Rating Rationale

Key Rating Drivers & Detailed Description

Strengths

Established market position: The group is one of the largest jewelry manufacturers with revenue of about Rs 4700 crores and has presence across the country with diverse set of clientele. Further, it also benefits from the promoters' experience of over three decades, their strong understanding of market dynamics, and healthy relations with customers and suppliers. The established market position is backed by its extensive reach and brand recall of Emerald and Jewel One. The group has retail presence with 14 stores spread across Tamil Nadu for its gold, silver and diamond jewelry. Also, the group has tie-ups with high end textile stores in Tamil Nadu for its fashionable silver jewelry.

Moderate working capital cycle: Its working capital requirement is moderate as reflected in gross current assets (GCA) which ranged between 80-104 days over the three fiscals ended March 31, 2022. The group offers very minimal credit to its customers and holds optimal inventory to support its operations leading to moderate GCA. Its moderate working capital cycle also aids in restricting the volatility in operating profitability to an extent due to change in gold prices.

Strong financial risk profile: Capital structure has been at healthy aided by moderate reliance on external funds yielding gearing of 0.90 time and low total outside liabilities to adjusted tangible networth (TOL/ANW) of 1.5 as on 31st March, 2022. The interest coverage and net cash accrual to total debt (NCATD) ratio are over 4 times and 0.2 times for fiscal 2022. With no large debt-funded expansion plans, financial risk profile would remain healthy.

Weaknesses:

Susceptibility of revenue and profitability to intense competition in a fragmented industry, and to volatility in gold prices: The presence of a large number of players, both small and big, in jewelry manufacturing leads to pressure on profitability. Also, the profitability is susceptible to volatility in gold prices as seen in the past 2 years where the margin improved on the back of increase in gold prices. However, the mandatory hallmarking requirement for gold jewelry from June 2021, is expected to benefit organized players such as EJIL.

Susceptibility to changing regulatory risks: The jewelry sector has seen heightened regulatory changes in the recent past. For instance, in fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued the gold-on-lease scheme and modified the gold deposit scheme. In fiscal 2015, the gold-on-loan scheme was re-started and the 80:20 rule was scrapped. In January 2016, the government mandated jewelers to collect PAN card for all purchases beyond Rs 2 lakh. The government has also introduced the sovereign gold bond scheme to shift consumer preferences away from physical gold. Import duty on gold was increased by 5% in fiscal 2023. Some of these regulatory changes moderated the company's performance. EJIL like other jewelry players will remain susceptible to changing regulatory norms.