Manish Basawante

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

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121