Rating Rationale
August 04, 2023 | Mumbai
Creative Newtech Limited
Rating outlook revised to 'Stable'; Ratings Reaffirmed; Rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.134 Crore (Enhanced from Rs.85.25 Crore)
Long Term RatingCRISIL BBB/Stable (Outlook revised from 'Positive'; Rating Reaffirmed)
Short Term RatingCRISIL A3+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Creative Newtech Limited (CNL, formerly known as Creative Peripherals And Distribution Ltd).to ‘Stable’ from  'Positive' while reaffirming the rating at ‘CRISIL BBB'. The short term rating has been reaffirmed at 'CRISIL A3+’.

 

The outlook revision reflects the continued dependence of the company on few key customers limiting the business risk profile of the company. While CNL is taking steps to dilute the concentration in terms of new customer additions in the export markets and continued focus on increasing sale of Honeywell products, sustenance of the same resulting in reduced customer concentration while maintaining healthy scale will remain a key rating sensitivity factor. However, revenues are estimated to have increased to Rs 1348 crores in fiscal 2023 from Rs 933 crores in fiscal 2022 supported by repeat orders and addition of products. Financial risk profile remains strong with comfortable capital structure and healthy liquidity.

 

The ratings continue to reflect the extensive experience of the promoter in the distribution of computer peripherals and consumer electronics, the company’s diversified product portfolio, established relationships with principal suppliers, efficient working capital management and above-average financial risk profile. These strengths are partially offset by exposure to intense competition, low operating margin and customer concentration in revenue.

Analytical Approach

Unsecured loan of Rs 1.96 crore as on March 31, 2022 (estimated at Rs 0.86 crores as on March 31,2023) from the promoter has been treated as debt.

Key Rating Drivers & Detailed Description

Strengths: 

Extensive experience of the promoter:

The promoter has more than two decades of experience in the consumer electronics business which has helped establish a clientele across multiple channels including small retailers, large format retailers and e-commerce players. The extensive experience helps in stocking decisions and addition of products to increase sales. This has led to steady growth in revenue to Rs 932.59 crore in fiscal 2022 (estimated at Rs 1348 crores in fiscal 2023).

 

Diversified product offerings and established relationships with principal suppliers:

The company is an exclusive distributor across India for various products for reputed brands such as Cooler Master, Honeywell, Olympus, Philips, Samsung, Transcend and Viewsonic across information technology (IT), imaging, lifestyle and security segments. The company also has a distribution agreement with Fujifilm and recently have signed distribution agreement with Lexar. They have also won the distribution agreement from Cricut and Razor Inc. The company has established relations with suppliers and is an exclusive distributor for many of its suppliers which has helped scale up operations. They receive compensation for any price revision or obsolesce of products, helping it manage inventory. The diversified product offerings reduce the risk of slowdown in demand for a single product.

 

Efficient working capital requirement:

The working capital cycle is efficiently managed, as reflected in gross current assets (GCAs) of 90 days as on March 31, 2022 (estimated at around 65-70 days as on March, 31,2023), with receivables of 32 days and inventory of 39 days for fiscal 2022 (19 days and 21 days respectively for fiscal 2023). The quick cash conversion cycle and strong relationships with vendors ensure limited inventory risk. The working capital cycle is partly supported by payables of 27 days. Diversified clientele, limited credit exposure to a single customer and low credit period safeguard against counterparty credit risk.  The working capital cycle is expected to improve and will remain a key monitorable over the medium term.

 

Above-average financial risk profile:

Net worth and total outside liabilities to adjusted net worth ratio were comfortable and estimated to be around Rs 75.18 crore and 2.27 times, respectively, as on March 31, 2022 (Rs 100.40 crore and 1.53 times respectively as on March 31, 2023) . Debt protection metrics were adequate, reflected in interest coverage and net cash accrual to total debt ratios of 4.89 times and 0.28 time, respectively, in fiscal 2022 and is estimated to remain at 4.15 times and 0.25 times respectively in fiscal 2023. The financial risk profile will remain healthy over the medium term owing to steady accretion to reserve and limited reliance on external borrowing.

 

Weakness: 

Customer concentration in revenue:

Though the revenue increased significantly to Rs 1348 crores in fiscal 2023, around 60% comes from a single overseas customer against 49% in fiscal 2022 which continues to contribute around 60% of revenues in Q1 of fiscal 2024. Any loss of business or change in strategy in key commercial terms of the principal customer can adversely impact the credit risk profile of CNL.

 

Exposure to intense competition:

Intense competition in the consumer electronics distribution business because of low entry barriers, as indicated by negligible capital requirement, leads to stiff pricing competition among players, impacting scalability.

 

Low operating margin:

Operating margin is typically low in the distribution business because of limited value addition. CNL had an operating margin of 2.5-4.0% in the three fiscals through 2023. The low operating margin leaves cash accrual highly vulnerable to changes in operating cost. Revisions in terms with vendors or pressure to enhance margin sharing with the distribution network amid intense competition will remain key monitorable

Liquidity: Adequate

Bank limit utilization is moderate at around 84 percent for the past twelve months ended June 2023. Cash accruals are expected to be over Rs 16 to 19 crores which are sufficient against term debt obligation of Rs 1.38 to 2.27 crore over the medium term. Current ratio are healthy at 1.45 times on March 31, 2022. Cash and cash equivalents are estimated at about Rs 0.60 crore as on March 31, 2023. The promoters are likely to extend support in the form of equity and unsecured loans to meet its working capital requirements and repayment obligations.

Outlook: Stable

CRISIL Ratings believes that CNL will continue to benefit over the medium term from the extensive industry experience of its promoters and its established relationships with principals.

Rating Sensitivity Factors

Upward factors:

  • Reduction in customer concentration to less than 40% from each customer
  • Steady revenue growth and stable operating margin leading to higher cash accrual
  • Continued efficient working capital cycle, strengthening the financial risk profile

 

Downward factors:

  • Stretched working capital cycle, with GCAs above 200 days, weakening the financial risk profile and liquidity
  • Decline in revenue or profitability, leading to lower cash accrual

About the Company

Set up in 1995 by Mr Ketan Patel, CNL is a distributor of consumer electronic goods in the information technology, imaging, lifestyle and security segments for brands such as GoPro, Honeywell, Olympus, Philips, Samsung, Transcend and Viewsonic. The company is based in Mumbai and is listed on the National Stock Exchange.

Key Financial Indicators

As on/for the period ended March 31

 Unit

2022

2021

Operating income

Rs crore

932.59

515.59

Reported profit after tax

Rs crore

17.18

10.75

PAT margins

%

1.84

2.09

Adjusted Debt/Adjusted Networth

Times

0.86

0.81

Interest coverage

Times

4.92

4.32

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon

rate (%)

Maturity date

Complexity level

Issue

size

(Rs.Crore)

Rating assigned with outlook

NA

Cash credit

NA

NA

NA

NA

66

CRISIL BBB/Stable

NA

Letter of credit & Bank Guarantee

NA

NA

NA

NA

39.5

CRISIL A3+

NA

Term loan

NA

NA

Dec-2024

NA

8.7

CRISIL BBB/Stable

NA

Electronic Dealer Financing Scheme(e-DFS)

NA

NA

NA

NA

3.75

CRISIL BBB/Stable

NA

Proposed Export Packing Credit

NA

NA

NA

NA

15

CRISIL BBB/Stable

NA

Proposed Fund-Based Bank Limits

NA

NA

NA

NA

1.05

CRISIL BBB/Stable

 

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 94.5 CRISIL BBB/Stable   -- 17-11-22 CRISIL BBB/Positive   -- 23-12-20 CRISIL BBB/Stable Withdrawn
      --   -- 04-11-22 CRISIL BBB/Positive   -- 26-03-20 CRISIL BBB/Negative --
      --   -- 19-07-22 CRISIL BBB/Positive   -- 24-02-20 CRISIL BBB/Stable --
      --   -- 10-03-22 CRISIL BBB/Positive   --   -- --
      --   -- 28-01-22 CRISIL BBB/Positive   --   -- --
Non-Fund Based Facilities ST 39.5 CRISIL A3+   -- 17-11-22 CRISIL A3+   -- 23-12-20 CRISIL A3+ --
      --   -- 04-11-22 CRISIL A3+   -- 26-03-20 CRISIL A3+ --
      --   -- 19-07-22 CRISIL A3+   -- 24-02-20 CRISIL A3+ --
      --   -- 10-03-22 CRISIL A3+   --   -- --
      --   -- 28-01-22 CRISIL A3+   --   -- --
All amounts are in Rs.Cr.
 
 
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 25 State Bank of India CRISIL BBB/Stable
Cash Credit 10 DBS Bank India Limited CRISIL BBB/Stable
Cash Credit 18 HDFC Bank Limited CRISIL BBB/Stable
Cash Credit 13 Axis Bank Limited CRISIL BBB/Stable
Electronic Dealer Financing Scheme(e-DFS) 3.75 State Bank of India CRISIL BBB/Stable
Letter of credit & Bank Guarantee 9 Axis Bank Limited CRISIL A3+
Letter of credit & Bank Guarantee 15 DBS Bank India Limited CRISIL A3+
Letter of credit & Bank Guarantee 15.5 HDFC Bank Limited CRISIL A3+
Proposed Export Packing Credit 15 Not Applicable CRISIL BBB/Stable
Proposed Fund-Based Bank Limits 1.05 Not Applicable CRISIL BBB/Stable
Term Loan 1.3 HDFC Bank Limited CRISIL BBB/Stable
Term Loan 1.83 Axis Bank Limited CRISIL BBB/Stable
Term Loan 5.57 State Bank of India CRISIL BBB/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Criteria for rating trading companies
CRISILs Bank Loan Ratings
Rating Criteria for Retailing Industry
Understanding CRISILs Ratings and Rating Scales

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