Rating Rationale
April 14, 2020 | Mumbai
M Suresh Jewellery Private Limited
Rating removed from 'Watch Developing' ; Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.115 Crore
Long Term Rating CRISIL A-/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its rating on the bank facilities of M Suresh Jewellery Private Limited (MSJ; Part of M Suresh Group) from 'Rating Watch with Developing Implications' and has reaffirmed the rating at 'CRISIL A-', while assigning a 'Negative' outlook.
 
CRISIL had placed its rating on the long term bank facilities of MSG on watch on March 17, 2020, following the inability of the group to meet its debt obligations due to the imposition of moratorium on deposits with yes Bank. This impacted group's ability to service debt in a timely manner despite having the cushion in liquidity and willingness to repay the debt. The group had working capital facilities with Yes Bank.
 
Subsequently, the debt obligations have been paid post the lifting of moratorium of Yes Bank.
  
The revision in outlook reflects expectation of sharp deterioration in the business risk profile and accordingly, financial risk profile of the group.  Overall sales in the first nine months of Fiscal 2020 were already lower than corresponding period of the previous fiscal. Revenue is expected to see further pronounced deterioration in fiscal 2021, significantly higher than CRISIL's earlier expectations. The group's operations are working capital intensive. A large portion of the receivables for the group are from US and Europe, which are expected to see substantial elongation. Further group also has sizeable inventory level due to globally spread operations. This is expected to impact the financial risk profile especially debt protection metrics and inventory risk cover over the medium term.
 
CRISIL has taken cognizance of the restrictions on economic activity, including closure of all non-essential manufacturing plants in India as well as lock down and disruptions in key global diamond markets, to contain the spread of Novel Coronavirus (COVID-19). Impact of Covid-19 related restrictions applicable post April 14th, 2020 will remain a key monitorable.
 
CRISIL has also taken into cognizance, extensions being granted by the bankers in the export credit facilities for a period between 2-3 months, as permitted by the Reserve Bank of India (RBI), which should significantly contain the risk of default. CRISIL believes although elongated, the group would see a steady inflow of receivables from its customers, over the medium term and would also be able to partially revive its export operations over the next two-three months. 
 
Nevertheless, a sustained long period of lockdown can result in significant deterioration in credit profile of the group. On the other hand a faster reversal to normalcy may contain the extent of deterioration likely in credit quality of the group. Also any further relief measures given by the lenders towards export credit facilities will also be a key monitorable.
 
The ratings continue to reflect the MSG's well established market presence backed by experience of partners, healthy operating efficiencies and diversified revenue profile along with moderate financial risk profile. These rating strengths are partially offset by large working capital requirements along with susceptibility to volatile diamond prices amidst intense competition and sluggish global demand resulting in moderate operating profit margins.

Analytical Approach

* Consolidated
CRISIL has consolidated the business and financial risk profiles of MSJ, Adinath Jewellery Exports (Adinath), and M Suresh Company Private Limited (MSC) together referred to as M Suresh Group (MSG). This is because all these entities, have common promoters, and there are operational and financial linkages between these entities.
 
* Unsecured Loans
Unsecured loans to the tune of Rs. 21.35 crores as on March 31, 2018 have been treated as debt as the promoters have exhibited a tendency of withdrawing the unsecured loans infused by them.

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:
* Established market presence backed by experience of promoters
Supported by extensive experience of the partners, MSG has established its position in domestic and international cut and polished diamond markets for more than five decades. The group is a family-run business and the promoters have maintained longstanding relations with customers while successfully navigating through several business cycles over the years. The firm's diversified customer base enables high bargaining power with its customers, and deep insights into consumer buying patterns; thus the firm can identify emerging market trends early. It operates in USA, Belgium, Hong Kong, UAE, Israel, India, etc. and derives around 83% of the revenue from exports.
 
* Healthy operational efficiencies and diversified revenue profile
MSG is a sightholder of the De Beers group and Alrosa, which enables it to source, process and distribute diamonds consistently in volume and variety. Close proximity to the diamond trading market has enabled the firm to receive its required supply of high quality rough diamonds during the times of supply disruptions leading to production efficiency. The group has a diversified revenue profile as seen by its diversified geographical and product profile over the years.
 
* Moderate financial risk profile
Networth has been adequate at Rs 441 crore as on March 31, 2018, with moderate total outside liabilities to tangible net worth ratio of 2.36 times, despite lower than expected accruals. Also, interest coverage and net cash accrual to adjusted debt ratios were moderate at 2.73 times and 0.05 time, respectively, in fiscal 2018. Financial risk profile is expected to exhibit some deterioration over the medium term amidst disruptions on account of Covid-19 outbreak.
 
Weaknesses:
* Large working capital requirements
Operations have been working capital intensive, with inventory, and receivables around 88 days, and 113 days, respectively, as on December 31, 2019. Working capital intensity is expected to increase over the medium term amidst disruptions on account of Covid-19 outbreak.
 
* Susceptibility to volatile diamond prices amidst intense competition and sluggish global demand resulting in moderate operating profit margins
The diamond industry is highly fragmented because of low entry barriers on account of relatively low capital and technology requirements, attracting numerous un-organised players across the country. MSG Group is also exposed to risks related to volatility in diamond prices. The company maintains inventory of rough and polished diamonds of which rough diamonds are usually procured from the international market. This makes the company vulnerable to fluctuation in diamond prices and with relatively limited value addition operating profitability has been moderate at around 3.97% to 4.66% over the last three fiscals through 2019.
Liquidity Adequate

MSG has adequate liquidity driven by unencumbered cash and cash equivalents of around Rs. 20 crore as on December 31, 2019. The group also has access to sanctioned bank limits of Rs.643.25 crore, utilized to the tune of around 75% over the 12 months ended December 2019. The group does not have any long term repayment obligation and no major capex plans over 2021. Liquidity is further supported by unsecured loans of Rs. 21.35 crore extended by the promoters. Such funding support is expected continue over the medium term. Moreover, the group has sufficient liquidity to meet the fixed cost of approximately Rs. 5 crore per month, for next two months, amidst lockdown and disruptions due to COVID-19 outbreak.

Outlook: Negative

CRISIL believes MSG's business and financial risk profile especially debt protection metrics and inventory risk cover will be under pressure owing to lock down imposed in key export geographies to contain the outbreak of Covid-19 and the recent shutdown announced by the Government of India along the similar lines.

Rating Sensitivity factors
Upward factors
* Significant improvement in working capital management with GCA (Gross Current Assets) sustaining below 200 days
* Improvement in debt protection metrics and capital structure through an incremental fund infusion
* Improved profitability resulting in higher cash accruals and RoCE levels
 
Downward factors
* Weaker operating profitability below 3.8% resulting in pressure on debt protection metrics
* Significant decline in the scale of operations or stretch in working capital management
* Unexpected capital withdrawals
About the Company

MSC, incorporated in 1968, cuts and polishes diamonds. It also trades in diamonds, and has been a DTC sightholder for two decades and also obtained Alrosa sight from Fiscal 2020.
 
MSJ exports diamond-studded jewellery and has a manufacturing unit in the Santacruz Electronics Export Processing Zone (SEEPZ) in Mumbai.
 
Adinath, a partnership firm which commenced operations in 2009, also exports diamond-studded jewellery.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 1990 1901
Profit after tax (PAT) Rs crore 39 42
PAT margin % 1.9 2.2
Adjusted debt/Adjusted networth Times 1.35 1.40
Interest coverage Times 2.73 3.29

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 Export Packing Credit NA NA NA 10 CRISIL A-/Negative
NA Fund-Based Facilities NA NA NA 40 CRISIL A-/Negative
NA Packing Credit (pre-shipment credit) NA NA NA 27 CRISIL A-/Negative
NA Post Shipment Credit NA NA NA 28 CRISIL A-/Negative
NA Working Capital Facility NA NA NA 10 CRISIL A-/Negative
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Adinath Jewellery Exports (Adinath) 100% All these entities, have common promoters, and there are operational and financial linkages between these entities
M Suresh Company Private Limited (Standalone)(MSC) 100%
M Suresh Jewellery Private Limited (MSJ) 100%
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  115.00  CRISIL A-/Negative  17-03-20  CRISIL A-/Watch Developing  29-06-19  CRISIL A-/Stable  28-03-18  CRISIL A/Negative      CRISIL A/Negative/ CRISIL A1 
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
Export Packing Credit 10 CRISIL A-/Negative Export Packing Credit 10 CRISIL A-/Watch Developing
Fund-Based Facilities 40 CRISIL A-/Negative Fund-Based Facilities 40 CRISIL A-/Watch Developing
Packing Credit (pre-shipment credit) 27 CRISIL A-/Negative Packing Credit (pre-shipment credit) 27 CRISIL A-/Watch Developing
Post Shipment Credit 28 CRISIL A-/Negative Post Shipment Credit 28 CRISIL A-/Watch Developing
Working Capital Facility 10 CRISIL A-/Negative Working Capital Facility 10 CRISIL A-/Watch Developing
Total 115 -- Total 115 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Criteria for rating trading companies
CRISILs Criteria for Consolidation

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