Rating Rationale
July 03, 2020 | Mumbai
Carat Lane Trading Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.351 Crore (Enhanced from Rs.251 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable' rating on the long term bank facilities of Carat Lane Trading Private Limited (CaratLane).

The rating continue to reflect the strength in CaratLane's business model derived from its unique positioning in the online retail jewellery segment, potential for exponential growth driven by expansion of its retail stores and strong operational, managerial and financial support received from its parent Titan Company Ltd (Titan; 'CRISIL AAA/Stable/CRISIL A1+'). The above strengths are partially offset by weak financial risk profile of the company and exposure to intense competition in the retail jewellery segment. 

For fiscal 2021, operating performance is expected to moderate given store shut downs, drop in sales as a result of lower footfalls but offset by presence in the online segment. This will consequently result in lower operating profitability and cash accruals. On a provisional basis, in fiscal 2020, company reported operating revenue growth of 50% and earnings before interest tax depreciation and amortisation (EBITDA) margin of 1% largely impacted by store closures due to covdi-19.

Financial profile of the company is weak indicated by low networth, though the company has achieved EBITDA breakeven in fiscal 2020. However, with increase in scale, the financial profile is expected to improve with operating leverage. The company is also expected to achieve breakeven at profit before tax (PBT) level in fourth quarter of fiscal 2021. Titan has provided support by way of guarantee for CaratLane's term debt which supports the weak financial risk profile.   

CaratLane operates in the highly competitive jewellery industry. Due to the fragmented nature of the industry and competition from both organised and unorganised segment, the company is expected to be susceptible to margin pressures. As the company expands its retail footprint, it is also expected to face competition from established players in the respective local markets.

Analytical Approach

CRISIL has applied its parent notch up criteria to arrive at the ratings for CaratLane.

Key Rating Drivers & Detailed Description
Strengths: 
* Unique market position catering to the youth and affordable jewellery segment
CaratLane caters to the domestic online and offline retail jewellery segment. It carries out its operations through CaratLane website, mobile application and through its network of 92 stores as of March 31, 2020. Over the years, it has improved its market position and is positioned as a leading supplier of designer jewellery at affordable prices. Its online sales are driven by gifting purchases which are often in the low-value ranges. The company's average ticket size is Rs 14,000-Rs 25,000 which augurs well for the youth and drives impulse purchases. In fiscal 2020, its operating income increased by 50% year-on-year (yoy), mainly driven by its retail store additions. The company opened 37 new retail stores during fiscal 2020.
 
* Potential for exponential growth driven by new store additions
CaratLane began its operations as a start-up in the online retail jewellery segment and has witnessed tremendous growth. The company's operating income has grown at a CAGR of 52% over the 3 years ended fiscal 2020. The company is expected to achieve sales of over Rs 600 crore in fiscal 2021, driven by new store additions but offset by shut down of store due to covid-19. The company plans to open 30-35 new stores in fiscal 2021 taking the total count to 122 to 127 stores. The expansion in stores is expected to be achieved with moderate to low capex as most of these stores would be franchised based where inventory is owned by the franchisee and lowers the overall inventory holding costs for the company.
 
 * Strong support from the parent
CaratLane is strategic to the interest of Titan and is expected to receive strong operational, managerial and financial support from the parent. The key management team of CaratLane is deputed from Titan which is expected to bring in synergies. Caratlane benefits from Titan's oversight on processes and treasury. CaratLane also enjoys financial support as its term debt is currently guaranteed by Titan. Further, CaratLane stores are positioned and branded as a 'Tanishq Partnership'? benefitting from legacy trust of customers on Titan and Tanishq brand.
 
Weakness:
* Weak financial risk profile
CaratLane's financial profile is weak. Though the company has achieved EBITDA breakeven in fiscal 2020, it has return on capital employed (ROCE) of nearly -7% and debt to EBITDA of 29 times. Its debt protection metrics are weak, marked by interest coverage ratio of 0.4 time, net cash accruals to adjusted debt (NCATD) of -0.05 time and gearing of 33 times. The company is expected to turn PBT positive for the fourth quarter of fiscal 2021 and is expected to have better margins in the longer-term due to higher contribution of studded jewellery which has higher margins and distribution of fixed costs over a larger scale. However, CaratLane's financial risk profile benefits from strong support from the parent and corporate guarantee it provided for the term loan.
 
* Operates in highly competitive business segment
Despite its unique market positioning, CaratLane faces challenges of intensifying competition from national and regional players. Further, the fragmented nature of the industry has resulted in strong competitive pressures thereby squeezing players' margins. As the company expands its retail footprint, it will also face competition from established players in the respective local markets.
Liquidity Strong

Bank limit utilisation is moderate at ~13% for twelve months ended March 2020. The company's net cash accruals would be insufficient to meet debt repayment obligations of Rs 8 crore per year. However, the company has unutilised bank lines which provide sufficient cushion to meet these repayments. In addition, the term debt has been guaranteed by Titan and CRISIL centrally factors in the expectation of timely support from it in the event of an exigency.

Outlook: Stable

CRISIL believes CaratLane will maintain its unique market position over the medium term, supported by its own strong brand equity and continued operational, managerial and financial support by Titan.

Rating Sensitivity factors
Upward factors
* Substantial improvement in the business performance coupled with sustained positive OPBDIT margins
* Sustained improvement in debt protection metrics with interest coverage of over 1.5 times
 
Downward factors
* Delay in breakeven
* Sharp increase in borrowings further impacting its key credit metrics.
* Change in stance of support and deterioration of credit profile of Titan by one or more notches
About the Company

Incorporated in 2008 by Mithun Sacheti - a jewellery retailer and Srinivasa Gopalan - an IT entrepreneur, CaratLane designs, manufactures, trades and retails gems and jewellery online as well as through physical stores in India. It is recognised as one of the top 20 e-commerce portals in India. As of March 31, 2020, the company had a network of 92 stores.
 
Titan took substantial stake of 66.39% in CaratLane in 2016 to expand its presence online. It further increased its stake by 3.08% in March 2019 by way of private placement of shares and by 2.8% in August 2019 by purchasing shares from one of the existing shareholders in the company; which makes the current shareholding of Titan in Carat Lane as 72.3%. Balance equity is held by promotors and employee stock ownership plan holders.

Key Financial Indicators
As on / for the period ended March 31 Unit 2020* 2019
Revenue Rs. Crore 629 419
Profit after tax Rs. Crore -27 -46
PAT margins % -4.3 -11.0
Adjusted Debt/Adjusted Networth Times 32.7 2.7
Interest coverage Times 0.4 -2.9
*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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs Cr) Complexity level Rating Assigned with Outlook
NA Term Loan NA NA 01-June-2023 27 NA CRISIL AA-/Stable
NA Cash Credit NA NA NA 50 NA CRISIL AA-/Stable
NA Working Capital Demand Loan^^ NA NA NA 125 NA CRISIL AA-/Stable
NA Working Capital Demand Loan^ NA NA NA 30 NA CRISIL AA-/Stable
NA Proposed Working Capital Facility NA NA NA 119 NA CRISIL AA-/Stable
^ Gold Metal Loan with sub-limit of Rs 21 crore of Working capital demand loan
^^ Gold Metal Loan with sub-limit of Rs 100 crore of Working capital demand loan/Overdraft
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  351.00  CRISIL AA-/Stable      31-12-19  CRISIL AA-/Stable    --    --  -- 
            26-11-19  CRISIL AA-/Stable           
            04-09-19  CRISIL AA-/Stable           
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
Cash Credit 50 CRISIL AA-/Stable Cash Credit 50 CRISIL AA-/Stable
Proposed Working Capital Facility 119 CRISIL AA-/Stable Proposed Working Capital Facility 54 CRISIL AA-/Stable
Term Loan 27 CRISIL AA-/Stable Term Loan 36 CRISIL AA-/Stable
Working Capital Demand Loan^^ 125 CRISIL AA-/Stable Working Capital Demand Loan* 90 CRISIL AA-/Stable
Working Capital Demand Loan^ 30 CRISIL AA-/Stable Working Capital Demand Loan** 21 CRISIL AA-/Stable
Total 351 -- Total 251 --
*Interchangeable with Gold Metal Loan and Cash Credit/Overdraft
**Gold Metal Loan
^ Gold Metal Loan with sub-limit of Rs 21 crore of Working capital demand loan
^^ Gold Metal Loan with sub-limit of Rs 100 crore of Working capital demand loan/Overdraft
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
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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