Detailed Rationale

CRISIL Rating has assigned its 'CRISIL AA-/Stable' ratings to the bank facilities of Monte Carlo Fashions Limited (MCFL).

 

The rating reflects MCFLs’ strong market position through its established brand ‘Monte Carlo’, pan India presence through its wide distribution network. The rating is further supported by robust financial profile with comfortable capital structure, healthy debt protection metrics and strong liquidity. MCFL has a healthy business profile supported by strong market position supporting steady increase in scale of operations which is estimated to have improved by over 40% in fiscal 2022. The increase in sales was supported by recovery in demand, increase in price realization and opening of new stores. The company maintained its operating margins even during pandemic through passing on increase in raw material prices and cutting down of discretionary expenses. MCFL is also setting up a rug manufacturing facility for a capex of Rs 240 crore over fiscal 2023-2025 which will help it increase its scale of operations in the medium term.

 

MCFL’s capital structure remains comfortable with estimated gearing of 0.06 time as on March 31, 2022 which is expected to remain below 0.2 in the medium term. The debt protection metrics remains healthy with expected interest coverage of over 11 times in fiscal 2022, net cash accrual to adjusted debt of 2.9 times and debt to EBITDA of 0.24 as on March 31, 2022.

 

The ratings are however constrained by improving albeit limited geographic diversification, seasonality in the business, working capital intensive nature of business leading to GCA days over 250 and exposure to presence of intense competition in apparel industry.

Analytical Approach:

For arriving at its ratings, CRISIL Ratings has combined financial and business profile of MCFL and its subsidiaries due to business linkages and common management.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business profile with established market position

MCFL has an established market position with Monte Carlo being the leading industry player in winter wear market. The company has also strong distribution and retail network with 315 EBOs, 2,087 MBOs, 739 National chain stores (NCS) and 235 other type of stores as on December 31, 2021. The company derives 50% revenue from summer segment, 25% from winter segment while other segment contributes the balance 25%. MCFL has also increased its e-commerce footprint with online sales of Rs 48 crore in nine months of fiscal 2022 compared to Rs 37 crore in full fiscal 2021.

 

MCFL is estimated to have posted a strong sales year on year growth of over 40% in fiscal 2022 with low base, full year of store operations, higher discretionary spending from end users and increase in price realizations. The revenue has shown a healthy CAGR of 10% over last five fiscals despite impact on revenue in fiscal 2021 due to pandemic. The revenue is expected to grow by over 15% in the medium term leading to networth increasing to around Rs 1,000 crore by fiscal 2025 from Rs 680 crore in fiscal 2022. MCFL’s leading brand ‘Monte Carlo’ is an industry leader in winter-wear segment with brand size of around Rs 900 crore. MCFL has in-house facility for designing and production of winter wear giving it additional control over quality and production.  The revenue of over Rs 200 crore from fiscal 2025 through its subsidiary for setting up rug manufacturing facility will further support business profile with higher scale of operations and revenue diversification.

 

The company has maintained healthy gross margins of over 40% and operating margins between 16-18% which is estimated to continue along with increase in scale of business. The strong operating margins of over 16% over last 5 years reflects strong pricing power.

 

• Strong financial risk profile

The financial risk profile remains strong with healthy net cash accruals, comfortable debt protection metrics and strong liquidity. Cash accrual of above Rs 120 crores  per annum will support upcoming capex of Rs 240 crore over 3 years for setting up rug manufacturing capacity. The capex will be funded through a combination of debt and internal accruals in the ratio of 70:30. Despite additional debt of around Rs 170 crore, capital structure will remain comfortable.

 

Gearing is likely to remain below 0.2 with additional capex to be funded with a combination of debt and internal accruals. Debt protection metrics were comfortable with estimated interest cover of over 11 times and net cash accrual to adjusted debt ratio of around 2.9 for fiscal 2022. Growth in profitability, led by better scale of operations, should support the metrics in the medium term. Total outside liabilities to tangible net worth ratio have remained below 0.7 over last five fiscals and the trend is expected to continue in the medium term.

 

Weaknesses:

• Exposure to intense competition in the apparel segment, seasonality and limited geographical diversity

MCFL caters to highly price and quality conscious customers and has dominant position in winter wear. The competitive landscape for the apparel sector remains high.  Competition in the company’s key product segments s becoming intense, notwithstanding the strong growth momentum. The company has been ramping its distribution network to sustain growth and maintain brand awareness. Furthermore, the ever-changing nature of trends makes it imperative to revamp the portfolio periodically. The company’s ability to constantly innovate and update its portfolio will, therefore, remain a key monitorable.  CRISIL Ratings believe strong brand equity of Montecarlo should continue to benefit MCFL in the medium term.

 

MCFL over the years has been improving its geographical diversification through opening new stores in west and central region. However, with lower number of stores present in west and central region currently, the overall share of revenue from these regions currently remains low at 15% (of revenue) indicating concentration to north and east region. Further, revenue of MCFL exhibit seasonality in its revenue as demand for its products spikes in winter (Q3) and due to festivities. Any impact in demand due to weak winter season may adversely impact the demand and impact overall sales.

 

• Working capital intensive nature of operations

Gross current assets (GCA) were estimated to be high at 282 days as on March 31, 2022, driven by high inventory and debtor days of 140 days and 130 days respectively. Given the nature of operations and seasonality in demand, the company has to maintain large inventory for stock keeping units at its stores at the start of winter and summer season. The debtor days remained high with credit period of over 3 months given to its distributors for selling in MBOs although the company uses outright sale model for some its channels mitigating the inventory risk. MCFL’s ability to maintain working capital cycle will remain a key monitorable.

Liquidity: Strong

Liquidity is supported by strong liquid investments, healthy cash accrual, low bank limit utilisation and low debt obligations. MCFL’s cash balances including liquid investments stood at Rs 194 crore as on December 31, 2021 which are expected to moderate with upcoming capex over fiscal 2023 and 2024. Net cash accrual of Rs 120-140 crore over fiscal 2023 and 2024 are sufficient to cover interest and debt obligations (Rs 5-15 crore). Average working capital limit utilization remained low at 24% over the 12 months in February 2022.

Outlook: Stable

The outlook is stable driven healthy business profile, established market position along with healthy financial risk profile.

Rating Sensitivity factors

Upward Factors:

• Sustained 20-25% growth in revenues, supported by better geographical diversification and brand diversification, leading to better scale of operations and cash accruals over Rs 200 crore on a sustained basis
• Improvement in operating margins to above 20%, and sustenance of healthy RoCE, while pursuing steady store expansion.
• Sustenance of healthy financial risk profile and debt protection metrics

 

Downward Factors:

• Sluggish revenue growth and decline in operating profitability to below 15% impacting cash generation
• Gearing ratio going above 0.5

About the Company

MCFL was incorporated in 2008 as a wholly owned subsidiary of Oswal Woollen Mills Ltd (OWML), the flagship company of Nahar group. MCFL was demerged from OWML in 2011. The company is an apparel retailer and manufacturers of woolen and cotton garments for men, women and kids. The brand MONTE CARLO is renowned as a winter wear brand. The company also other brands such as Cloak and Decker, Alpha and Rock-It. Monte Carlo Fashions was listed in December 2014 on BSE and NSE.

 

MCFL is Part of Nahar group of companies which includes Oswal Woollen Mills Limited, Nahar Spinning Mills Limited and Nahar Industrial Enterprises Limited which has extensive experience in textile and apparel industry. MCFL operates on an arm’s length basis with its group companies.

In first nine months of fiscal 2022, company posted revenue and profit after tax (PAT) of Rs 742 crore and Rs 101 crore respectively.

Any other information: Not applicable