Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Joyalukkas India Limited (JIL) from 'Rating Watch with Developing Implications' and reaffirmed the ratings at ‘CRISIL A+/CRISIL A1’ while assigned a 'Stable' outlook to the long term rating.

 

The ratings were placed on watch on March 02, 2023, following the attachment of assets worth Rs 305.84 crore belonging to the promoter, Mr Joy Alukkas Varghese, by the Enforcement Directorate (ED) in February 2023, under Section 37A of Foreign Exchange Management Act, 1999 (FEMA) and for violation of Section 4 of FEMA. As per the press release by ED, the attached assets had included landed properties worth Rs 81.54 crore, bank accounts worth Rs 91.22 lakh, fixed deposits of Rs 5.58 crore and shares of JIL worth Rs 217.81 crore.

 

As per the order dated August 18, 2023, the Commissioner of Customs and Competent Authority under Section 37A(3) of  FEMA, 1999, has set aside the seizure order. Following the same, the management of JIL confirmed that the banks need an order to lift the attachment of assets including savings account, fixed deposits and properties. The promoter has approached the High Court for an order to lift these attachments. While the High court has lifted the attachment on promoter’s saving accounts, as confirmed by JIL’s management, Lifting of attachment on the fixed deposits & properties are currently in process. Attachment on the promoter shareholding in JIL is no longer in force as the Competent Authority has set aside the provisional attachment order of ED. This has been additionally confirmed by the management.

 

However, there has been no impact on the operations of JIL because of the ED order and the company has continued to register healthy sales. Further, the relationship with lenders had not witnessed any impact due to the ED matter with funding support continuing to be available to JIL from banks. Also, the working capital limit has been enhanced by ~Rs 160 crore by three banks in the past 3-4 months. JIL is also in discussion with banks for further enhancement of its working capital facilities. Resolution of the watch factors the same.

 

There was an income tax (IT) raid on JIL in January 2018, with regards to suppression of income pertaining to melting losses for the period 2012 to 2018. The company, based on its self-assessment of tax, arrived at the amount of Rs 428 crore (Rs 260 crore of tax on the additional income generated and Rs 168 cr of interest on the delayed tax payments) and paid these taxes during fiscals 2019 and 2020. The interim board for the settlement has settled the tax matters on August 14, 2023, with an additional income of Rs 76 lakhs for which company has to pay tax. Company is awaiting the tax demand notice from the IT for the said income..

 

The company continues to benefit from strong revenue growth, in line with healthy demand in the organised domestic gold jewellery market. Revenue is expected to grow 14-17% in fiscal 2024 on a high base of fiscal 2023, supported by higher realisation, opening of new stores and healthy festive and wedding demand. Operating margin may marginally moderate by 50-70 basis points (bps) to 10.0-10.4% due to comparatively higher marketing spends and discounts on making charges. For the six months ended September 30, 2023, the company reported revenue of Rs 8,396 crore (year-on-year growth of ~18%) and the operating margin moderated by ~40 bps to ~10.7%.

 

The financial risk profile is expected to remain healthy owing to strong cash accrual and prudent funding of store expansion. Debt protection metrics are expected to remain healthy; interest coverage ratio is expected at more than 6 times over the medium term and the total outside liabilities to tangible networth (TOL/TNW) ratio at 1.0-1.2 times.

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 and strong brand image

JIL has an established market position and brand image in south India. Number of stores more than tripled to 92 as of October 2023 from 29 in fiscal 2012 as the brand, Joyalukkas, expanded into newer geographies. Performance is driven by the seasoned management and the extensive experience of the promoter, who has more than three decades of experience in the jewellery business. Revenue registered a compound annual growth rate of 16% between fiscals 2019 and 2023. Market position will improve further, with revenue expected above Rs 16,000 crore over the medium term, supported by store additions and growth in sales.

 

• Improving operating efficiency

Operating margin was healthy at 10.9% in fiscal 2023 and may marginally moderate to 10.0-10.4% in fiscal 2024. Even as significant inventory gains, which organised gold retailers registered in fiscals 2022 and 2021, are normalised, cost optimisation measures undertaken by the company will continue to drive profitability. The company has seen increased sales of diamonds and studded jewellery, which have higher margin than plain gold; this will support profitability over the medium term. Promotional spend is expected to increase but will however remain under control (~1% of revenue) owing to increased focus on digital advertising and limited celebrity-based advertisements. Moreover, the company does not hedge most of its gold inventory and replenishes stock at regular intervals.

 

• Healthy financial risk profile

Networth rose to Rs 3,323 crore as on March 31, 2023, from Rs 2,419 crore as on March 31, 2022, aided by healthy cash accrual; also, debt increased to Rs 1,668 crore from Rs 1,562 crore to support pent-up demand and fund inventory in new stores. In the current fiscal, networth is expected more than Rs 4,000 crore. Store expansions are being funded through a prudent mix of cash accrual and debt. The TOL/TNW ratio improved to 1.2 times as on March 31, 2023 (against 1.4 times a year ago) and is expected at ~1-1.2 time in the current fiscal. Interest coverage ratio, too, is expected to remain healthy at more than 6 times over the medium term.

 

Weaknesses:

• Large working capital requirement

Jewellery retailers maintain large inventory of gold and other precious commodities in variety of designs to meet customer requirement. JIL, on average, maintains inventory of Rs 65-70 crore per store. However, its gross current assets have improved over the years. Majority of the its borrowings are short-term but utilisation remains high, given the nature of business. Because of store additions, inventories are expected to remain high at the end, necessitating higher borrowings.

 

• Exposure to regulatory risks

The jewellery sector has seen heightened regulatory actions in the 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. Subsequently, in fiscal 2015, the gold-on-loan scheme was restarted and the 80:20 rule was scrapped. In January 2016, the government mandated jewellers to collect PAN card for all purchases beyond Rs 2 lakh. In fiscal 2023, the government hiked basic import duty on gold to 15% (from 12.5%). Also, it has introduced the sovereign gold bond scheme to shift consumer preferences away from physical gold. Any changes in government regulations and its impact on the operating performance will remain key monitorables.

Liquidity: Adequate

Liquidity was healthy with unutilised bank facilities of Rs ~240 crore and cash balances of Rs ~110 crore as on November 16, 2023. Bank limit utilisation was 89% for the seven months through October 2023. The company does not have large principal obligation as majority of its debt is used for meeting working capital requirement. The promoter has infused funds in the past to support operations. Given the expansion plans of the company, continued enhancement in bank limits or alternate sources of funding, including from the promoter, may be required.

Outlook: Stable

The credit risk profile of JIL will remain stable over the medium term due to its established market position, improved operating efficiency, steady cash generation, prudent capital spending and inventory management.

Rating Sensitivity factors

Upward factors

• Steady revenue and stable operating margin at 10-12% leading to higher cash accruals
• Significant improvement in the financial risk profile, with TOL/TNW ratio of 0.8-1 time
• Strengthening of liquidity, with increase in unutilised bank lines

 

Downward factors

• Adverse regulatory action by Reserve Bank of India or ED, materially impacting the operating performance
• Sharp decline in revenue and operating profitability (~6-7%) leading to lower cash accrual owing to decline in gold prices or regulatory aspects
• Large debt-funded capital expenditure or stretched working capital cycle, moderating debt metrics and the liquidity profile

About the Company

JIL was incorporated in 2002 following the separation of businesses among the Alukkas family members. The company is 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 91 showrooms as of April 2023. Operations are concentrated in India and largely in the southern states of Kerala, Tamil Nadu, Andhra Pradesh, Telangana and Karnataka, though it has expanded into New Delhi, Punjab, Kolkata and Mumbai in the recent past.

 

Mr Alukkas Varghese Joy has three children: Mr John Paul Joy Alukkas, who looks after the jewellery retailing business in the Middle East and South Asia; Ms Mary Antony oversees the foreign exchange business based in the United Arab Emirates.

Key Financial Indicators*

As on/for the period ended March 31		2023	2022
Operating income	Rs crore	14,513	10,295
Adjusted profit after tax (PAT)	Rs crore	899	638
PAT margin	%	6.2	6.2
Adjusted debt/adjusted networth	Times	0.5	0.7
Interest coverage	Times	6.7	5.5

*CRISIL Ratings-adjusted figure

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned  with outlook
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	1192.40	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	17.60	NA	CRISIL A+/Stable
NA	Short Term Loan	NA	NA	NA	240.00	NA	CRISIL A1