Rating Rationale
February 26, 2019 | Mumbai
Mirza International Limited
Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+'
Rating Action
Total Bank Loan Facilities Rated Rs.544.5 Crore
Long Term Rating CRISIL A-/Negative (Downgraded from 'CRISIL A/Stable')
Short Term Rating CRISIL A2+ (Downgraded from 'CRISIL A1')
Rs.50 Crore Commercial Paper CRISIL A2+ (Downgraded from 'CRISIL A1')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities and commercial paper of Mirza International Ltd (MIL) to 'CRISIL A-/Negative/CRISIL A2+' from 'CRISIL A/Stable/CRISIL A1'.
The rating action reflects weakening in the company's business risk profile because of increase in working capital requirement and pressure on operating profitability. These issues have also impacted debt protection metrics and liquidity.
MIL is changing its business model, with a shift in focus from leather export to domestic branded sales through offline and online channels. Domestic sales are estimated to account for more than 50% of revenue in fiscal 2019 as against 30% in fiscal 2017. The retail business in the domestic market is working capital intensive because of higher inventory requirement. As a result, finished goods inventory increased to Rs 350 crore as of December 2018 from Rs 240 crore as of March 2018. To release built-up inventory, the company has started selling products at discount, impacting operating performance in the third quarter of fiscal 2019.
Operating margin declined to 9.6% in the quarter ended December 31, 2018, from 14.4% in the preceding quarter. The margin was 18% in fiscal 2018. Decline in the profitability weakened debt protection metrics, as reflected in interest coverage of 3.41 times for the quarter ended December 31, 2018, against 6.99 times for fiscal 2018. Sales at discounted prices will continue in the fourth quarter of fiscal 2019, constraining operating performance. Ability to rationalise inventory and improve profitability will remain key rating sensitivity factors.
The ratings reflect the experience of the promoters in the leather industry, established market position, integrated operations, and strong revenue growth in the domestic branded sales business. These strengths are partially offset by exposure to intense competition, and susceptibility to volatility in newsprint prices and to economic cycles.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of MIL and its subsidiary Mirza (HK) Ltd, as both the entities are in the same business and have common promoters. CRISIL has treated discounted bills of Rs 119 crore as on March 31, 2018, 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
* Experience of the promoters, established market position, and integrated operations: MIL's promoters have experience of around 40 years in the leather industry. The company has an established position backed by diversified presence in both domestic and overseas markets, along with reputed brands. It sells footwear, apparel, and accessories under the Redtape, Mode, and BondStreet brands in the domestic market. Its operating margin has benefited from integrated operations, with an in-house tannery for conversion of raw hide into finished hide. MIL's market position should remain healthy over the medium term, backed by strong growth in the domestic retail business and healthy export revenue.
* Healthy revenue growth in domestic branded business: Despite a 19% decline in overseas sales, MIL reported a 4% increase in operating income in fiscal 2018, driven by 74% increase in domestic branded sales. The domestic sales increased 44% in the first 9 months of fiscal 2019 over the corresponding period of the previous fiscal. The strong revenue growth in the domestic market was driven by established Redtape brand as well as launch of brands BondStreet (in fiscal 2017) and Mode (in fiscal 2018). Established brands should help sustain healthy revenue growth in the domestic business over the medium term.
* Increased working capital requirement and weakening liquidity: In line with the changing business model, working capital requirement has increased. The company opened 42 large format online stores in fiscal 2019 to enhance its retail presence. As a result, it had to stock significant inventory. Finished goods inventory increased to Rs 350 crore as on December 31, 2018, from Rs 240 crore as on March 31, 2018. This affected liquidity, with cash credit limits utilised at an average of 95% over the six months through December 2018.
The company has taken steps to rationalise working capital requirement by selling products at heavy discounts. This led to decline in operating margin to 9.6% for the quarter through December 2018 from 14.4% in the previous quarter and 18.1% in the corresponding quarter of the previous fiscal. Ability to rationalise inventory holding period and return to healthy profitability will remain a key monitorable.
* Declining revenue in overseas markets: Sales in overseas markets declined to Rs 526 crore in fiscal 2018 from Rs 691 crore in fiscal 2016, and by 6% to Rs 368 crore in the first 9 months of fiscal 2019 compared to the corresponding period of the previous fiscal. Low demand as well as high competitive pressure since fiscal 2016 led to the decline in overseas sales.
* Vulnerability to fluctuations in forex rates: MIL derives around 25% of its sales in British pounds, leading to significant exposure to forex risk, as the pound has been volatile since the Brexit referendum. MIL imports raw materials such as cow hide that are not available in India, and other hides during temporary interruptions in its tannery operations (for example, during the Kumbh Mela). The company has a policy of entering into forward contracts to cover 100% export while import is left open.

Liquidity is moderate, driven by cash balance and liquid investments of Rs 13 crore as on March 31, 2018. Cash credit limit was utilised more than 95% over the 6 months through December 2018. Long-term debt remained low as the company largely uses fund-based limits to meet working capital requirement. It will need additional bank lines to fund incremental working capital requirement. 

Outlook: Negative

CRISIL believes MIL's credit risk profile may weaken if operating performance does not improve and working capital requirement remains large.
Downside scenario
* Further increase in working capital cycle
* Sustained weak operating performance
* Large, debt-funded acquisition or capital expenditure, weakening the capital structure or debt protection metrics
Upside scenario
* Rationalisation of working capital cycle and improvement in operating performance

About the Company

Incorporated in 1979, MIL manufactures footwear and has a tannery. 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 40% of its revenue from export, wherein 90% of sales of footwear is under customers' brands and 10% is under the company's RedTape footwear brand. MIL's primary export market is the UK. The company sells footwear and apparels in the domestic market under its Redtape, Mode, and BondStreet brands.
For the nine months ended December 31, 2018, the company reported operating income of Rs 865 crore and profit after tax (PAT) of Rs 42 crore, against operating income of Rs 746 crore and PAT of Rs 61 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended March 31   2018 2017
Operating revenue Rs crore 973 937
Adjusted profit after tax (PAT) Rs crore 78 71
Adjusted PAT margin % 8.0 7.6
Adjusted debt/adjusted networth Times 0.70 0.66
Adjusted interest coverage Times 7.02 6.20
These are CRISIL adjusted numbers and do not match directly with the numbers reported by the company

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 A2+
NA Cash Credit NA NA NA 100.00 CRISIL A-/Negative
NA Packing Credit NA NA NA 120.00 CRISIL A2+
NA Bill discounting NA NA NA 190.00 CRISIL A2+
NA Letter of credit NA NA NA 50.00 CRISIL A2+
NA Term loan NA NA 31-Mar-19 10.89 CRISIL A-/Negative
NA Term loan NA NA 30-Jun-20 6.47 CRISIL A-/Negative
NA Term loan NA NA 30-Sep-21 9.66 CRISIL A-/Negative
NA Bank guarantee NA NA NA 0.50 CRISIL A2+
NA Proposed Long Term
Bank Loan Facility
NA NA NA 56.96 CRISIL A-/Negative
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Mirza (HK) Ltd Full Wholly owned subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A2+      06-08-18  CRISIL A1    --    --  -- 
            12-06-18  CRISIL A1           
            16-04-18  CRISIL A1           
Fund-based Bank Facilities  LT/ST  494.00  CRISIL A-/Negative/ CRISIL A2+      06-08-18  CRISIL A/Stable/ CRISIL A1  27-09-17  CRISIL A/Stable/ CRISIL A1  29-06-16  CRISIL A/Stable/ CRISIL A1  CRISIL A/Stable/ CRISIL A1 
            12-06-18  CRISIL A/Stable/ CRISIL A1      05-05-16  CRISIL A/Stable/ CRISIL A1   
            16-04-18  CRISIL A/Stable/ CRISIL A1           
Non Fund-based Bank Facilities  LT/ST  50.50  CRISIL A2+      06-08-18  CRISIL A1  27-09-17  CRISIL A1  29-06-16  CRISIL A1  CRISIL A1 
            12-06-18  CRISIL A1      05-05-16  CRISIL A1   
            16-04-18  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 A2+ Bank Guarantee .5 CRISIL A1
Bill Discounting 190 CRISIL A2+ Bill Discounting 190 CRISIL A1
Cash Credit 100 CRISIL A-/Negative Cash Credit 100 CRISIL A/Stable
Letter of Credit 50 CRISIL A2+ Letter of Credit 50 CRISIL A1
Packing Credit 120 CRISIL A2+ Packing Credit 120 CRISIL A1
Proposed Long Term Bank Loan Facility 56.96 CRISIL A-/Negative Proposed Long Term Bank Loan Facility 56.96 CRISIL A/Stable
Term Loan 27.04 CRISIL A-/Negative Term Loan 27.04 CRISIL A/Stable
Total 544.5 -- Total 544.5 --
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 Consolidation
CRISILs Criteria for rating short term debt

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