Rating Rationale
March 26, 2020 | Mumbai
Creative Peripherals And Distribution Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.33.5 Crore
Long Term Rating CRISIL BBB/Negative (Outlook revised from 'Stable' and Rating reaffirmed)
Short Term Rating CRISIL A3+ (Rating reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Creative Peripherals And Distribution Limited (CPDPL) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL BBB'. The short-term rating has been reaffirmed at '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 slowing end-customer demand could lead to reduced sales to distributors and stretch in receivables. and thereby may have an impact on its credit quality, especially liquidity position. It could also face procurement related issues given it imports 50% of its products from Singapore, Hong Kong and China etc. 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 firms. 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.
 
The rating continues to reflect extensive experience of the CPDPL's promoters in the distribution of computer peripherals and consumer electronics products, its diversified product offerings coupled with established relationships with principals, moderate working capital requirements and above-average financial risk profile. These rating strengths are partially offset by exposure to intensely competitive industry and low operating margins.

Analytical Approach

Unsecured loans from promoters, outstanding at Rs 1.21 crore as on March 31, 2019, have been treated as debt.

Key Rating Drivers & Detailed Description
Strengths:
* Extensive industry experience of promoters:
The promoters of CPDPL have more than 2 decades of experience in consumer electronic goods distribution industry helped to establish strong relationship with customers and suppliers. Repeat order from its customers have led to steady growth in revenues over the years to Rs. 450 crores estimated in fiscal 2020, from Rs. 184.3 crores in fiscal 2016.
 
* Diversified product offerings coupled with established relationships with principals:
CPDPL is a distributor for diversified products of reputed brands such as AOC, GoPro, Honeywell, Olympus, Philips, Samsung, Transcend across IT, imaging, lifestyle and security segments. It is an exclusive distributor across India for most of its principals and long-standing relationships with them has helped CPDPL to improve its scale of operations. Further, diversified nature of its product offerings reduces the risk of slowdown in demand of any particular product.
 
* Moderate working-capital-intensive operations:
CPDPL's operations are moderately working capital intensive, as reflected in its gross current assets (GCAs) of 107 days as on March 31, 2019, with debtor of 40-60 days and inventory of 30-40 days. The quick cash conversion cycle and the strong relationship with vendors also ensures limited inventory-related risk. A diversified customer base, policy of limiting credit exposure to a single customer, and low credit period offered provide a safeguard against counterparty credit risks. Against this the company gets limited credit of 30'40 days. CPDPL's working capital management with increase in scale of operations will remain a key monitorable over the medium term.
 
* Above-average financial risk profile:
Networth and total outside liabilities to adjusted networth was comfortable at Rs 33.24 crore and 2.50 time, respectively as on March 31, 2019; expected to be around Rs. 38 crore and 2.20 times, respectively, as on March 31, 2020. Debt protection metrics is adequate with interest coverage and net cash accrual to total debt ratios of 2.95 times and 0.18 times, respectively, for fiscal 2019; expected to be around similar levels for fiscal 2020. Financial risk profile is expected to remain at similar levels owing to healthy accretion to reserves and controlled reliance on external debt.
 
Weaknesses:
* Exposure to intensely competitive trading of consumer electronics:
CPDPL's business risk profile is constrained by its moderate scale of operations in the intensely competitive distribution market for consumer electronics. Also, the consumer electronics distribution business is fragmented, given the low entry barriers and low capital requirements. This leads to stiff pricing competition and in order to garner higher volumes, principals incentivise bulk purchases by extending discounts, which may impact CPDPL's revenue growth.
 
* Low but stable operating margin:
The margin in the distribution business is low due to limited value addition. The operating margin of has been at 3-3.5% in the four fiscals through 2019. A very low net margin leaves cash accrual highly vulnerable to changes in operating cost. Any revision in terms with vendors or pressure to enhance margin sharing with the distribution network amid intensifying competition will remain a key monitorable.
Liquidity Adequate

Liquidity is adequate, marked by expected cash accrual of over Rs 7.5-9 crore annually in fiscal 2020 and fiscal 2021, against which it has no repayment obligations in the medium term. It had cash and bank balance of Rs 3.59 crores as on March 31, 2019. Utilisation of fund-based limit of Rs 20 crore was 91% as on date. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its incremental working capital requirements.

Outlook: Negative
CRISIL believes that CPDPL's business risk profile could be impacted with slowdown in sales and receivable stretch.

Rating Sensitivity factors
Upward Factors
* Significant and sustained improvement in revenue and profitability leading to cash accruals of more than Rs 10 Cr
* Improvement in the working capital cycle, strengthening financial risk profile
 
Downward Factors
* Substantial increase in working capital requirements with gross current assets of more than 200 days, impacting financial risk profile
* Sharp decline in revenue or profitability margin, impacting cash accruals
About the Company

CPDPL, set up in 1995 by Mr. Ketan Patel and headquartered in Mumbai, is a distributor of consumer electronic goods in IT, imaging, lifestyle and security segments for brands such as AOC, GoPro, Honeywell, Olympus, Philips, Samsung, Transcend, etc.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs. Cr. 367.70 249.82
Profit After Tax Rs. Cr. 5.65 2.89
PAT Margin % 1.54 1.16
Adjusted Debt/Adjusted Net worth Times 1.02 0.84
Interest coverage Times 2.95 2.48

Status of non cooperation with previous CRA:
CPDPL has not cooperated with Brickwork Ratings, which had classified as 'Issuer not Cooperating' vide a release dated March 18, 2020. The reason provided by Brickwork Ratings was non-furnishing of adequate information for monitoring the rating.

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)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs. Cr)		 Rating Assigned  with Outlook
NA Cash Credit NA NA NA 20 CRISIL BBB/Negative
NA Letter of Credit NA NA NA 13.5 CRISIL A3+
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  20.00  CRISIL BBB/Negative  24-02-20  CRISIL BBB/Stable              CRISIL BB+/Stable 
Non Fund-based Bank Facilities  LT/ST  13.50  CRISIL A3+  24-02-20  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
Cash Credit 20 CRISIL BBB/Negative Cash Credit 20 CRISIL BBB/Stable
Letter of Credit 13.5 CRISIL A3+ Letter of Credit 13.5 CRISIL A3+
Total 33.5 -- Total 33.5 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Criteria for rating trading companies
Rating Criteria for Retailing Industry
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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