By Saumil Shah

India Ratings and Research (Ind-Ra) has assigned Malabar Mangalore Arcade Private Limited (MMAPL) a Long-term Issuer Rating of ‘IND BBB’. The Outlook is Stable. The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital limits

-

-

-

INR100

IND BBB/Stable/IND A2

Assigned

Analytical Approach: The ratings derive comfort from the support available to MMAPL from its franchisor, Malabar Gold Private Limited (MGPL, ‘IND A’/Stable), owing to the strong operational and moderate strategical linkages between the entities. Ind-Ra has taken a view on standalone financials of the company while arriving at the ratings.

KEY RATING DRIVERS

Established Brand and Experienced Management: MMAPL is a franchisee of MGPL and operates out of a single showroom in Mangalore, Karnataka. The company retails its jewellery products under the brand name Malabar Gold and Diamonds, which is one of the most reputed and largest retail jewellery brands in India with a vintage of over 27 years. Four out of 10 directors of MMAPL represent the Malabar group and are also on the board of various other Malabar group companies including MGPL. The management of the group has successfully been able to expand its business past three decades, thus establishing a strong brand presence across India. 

Moderate Parental Support from MGPL:
 MMAPL is a part of Malabar group. MGPL along with group companies and promoters put together holds 31% stake in the company. As a franchisor, MGPL supports MMAPL with all the manufacturing activities, human resource management, after-sales support, and coordinating marketing and promotions. As a franchisee of MGPL, the company pays 15% of its EBIT as a franchisee fee. Some of the directors of the group have provided personal guarantees towards MMAPL’s bank loans. 

Stable Operational Performance:
 As per provisional numbers, the revenue declined 9.0% yoy to INR2,755 million in FY21, impacted by the disruptions caused by the pandemic in 1QFY21. However, any further decline in the revenues was arrested on account of a strong recovery in 2HFY21 due to the festival demand and pent-up wedding demand. The EBITDAR margins improved to 6.1% in FY21 (FY20: 5.4%, 4.1%) as the sharp increase in gold prices led to better realisations. 

During 1HFY22, the revenue surged 70% yoy to INR1,460.4 million, primarily due to a low base effect and softer impact of the second wave of COVID-19. Ind-Ra thus expects MMAPL to report revenue growth of 5%-8% yoy in FY22, considering the trend of a sharp recovery in the demand for gold jewellery. 

Comfortable Credit Metrics:
 Ind-Ra expects MMAPL’s credit metrics to remain comfortable, as the external debt remains low. MMAPL’s interest coverage (EBITDAR/gross interest expense + rent) improved to 7.0x in FY21 (FY20: 6.0x, FY19: 4.2x), on the back of the improved margins and lower interest expense. The net leverage (net adjusted debt/EBITDAR) remained comfortable at 0.5x in FY21 (FY20: 0.4x) due to a stable absolute EBITDA and limited external debt. It reported an interest expense of INR15.9 million in FY20 (FY19: INR15.9 million), on compulsory convertible debentures and compulsory convertible unsecured loans put together, which is paid at the discretion of the board of directors of the company and is linked to distributable profits after tax. The total outstanding convertible securities as of FY20 amounting to INR106.4 million, comprising compulsory convertible debentures and compulsory convertible unsecured loans, were excluded while arriving at gross debt levels. 

Liquidity Indicator - Adequate
 Ind-Ra believes the liquidity of MMAPL would be adequate over the medium term, given part of the inventory being in the form of easily monetisable gold coins and regular non-operating income on investments in other Malabar group companies. The Ind-Ra-calculated cash flow from operations turned negative INR8 million in FY21 (FY20: INR19 million, FY19: INR17 million) despite the improvement in profitability as incremental funds were locked in higher inventory holding cost. Ind-Ra thus expects the company's net working capital cycle to have stretched to 96 days in FY21 (FY20: 64 days). MMAPL’s average utilisation of the fund-based working capital limits was 61% for the 12 months ended September 2021.The company did not avail the Reserve Bank of India prescribed debt moratorium on working capital interest payments.

Malabar Group Structure:
 MGPL, the flagship company of the Malabar group, is an operating-cum-holding company. The Malabar Group has a mix of direct holding-cum-franchisee model structure for operating about 130 showrooms in India which are spread across 14 states. MGPL operates 29 showrooms under itself and 101 franchisee-run showrooms are spread across four multi-showroom operating entities under limited liability partnerships; of these, about 40 are single showroom operating entities under private limited company (PLC) structure. The legal structure varies across the entities in the group. Ind-Ra derives more comfort from PLC corporate structure than limited liability partnerships. MMAPL is a single showroom entity, with legal structure as a PLC. 

Small Scale of Operations, Thin Margins:
 MMAPL has a small scale of operations, wherein it contributes 1%-2% to the Malabar group’s retail revenues. Ind-Ra expects the scale of operations to remain small, as the company operates out of a single showroom. Moreover, the reported margins for franchisee companies such as MMAPL are thin since part of the revenue is on account of intergroup sales. The company’s retail business EBITDA margin stood in the range of 5.7%-11% over FY19-FY21.  

Gold Price Volatility:
 MMAPL's margins are susceptible to volatility in gold prices. However, the risk is partially mitigated by the company’s prudent sourcing policy, backed by an inventory policy of replenishing a similar quantity of gold sold during the day, thereby maintaining a constant inventory level in accordance to the sales every year.


RATING SENSITIVITIES

Positive: Developments that could, individually or collectively, lead to a positive rating action include:

- an improvement in the linkages with MGPL

- substantial improvement in the scale of operations while maintaining the credit metrics at the current levels on a sustained basis

 

Negative: Developments that could, individually or collectively, lead to a negative rating action include:

- a rating downgrade of MGPL or weakening of the linkages with MGPL
- deterioration in the standalone financial performance along with liquidity position, leading to the interest coverage ratio reducing below 2.5x on a sustained basis


COMPANY PROFILE

Incorporated in 2007, MMAPL is involved in the retail of jewellery and operates out of a single showroom located in Mangalore, Karnataka. It is a franchisee of MGPL and a part of the Malabar Group, which is one of the leading jewellery retailers of India. MGPL  started operations in 1993 as a partnership firm of M P Ahammed and his team of entrepreneurs.

FINANCIAL SUMMARY
 

Particulars (INR million)

FY21*

FY20

Revenue

2,755

3,019

EBITDAR

169

162

EBITDAR margins (%)

6.1

5.4

Interest expense

24

27

Gross interest coverage (x)

7.0

6.0

Net leverage (x)

0.5

0.4

Source: MMAPL, Ind-Ra

*FY21 Provisional




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. 

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

India Ratings is a 100% owned subsidiary of the Fitch Group.

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

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names

  • Primary Analyst

    Saumil Shah

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

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121