Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Joyalukkas India Limited (JIL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Stable’ and reaffirmed the short-term rating at 'CRISIL A1’.

 

The upgrade reflects the expectation of continued improvement in business and financial risk profiles over the medium term. JIL’s business risk profile is benefiting from strong growth in revenues, in line with the recovery in jewellery demand for organised retailers, and this is expected to continue over the medium term. CRISIL Ratings expects the company to report a revenue growth of 25-30% on-year in fiscal 2022 to over Rs 10,200 crore, driven by pent-up demand from wedding and festivities in the second and third quarter of the current fiscal. Revenue growth is expected to continue in mid-double digits (13-15% compound annual growth rate [CAGR]) while operating margin is expected to sustain at 10-11% over the medium term, led by higher gross margin and controlled promotional spends, leading to improvement in cash accrual. In the first nine months of fiscal 2022, company reported revenues of over Rs 7,200 crore and operating margin of 11%. Earlier, in fiscal 2021, JIPL reported flat revenue growth despite the disruptions caused by the pandemic. Operating margins improved by 200 basis points (bps) to ~11%, driven by windfall gains on inventory on account of surge in gold prices and continued cost optimisation measures.

 

The financial risk profile continues to benefit from healthy annual accrual (Rs 700 crore in fiscal 2022 against Rs 572 crore in fiscal 2021), and near-stable debt levels (Rs 1,500 crore), due to prudent capital spend and inventory funding. This will lead to better debt metrics in fiscal 2022, with total outside liabilities to tangible net worth (TOL/TNW) ratio improving to 1.2 times (from 1.4-2.1 times over fiscals 2018 and 2021) and interest coverage ratio of over 7 times in fiscal 2022 (from 3.8-5.8 times over fiscals 2018 and 2021). Over the medium term, debt is expected to range between Rs 1,300-1,500 crore and will largely comprise short-term working capital borrowings. The company has capital spending plans in fiscals 2023 and 2024 and is expected to open 10 stores each in these two years, besides closing few low-performing stores. Sustained healthy operating profitability and higher scale, coupled with stable debt is expected to lead to continued improvement in debt metrics with interest coverage ratio of 8-9 times and TOL/TNW ratio of under 1.0 time over fiscals 2023 and 2024.

 

Besides, liquidity has also strengthened, due to better cash accrual, leading to moderation in utilisation of working capital limits, averaging  87% in calendar year 2021 (against 91% last year).

Analytical Approach

CRISIL Ratings has considered gold on loan as short-term debt for its analysis.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position with strong brand image: JIL has an established market position and enjoys a strong brand image especially in South India. It has aggressively expanded to 85 stores as on December 31, 2021, from 29 stores in fiscal 2012, thereby taking the ‘Joyalukkas’ brand into newer geographies. The strong brand recall emanates from the extensive experience of the promoter, Mr. Alukkas Varghese Joy, who has over three decades of experience in the jewellery business. New stores expansions and strong brand image in the South India markets has enabled the company to register a CAGR of 7% in revenue, between fiscals 2017 and 2021. Market position is expected to improve further with revenues in excess of Rs 12,000 crore over the medium term supported by new store additions.

 

• Improving operating efficiencies: Operating profitability is expected to sustain at 10-11% in fiscal 2022 in line with fiscal 2021 at 11%, due to sustained high gross margins led by higher making charges and improving share of studded jewellery (17% in the first nine months of fiscal 2022 against 14% in fiscal 2021) coupled with continued cost optimisation measures. The company has been focusing on pruning costs even before the pandemic, as reflected in better operating margin, compared with most of its peers. return on capital employed was also healthy at over 20% between fiscals 2018 and 2021. Promotional spend is expected to remain under control, due to increased focus on digital advertising and limiting of celebrity based advertisements to a significant extent. While employee costs could rise again as operations fully recover to pre-Covid levels and as new stores get added. Closure of low-performing stores, and flexibility in adjusting making charges are expected to ensure operating profitability sustains at 10-11% over the medium term. Nevertheless, as the company does not hedge most of its gold inventory, and replenishes stock at regular intervals, a sharp decline in gold prices renders some vulnerability to its operating profitability.

 

• Improving financial risk profile: JIL’s financial risk profile has witnessed an improvement due to healthy annual accrual, which has benefitted net worth (Rs 1,700 crore as on March 31, 2021, and over Rs 2,000 crore as on March 31, 2022), while debt has remained stable at Rs 1,300-1,600 crore as most of the incremental inventory over the last few years have been largely funded through internal accruals. This has resulted in strengthening of debt metrics in fiscal 2022, with TOL/TNW ratio improving to an estimated 1.2 times (1.4 times in fiscal 2021) and interest coverage ratio improving to over 7 times (5.8 times in fiscal 2021). Though the company has capital spending plans in fiscals 2023 and 2024, debt is expected to range between Rs 1,300-1,500 crore, resulting in continued improvement in debt metrics.

 

Weaknesses:

• Working capital intensive operations: Jewellery retailers typically have to maintain large inventory of gold and other precious commodities in the form of variety of designs, to meet customer requirements. JIL, on average, maintains an inventory of Rs 30-35 crore per store. During fiscal 2021, gross current assets continued to remain high at 181 days. Most of the company’s borrowings are short-term in nature to fund its inventory as reflected in higher but improving utilisation of bank limits at around 87% in calendar year 2021 (against 91% last year). Working capital intensity is thus expected to continue over the medium term. 

 

• Exposure to regulatory risk in the jewellery industry: The jewellery sector has seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued gold on lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold on loan scheme was re-started and the 80:20 rule was scrapped. Furthermore, since January 2016, the government has mandated jewellers to collect PAN card for all purchases beyond Rs 2 lakhs. The government introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Import duty on gold was increased by 2.5% in fiscal 2020 and then reduced by 2% to 10.75% in fiscal 2021. These regulatory changes had moderated JIL’s operating performance in the past. The company will remain susceptible to changing regulatory norms.

Liquidity: Adequate

The company's liquidity is adequate with unencumbered cash balance of Rs 58 crore and unutilised bank lines of Rs 122 crore (including unutilised bank lines under multiple banking arrangements, short-term loans and vendor financing facilities) as on December 31, 2021. For the 12 months through December 2021, bank line utilisation averaged 87%. The company does not have large principal repayment obligations (around Rs 47-50 crore), as majority of its debt is for working capital requirements. JIL’s promoter also enjoys considerable financial flexibility, and need based funding support can be provided, if required, and as has been demonstrated in other group companies.

Outlook: Stable

CRISIL Ratings believes that the credit profile of JIL will remain stable over the medium term due to its established market position, improved operating efficiencies, steady cash generation, prudent capital spending and inventory management.

Rating Sensitivity factors

Upward factors:

• Stronger than expected growth in revenues with operating margin sustaining at over 10-12%, leading to better cash accrual
• Significant improvement in financial risk profile and debt protection metrics; for instance, TOL/TNW ratio sustaining at or below 0.8-1.0 time.
• Significant improvement in liquidity, especially in the form of unutilised bank lines

 

Downward factors:

• Sharp decline in business levels and operating profitability (below 6-7%), impacting cash accruals, including due a steep decline in gold prices or regulations
• Higher than anticipated debt funded capital expenditure or working capital requirements, leading to moderation in debt metrics; for instance TOL/TNW ratio exceeding 2.2-2.5 times.
• Moderation in liquidity, and reflected in almost complete utilisation of bank lines, and low cash surpluses.

About the Company

JIPL was incorporated in 2002, following the separation of businesses among the Alukkas family, and was promoted by Mr. Alukkas Varghese Joy, who has over three decades of experience in the jewellery business. The company is a leading retailer of 22-carat jewellery in India with 85 showrooms across the country as of December 31, 2021. The company’s operations are almost concentrated only in India and largely in the southern states of Kerala, Tamil Nadu, Andhra Pradesh, Telangana and Karnataka, though it has also expanded into New Delhi, Punjab, Kolkata, Chandigarh and Mumbai in the recent past.

 

Mr. Alukkas Varghese Joy has three children. His son, Mr. John Paul Joy Allukkas, looks after the group’s jewellery retailing business in the Middle East and South Asia. His two daughters, Ms. Mary Antony overseas the group’s foreign exchange business based out of UAE, while Ms Elsa Joy oversees a mall and the silk fashion textile business of the group.

Any other information: Not applicable

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	Cash Credit	NA	NA	NA	953	NA	CRISIL A+/Stable
NA	Short Term Loan*	NA	NA	NA	25	NA	CRISIL A1
NA	Term Loan	NA	NA	Mar-2022	1.56	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sep-2022	8.47	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sep-2023	4.77	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Feb-2023	3.63	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	May-2024	15.1	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Apr-2023	5.43	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sep-2022	5	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Aug-2023	18.16	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	51.88	NA	CRISIL A+/Stable
NA	Working Capital Demand Loan *	NA	NA	NA	40	NA	CRISIL A+/Stable
NA	Working Capital Demand Loan	NA	NA	NA	190	NA	CRISIL A+/Stable
NA	Working Capital Demand Loan #	NA	NA	NA	128	NA	CRISIL A+/Stable

*Interchangeable with GML

#Interchangeable with Short Term Loan