Rating Rationale
March 30, 2020 | Mumbai
Aero Club
Ratings downgraded to 'CRISIL BB+/Negative/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.590.52 Crore
Long Term Rating CRISIL BB+/Negative (Downgraded from 'CRISIL BBB-/Stable')
Short Term Rating CRISIL A4+ (Downgraded from 'CRISIL A3')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Aero Club to 'CRISIL BB+/Negative/CRISIL A4+' from 'CRISIL BBB-/Stable/CRISIL A3'.
 
The rating action follows measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to impact the business profile of the company as declined sales will result in lower cash generation thereby impacting its credit quality, especially liquidity position. While, most of the state government's measures are applicable till March 31, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19. A sustained long period of closures can result in significant deterioration in credit profiles of firm. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely in credit quality of firms. That said, the ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.
 
Furthermore, the liquidity profile of the company remains moderated due to consistent high bank limit utilisation at an average of 98%. This has resulted in limited cushion in case of exigency situation as the limits are capped at Rs 450 crore). In the first quarter of fiscal 2021, the operating performance is expected to be moderated given ongoing store shut downs and drop in sales as a result of lower footfall. This will result in lower operating profitability in fiscal 2021 compared to fiscal 2020. The accruals will be impacted. In case the situation takes time to get back to normal, promoter support in timely manner will be critical. Funding support by the promoters will remain key monitorable.
 
The ratings continue to reflect the Aero group's established brand image, diversified product portfolio, and strong distribution network along with average operating efficiencies. These strengths are partially offset by the average financial risk profile of the firm, high bank limit utilisation reflecting moderate liquidity, large working capital requirement, and exposure to intense competition in the footwear industry.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Aero Club, Earthline Apparels Pvt Ltd (Earthline), Bora Knitwear Pvt Ltd (Bora), Jiwand Singh & Sons, Avtar Singh & Sons, College Shoes and Indo Apparels Pvt Ltd (Indo). This is because these entities, collectively referred to as the Aero group, are in similar lines of business and belong to the same promoters.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Stable business risk profile marked by established brand, diversified product portfolio, and strong distribution network
The Aero group's home-grown brand, Woodland, has been present in India over 20 years, and is well known in the leather footwear market, both in the men's and women's segments. The group has a diversified product profile with apparel and high-end footwear brand, Woods also in its portfolio. The footwear segment contributed 66% to the total revenue and rest 34% was from apparel and accessories segment during fiscal 2019.  CRISIL believes the Aero group will continue to benefit from its established brand presence and diversified product portfolio.
 
* Average operating efficiency
The Aero group's operating margin has ranged between 11% to 15% between fiscals 2016-2019, fluctuating in line with product mix, cost of raw materials, competitive pressures, and initial losses from newly opened stores. CRISIL believes Aero group's operating margin will remain range bound  over the medium term with the increasing contribution of apparels to the group's revenues, reduced dependence on imports, increase in proportion of broken even stores and higher utilization of newly added capacities.
 
Weaknesses
* Average financial risk profile
The group's average financial risk profile is marked by moderate debt protection measures (interest coverage and net cash accrual to total debt of 1.81 times and 0.07 time, respectively, estimated for fiscal 2020). The gearing is estimated to be at 1.11 times in fiscal 2020. The dependence on short term also remains high due to working capital intensity.
 
With operating margins moderating in fiscal 2021 compared to fiscal 2020 performance, the debt protection metrics will be further impacted, due to lower annual cash generation.
 
* Liquidity continues to remain moderate
Lowering of working capital bank lines in an attempt to enforce greater discipline over collection and inventory cycle, has led to almost complete utilisation on bank lines since May 2018, resulting in moderation of the group's liquidity position. With cash generation from operations is coming down, the liquidity profile will be further impacted. The promoters nevertheless, are expected to infuse funds in a timely manner, to meet exigencies, in the event of any liquidity stretch, including due to elongation of the working capital cycle.
 
* Large working capital requirement
Manufacturing leather and leather goods is a working-capital-intensive process mainly because of the long processing period of over two months. Furthermore, the group has a policy of maintaining base inventory of 1500 to 2000 pairs per store at all times resulting in higher finished good inventory of around 140 days and overall inventory holding period of 200-250 days. Aero club's initiative to reduce to dependence on imports for its key raw material (leather) over next 2 years and reduce finished good inventory holding period, may result in gradual reduction in overall inventory days in the medium term. This will remain a monitorable.
 
* Exposure to intense competition in footwear industry
The footwear industry is highly fragmented, with the unorganised sector accounting for 70% of the market share. Furthermore, given the increasing presence of international brands in India, competition in the footwear industry is expected to increase. CRISIL, however, believes that the brand visibility of Woodland will help Aero group maintain its market position.
Liquidity Stretched

The liquidity is weak due to high BLU, average utilization 98%, and limited flexibility in case of any exigency. Net cash accruals are expected to be lower than earlier expectation of Rs 50-70 crore per annum over the medium term. The accruals should remain sufficient to meet the repayment obligations, however, timely support from the promoter will remain a key monitor able.

Outlook: Negative

CRISIL believes that Aero Club will continue to benefit from the established market position of its flagship brand 'Woodland' and its extensive distribution channel however, the financial risk profile is impacted due to moderated operating performance, lowered accruals and constrained liquidity due to high bank limit utilisation.
 
Rating Sensitivity Factors
Downward factors
* Continued high bank limit utilisation at 98% in absence of enhancement in limits
* Sharp decline in cash accruals due to store shut downs and/ or reduced footfalls in operational stores
* Higher than expected debt-funded capex/acquisitions, or increase in working capital requirement or higher-than-expected capital withdrawals constraining improvement in debt protection metrics
 
Upward factors:
* Normalisation of operations once COVID-19 issues go away
* Improvement in debt metrics, owing to pruned working capital cycle also resulting in better liquidity
* Reduction in ST debt through proceeds from sale of land resulting in average BLU less than 90% on sustained basis

About the Company

Aero Club, a partnership firm set up in 1992 by Mr. Avtar Singh and Mr. Harkirat Singh, manufactures shoes and garments under the Woodland and Woods brands. The Woodland brand was launched in 1992. The firm has set up its own network of exclusive showrooms and franchise outlets promoting its brands. Aero Club currently operates 567 exclusive showrooms as on March 31, 2019.
 
Earthline, Bora, and Indo initially manufactured apparels and accessories for Aero Club. In fiscal 2013, the manufacturing business of the group entities was transferred to Aero Club, and the entities currently undertake job work for Aero Club.
 
For 10 months fiscal 2020, Aero Club reported net sales of Rs 1120 crore.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019* 2018
Revenue Rs crore 1400 1283
Profit after tax (PAT) Rs crore 37 17
PAT Margins % 2.64 1.36
Adjusted Debt/Adjusted Net Worth Times 1.07 1.15
Interest coverage Times 1.91 1.58
Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
SIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)		 Rating assigned with outlook
NA Bank guarantee NA NA NA 3.22 CRISIL A4+
NA Cash credit NA NA NA 219 CRISIL BB+/Negative
NA Letter of Credit NA NA NA 87.3 CRISIL A4+
NA Proposed Long Term Bank Loan Facility NA NA NA 54 CRISIL BB+/Negative
NA Working Capital Demand Loan NA NA NA 227 CRISIL BB+/Negative
 
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extend of consolidation
Earthline Apparels Privatet Ltd 100%
Bora Knitwear Pvt Ltd 100%
Indo Apparels Pvt Ltd 100%
Jiwand Singh & Sons 100%
Avtar Singh & Sons 100%
M/s College Shoes 100%
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  500.00  CRISIL BB+/Negative      29-08-19  CRISIL BBB-/Stable  09-07-18  CRISIL BBB/Stable  30-03-17  CRISIL BBB/Stable  CRISIL BBB/Negative 
                03-05-18  CRISIL BBB/Positive  24-02-17  CRISIL BBB/Stable   
Non Fund-based Bank Facilities  LT/ST  90.52  CRISIL A4+      29-08-19  CRISIL A3  09-07-18  CRISIL A3+  30-03-17  CRISIL A3+  CRISIL A3+ 
                03-05-18  CRISIL A3+  24-02-17  CRISIL A3+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 3.22 CRISIL A4+ Bank Guarantee 3.22 CRISIL A3
Cash Credit 219 CRISIL BB+/Negative Cash Credit 219 CRISIL BBB-/Stable
Letter of Credit 87.3 CRISIL A4+ Letter of Credit 87.3 CRISIL A3
Proposed Long Term Bank Loan Facility 54 CRISIL BB+/Negative Proposed Long Term Bank Loan Facility 54 CRISIL BBB-/Stable
Working Capital Demand Loan 227 CRISIL BB+/Negative Working Capital Demand Loan 227 CRISIL BBB-/Stable
Total 590.52 -- Total 590.52 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for Consolidation

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

 Anuj Sethi
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Gautam Shahi
Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
gautam.shahi@crisil.com

Palak Agrawal
Rating Analyst - CRISIL Ratings
CRISIL Limited
B:+91 22 3342 3000
Palak.Agrawal@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL