Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of MMTC - Pamp India Private Limited (MPIPL) continue to reflect the technical, managerial, and financial support that it receives from its ultimate parent MKS Pamp Holding BV, Netherlands (MKPS), and business support from MMTC Ltd (MMTC), healthy market position as an integrated player with back-end operations in refining and front-end operations through consumer segments: and its comfortable financial risk profile. These strengths are partially offset by susceptibility to regulatory risks and volatility in demand for gold.

 

CRISIL Ratings expects MPIPL’s performance to improve in fiscal 2022 reflected by cash accrual of Rs 120-130 crore against cash accrual of Rs 28 crore in fiscal 2021. The improvement in cash accrual is driven by recovery in the refining business, supported by healthy volume expectation of over 70 tons (against 44 tons in fiscal 2021) coupled with strong ramp-up in the consumer business. Operating margin is expected to improve to over 0.50-0.55% in fiscal 2022 (against 0.35% in fiscal 2021) on account of increasing contribution from consumer business which has higher margins, coupled with benefits from economies of scale. Performance of the company in the first quarter of fiscal 2022 was significantly stronger than the corresponding period last year, as it reported volumes of 11.5 tons (against 4 tons last fiscal). Operating margin though, was lower in the quarter at 0.35%, compared to corresponding period last fiscal (0.75%), it is expected to improve sequentially, aided by increase in scale of operations and higher contribution from the consumer business. During the first quarter of last fiscal, company had received substantially higher premiums on its bullion and trading business, due to lower availability of metal during the pandemic.

 

Company reported cash accrual of Rs 28 crore in fiscal 2021 and Rs 1 crore in fiscal 2020, against cash accrual of around Rs 100 crore in fiscal 2019. Impact in fiscal 2021 was largely on account of disruptions caused by covid-19 pandemic as jewellers reduced their inventory and some lead time before the company could start operations post September 2020. While in fiscal 2020, higher dividends amounting to Rs 57 crore, led to lower accruals. Furthermore in November 2020, Company paid customs duties amounting to Rs 206 crore, as it was discovered that duty was being paid on the basis of provisional invoice wherein, freight charges and metal value were captured on a provisional basis. These were subsequently finalised in the final invoices. The company have made these payments suo moto to custom authorities, which has also led to restatements of accounts for fiscal 2020 and subsequently lower accruals. As the company has made the required payments, no major tax outgo pertaining to this matter is expected over the near to medium term. In addition, company is expecting refunds of around Rs 88 crore from the authorities, for instances where customs duty paid on provisional basis is higher than post landing charges.

 

CRISIL Rating expects the financial risk profile to remain comfortable over the medium term, with interest coverage ratio of over 3.5 times and total outside liabilities to tangible networth (TOL/TNW) ratio of below 4.5 times. Prudent inventory management policies undertaken by the company, which involves capping the inventory levels to 5-6 tons is also expected to prevent inventory build-up during low demand period and also limit the impact from gold price fluctuations and regulatory headwinds. In addition, company has liquidity amounting to Rs 626 crore as of August 2021, in the form on cash and equivalents amounting to Rs 41 crore and unutilised working capital demand loan of Rs 585 crore, which would be sufficient to meet the working capital requirements.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profile of PAMP Speciality services Pvt Ltd and PAMP Precision Manufacturing India Pvt with MPIPL as these business have a common management and significant business and financial linkages.

 

CRISIL Ratings has reclassified creditors backed by letter of credit as debt.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Technical, managerial and financial support from MKPS: MPIPL is a joint venture between MMTC (26.00% ownership) and PAMP SA (72.65%), a part of the MKPS group. The MKPS group, who are the ultimate promoters of MPIPL, have been engaged in refining and trading of precious metals since 1977. The group operates in the precious metal refining business through its step-down subsidiary, PAMP SA. MPIPL benefits from the parentage of PAMP SA on account of technology and technical expertise for its gold refinery. The group provides managerial support to MPIPL through its nominated directors and has provided financial support in the form of letters of comfort to the bankers of MPIPL in India for the banking facilities provided by them. CRISIL Ratings believes that the group will continue to provide technical, managerial, and financial support to MPIPL for its operations in India.

 

• Integrated player with back-end operations in refining and front-end operations through consumer segments: MPIPL has demonstrated a track record of refining and recovery capabilities over the years. Its refinery commenced operations in March 2012, and turned profitable in the first full year of operations. Post commencement of operations, the company had gradually increased its refining capacity to 200 tons in fiscal 2016 and 300 tons in fiscal 2019 from 150 tons in fiscal 2015. MPIPL’s refining facility is the sole refinery in India to have ‘Good Delivery’ accreditation from the London Bullion Market Association (LBMA), supporting the business risk profile. CRISIL Ratings believes that the company will continue to benefit from its robust refining and recovery capabilities over the medium term.

 

Furthermore, MPIPL is also expanding its consumer business substantially, which includes sale of coins and bars to on-line, off-line and B2B customers, digital gold services through various on-line platforms and provides hallmarking services through its own centres. Foray into these segments will lead to MPIPL becoming an integrated player with back-end operations in refining and front-end operations through consumer segments.

 

• Comfortable financial risk profile: MPIPL has comfortable financial risk profile, marked by strong networth and improving debt-protection metrics. The networth of the company is estimated to improve to Rs 380-400 crore in fiscal 2022, supported by healthy accretion to reserves. Networth dipped in fiscal 2020 to Rs 302 crore from Rs 363 crore in fiscal 2019 on account of payments made to custom authorities. While networth improved only marginally to Rs 305 crore in fiscal 2021 due to low accretion to reserves on account of disruptions caused by the pandemic. Company plans to incur capital expenditure amounting to Rs 60-65 crore in fiscal 2022 towards its silver contacts and catalyst unit. However, debt protection metrics are expected to remain comfortable over the medium term with interest coverage and TOL/TNW ratios expected to improve to over 3.5 times and below 4.5 times respectively over the medium term, against 1.9 times and 5.7 times respectively in fiscal 2021. TOL/TNW was higher in fiscal 2021 on account of higher customer advances against inventory held for the digital gold services. MPIPL’s business model is marked by short working capital cycle, on account of consignment based business model reflected in gross current asset of 30 days as on fiscal 2021.

 

Weakness

• Susceptibility to regulatory risk: MPIPL’s business is dependent on the regulations framed by the Government of India (GoI) and Reserve Bank of India (RBI) from time to time. MPIPL’s revenues and profitability are thus highly dependent upon duty structures which are formulated or regulated by GoI and RBI. Any adverse change in the duty structure will have a material impact on the operating performance of the company. For instance, the duty differential (pre-GST) which had remained unaltered till March 2016 was reduced with the increase in excise duty for gold refineries to 9.50% from earlier levels of 9.0% during the Union Budget in March 2016 while keeping the import duty unchanged. The excise duty was subsequently reduced to 9.35%.

 

In February 2016, the government imposed a 1% excise duty subsequent to which jewellers went on strike resulting in lower demand and higher market disparity thereby impacting the volume sales of the company. This resulted in operating profit margin moderating to 0.31% in fiscal 2017 from 0.47% in fiscal 2016. CRISIL Ratings, therefore, believes that MPIPL will remain susceptible to regulatory risks, as any unfavourable revision in the duty structure can significantly impact the company's operations.

 

• Volatility in demand for gold: The demand for gold in the short term is highly elastic to volatility in gold prices and regulatory changes. A sudden surge in gold prices is likely to have a bearing on the gold volumes sold by the company. In fiscal 2021 volumes dropped to 44 tons against 82 in fiscal 2020 and 150 tons in fiscal 2019 on account of disruptions caused by the pandemic and subsequent implementation of lockdowns. Similarly in fiscal 2017, company’s volumes had dropped to 81 tons from over 100 tons in fiscal 2016 on account of jeweller’s strike, which led to significant inventory build-up and liquidity stretch.

Liquidity: Adequate

As of August 2021, MPIPL had adequate liquidity, marked by cash and equivalents of Rs 41 crore and unutilised working capital demand loan limits of Rs 585 crore.

Outlook: Stable

CRISIL Ratings believes MPIPL’s business risk profile will be supported by its established market position and MKS PAMP group will continue to provide technical, managerial, and financial support to it. CRISIL Ratings also believes that MPIPL’s operating performance will improve going forward supported by recovery in refining business coupled with strong ramp-up in consumer business.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in scale of operations, improvement in duty differential and consequently higher cash accruals and liquidity.
• Strong financial risk profile with improvement in interest coverage ratio of above 4 times

 

Downward Factors

• Unfavourable change in the duty structure or regulations or sluggish demand leading to decline in scale of operations, operating profitability and cash accruals.
• Weakening of financial risk profile due to higher than expected debt, leading to sustained weakening of interest coverage ratio to below 1.5 times.

About the Company

MPIPL is a joint venture between MMTC (26.00% ownership) and PAMP SA (72.65% ownership), part of the MKPS group. MKPS is a precious metals and financial services conglomerate, specialising in processing and trading of gold and other precious metals for over 40 years. MPIPL refines gold and silver, and mints gold and silver coins. It has installed capacity to refine 300 tons of gold and 600 tons of silver per annum, and mint 25 lakh pieces of gold/silver coins per annum. Its facility is accredited as Good Delivery gold and silver refinery by LBMA, an international quality standard for gold and silver.

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	Bank Guarantee	NA	NA	NA	250.00	NA	CRISIL A1
NA	Cash Credit	NA	NA	NA	15.00	NA	CRISIL A/Stable
NA	Foreign Exchange Forward	NA	NA	NA	49.95	NA	CRISIL A1
NA	Letter of Credit$	NA	NA	NA	35.00	NA	CRISIL A1
NA	Letter of Credit^	NA	NA	NA	450.00	NA	CRISIL A1
NA	Letter of Credit	NA	NA	NA	230.05	NA	CRISIL A1
NA	Letter of Credit&	NA	NA	NA	1800.00	NA	CRISIL A1
NA	Letter of Credit@	NA	NA	NA	400.00	NA	CRISIL A1
NA	Working Capital Demand Loan#	NA	NA	NA	5.00	NA	CRISIL A/Stable
NA	Working Capital Demand Loan*	NA	NA	NA	450.00	NA	CRISIL A/Stable
NA	Proposed Term Loan	NA	NA	NA	30.00	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Jan-2027	50.00	NA	CRISIL A/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	242.00	NA	CRISIL A1

*Includes sub-limit of cash credit of Rs 50 crore and Letter of credit of Rs 350 crore

#Includes sub-limit of cash credit of Rs 5 crore

@includes sub-limit of cash credit of Rs 200 crore and working capital demand loan of Rs 400 crore

^Includes sub-limit of cash credit of Rs 15 crore, bank guarantee of Rs 100 crore and working capital demand loan of Rs 200 crore

$Includes sub-limit of bank guarantee of Rs 35 crore

&Includes sub-limit of bank guarantee of Rs 90 crore