By Saumil Shah

India Ratings and Research (Ind-Ra) has assigned Malabar Ornaments Private Limited (MOPL) 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

-

-

-

INR230

IND BBB+/Stable/IND A2+

Assigned

Analytical Approach: The ratings derive comfort from the support available to MOPL 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: MOPL is a franchisee of MGPL and operates out of a single showroom in Thalaserry, Kerala. 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. Six out of 10 directors of MOPL 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:
 MOPL is a part of Malabar group. MGPL along with group companies and promoters put together holds 64% stake in the company. As a franchisor, MGPL supports MOPL 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. One of the promoters of the Malabar group along with some other group directors has provided personal guarantees towards MOPL’s bank loans.

Stable Operational Performance:
 As per provisional numbers, the revenue marginally grew to INR4,227 million in FY21 (FY20: INR4,166 million), supported by a strong recovery in 2HFY21 on account of the festival demand and pent-up wedding demand. The EBITDAR margins marginally declined to 3.8% in FY21 (FY20: 4.0%, FY19: 3.2%) as a 10% moderation in gold prices in 4QFY21 led to a reversal of inventory gains reported earlier in the year due to higher gold prices.

During 1HFY22, the revenue surged 43% yoy to INR1,839.1 million, primarily due to a low base effect and softer impact of the second wave of COVID-19. Ind-Ra thus expects MOPL 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 MOPL’s credit metrics to remain comfortable, as the external debt remains low. MOPL’s interest coverage ratio improved to 4.0x in FY21 (FY20: 3.8x, FY19: 2.6x) while the net leverage ratio remained comfortable at 1.4x (1.3x, 1.5x), on the back of lower interest expense, limited debt levels and moderated-yet-stable absolute EBITDA. It reported an interest expense of INR21.9 million in FY20 (FY19: INR21.9 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 INR146 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 MOPL 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  remained positive, although declined marginally to INR10 million in FY21 (FY20: INR13 million) as increased funds were used towards higher cost inventory purchase amid the sharp rise in gold prices. The company's net working capital cycle is expected to have remained healthy at 51 days in FY21 (FY20: 43 days). MOPL’s average utilisation of the fund-based working capital limits was 82% 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. MOPL is a single showroom entity, with legal structure as a PLC.

Small Scale of Operations, Thin Margins:
 MOPL 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 MOPL 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 4.8%-6.8% over FY19-FY21. 

Gold Price Volatility:
 MOPL'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

- a 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 3.5x on a sustained basis


COMPANY PROFILE

Incorporated in 2003, MOPL is involved in the retail of jewellery and operates out of a single showroom located in Thalaserry, Kerala. 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

4,227

4,166

EBITDAR

160

166

EBITDAR margins (%)

3.8

4.0

Interest expense

40

44

Gross interest coverage (x)

4.0

3.8

Net leverage (x)

1.4

1.3

Source: MOPL, Ind-Ra

*Provisional numbers




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.

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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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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