Rating Rationale
August 06, 2018 | Mumbai
Mirza International Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.544.5 Crore (Enhanced from Rs.396.88 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.50 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on the bank facilities and commercial paper of Mirza International Limited (MIL).

MIL's business model is undergoing a change with a shift in focus from leather export to domestic branded sales through both offline and online channels. This was also evident in fiscal 2018, wherein this segment grew 75% year-on-year to Rs 390 crore. Launch of new brands in fiscal 2018, continuing healthy domestic demand and addition of new retail stores in the near term, is expected to significantly increase branded domestic segment sales.

In line with the business growth, working capital requirement is also expected to increase. Inventory increased to 175 days as on March 31, 2018, from 125 days a year ago; correspondingly, debt increased to around Rs 390 crore from Rs 330 crore. Nonetheless, debt protection metrics were comfortable and should remain so given the expectation of healthy cash accrual and absence of any new long-term debt. Adequate revenue and stable profitability will remain key monitorables over the near to medium term.

The ratings continue to reflect the experience of MIL's promoter in the footwear manufacturing segment, established market position, integrated operations, and healthy financial risk profile. These strengths are partially offset by large working capital requirement, geographical and customer concentration in revenue, and susceptibility to fluctuations in foreign exchange (forex) rates.

Analytical Approach

Discounted bills of Rs 119 crore as on March 31, 2018, have been treated as debt.

Key Rating Drivers & Detailed Description
Strengths
* Experience of promoter, established market position, and integrated operations
MIL has an established position owing to the well-diversified presence in both domestic and export markets, along with a reputed brand. MIL sells footwear, apparel and accessories under the brand, Redtape & BondStreet in the domestic market. In fiscal 2017, despite decline in export business, the company has been effectively able to increase domestic Branded business (grown by 28% from previous fiscal). In addition, MIL benefits from integrated operations, with an in-house tannery for conversion of raw hide into finished hide.

Business risk profile should further improve over the medium term, supported by expansion in the higher-margin domestic retail business and healthy export revenue.

* Healthy financial risk profile
Networth and gearing were healthy at Rs 571 crore and 0.91 time, respectively, as on March 31, 2018. Interest coverage was 7.02 & 6.2 times in fiscals 2018 and 2017.

Operating margin has been above 15% over the five fiscals through 2018 despite wide fluctuations in forex earnings. The margin has been supported by integrated operations as reflected in healthy operating efficiency, with an earnings before interest, tax, depreciation, and amortisation margin of 18% and return on capital employed of around 16% for fiscal 2018.

MIL has negligible long-term debt; short-term debt is taken to meet working capital needs. While the short term debt is expected to increase in fiscal 2019, but the debt protection metrics like the interest coverage ratio is expected to remain stable, because of the expected increase in the profitability of the operations with the planned business expansion.

Weaknesses
* Large working capital requirement
Working capital requirement is large, with high inventory and debtor days. MIL needs to maintain high inventory because of substantial lead time involved in production process. Furthermore, due to integrated operations, MIL has to maintain inventory for both its divisions'leather and footwear. Inventory holding increased to 175 days as on March 31, 2018, from 125 days a year ago. It is further expected to increase to around 190 days in fiscal 2019 with adequate growth in the domestic market. A commensurate revenue and profitability growth is expected to offset the impact of the increased working capital requirement and will be a key monitorable.

* Geographical and customer concentration in revenue
MIL has been successful in increasing domestic sales, with around 74% rise in domestic branded sales in fiscal 2018; around 54% of revenue is still earned through exports.

Around 74% of export revenue is from sales to the UK, which makes the operating performance vulnerable to any downswing in the UK economy as well as fluctuations in forex rates. Furthermore, sales to top three customers constitute around 60% of the total footwear exports, with Mirza UK Ltd being the biggest customer (45% of total exports are to Mirza UK). Mirza UK sells MIL's products to leading chain stores in the UK market. MIL continues its efforts to increase its presence in the US & rest of world, with 15% & 11% of the export revenue coming from the US & Rest of World respectively.

* Vulnerability to fluctuations in forex rates
MIL derives around 60% of its sales in pounds, leading to significant exposure to forex risk, as the pound has been volatile since the Brexit. MIL also imports raw materials such as cow hide which are not available in India. The company has a policy of entering into forward contracts to cover 100% exports while the imports are left open.

MIL will likely remain exposed to geographical and customer concentration risk over the medium term. Moreover, operations are expected to remain working capital intensive, driven by high debtor and inventory days.
Outlook: Stable

CRISIL believes MIL will continue to benefit from integrated operations, promoter's experience and higher growth in the domestic branded segment. The financial risk profile is expected to remain strong over the medium term, supported by low gearing, moderate capital expenditure, and healthy cash accrual.

Upside scenario
* Significant rise in revenue through diversification in geographic mix
* Sustainable increase in profitability, while maintaining financial risk profile
* Improvement in liquidity

Downside scenario
* Significant decline in revenue and profitability because of intense competition
* Weakening of financial risk profile
* Stretch in liquidity, driven by more-than-expected increase in working capital requirement.

About the Company

MIL, incorporated in 1979 manufactures footwear and also has a tannery unit. The company was reconstituted as a public-limited company in fiscal 1994 following a public issuance of shares. Operations were established by Mr Irshad Mirza, the current chairman. MIL earns 54% of its revenue through exports, wherein 90% of sales of footwear are while label undertaken under customers' brand names, Rest 10% is export of own brand RedTape Footwear. MIL's primary export market is the UK, which contributes to a major portion of its export revenue. The company sells footwear in the domestic market under its brand, Redtape.

Key Financial Indicators (CRISIL Adjusted Numbers)
Particulars Unit 2018 2017
Revenue Rs.Crore 973 937
Profit After Tax (PAT) Rs.Crore 78 71
PAT Margins % 8.0 7.6
Adjusted debt/Adjusted networth Times 0.70 0.66
Interest coverage Times 7.02 6.20

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 Commercial Paper NA NA 7-365 days 50.00 CRISIL A1
NA Cash credit NA NA NA 100.00 CRISIL A/Stable
NA Packing credit NA NA NA 120.00 CRISIL A1
NA Bill discounting NA NA NA 190.00 CRISIL A1
NA Letter of credit NA NA NA 50.00 CRISIL A1
NA Term loan NA NA 31-Mar-2019 7.54 CRISIL A/Stable
NA Term loan NA NA 31-Mar-2019 3.35 CRISIL A/Stable
NA Term loan NA NA 30-Jun-2020 6.47 CRISIL A/Stable
NA Term loan NA NA 30-Sep-2021 9.66 CRISIL A/Stable
NA Bank guarantee NA NA NA 0.50 CRISIL A1
NA Proposed long term bank loan facility NA NA NA 56.96 CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A1  12-06-18  CRISIL A1    --    --    --  -- 
        16-04-18  CRISIL A1               
Fund-based Bank Facilities  LT/ST  494.00  CRISIL A/Stable/ CRISIL A1  12-06-18  CRISIL A/Stable/ CRISIL A1  27-09-17  CRISIL A/Stable/ CRISIL A1  29-06-16  CRISIL A/Stable/ CRISIL A1  27-01-15  CRISIL A/Stable/ CRISIL A1  CRISIL A/Stable/ CRISIL A1 
        16-04-18  CRISIL A/Stable/ CRISIL A1      05-05-16  CRISIL A/Stable/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST  50.50  CRISIL A1  12-06-18  CRISIL A1  27-09-17  CRISIL A1  29-06-16  CRISIL A1  27-01-15  CRISIL A1  CRISIL A1 
        16-04-18  CRISIL A1      05-05-16  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
Bank Guarantee .5 CRISIL A1 Bank Guarantee .5 CRISIL A1
Bill Discounting 190 CRISIL A1 Bill Discounting 190 CRISIL A1
Cash Credit 100 CRISIL A/Stable Cash Credit 40 CRISIL A/Stable
Letter of Credit 50 CRISIL A1 Letter of Credit 20 CRISIL A1
Packing Credit 120 CRISIL A1 Packing Credit 120 CRISIL A1
Proposed Long Term Bank Loan Facility 56.96 CRISIL A/Stable Term Loan 26.38 CRISIL A/Stable
Term Loan 27.04 CRISIL A/Stable -- 0 --
Total 544.5 -- Total 396.88 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt

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