Rating Rationale
June 23, 2020 | Mumbai
Mukund Hospitality Private Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.10 Crore
Long Term Rating CRISIL BB+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A4+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Mukund Hospitality Pvt Ltd (MHPL) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL BB+'. The short term rating has been reaffirmed at 'CRISIL A4+'.
 
The revision in outlook is reflects expected impact on business of MHPL due to measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures have impact the operations of the company as MHPL's restaurants were nonoperational from last week of March 2020 until June 08, 2020 when it started its operations. This has impacted the business with nil revenue during this period. Also improvement in footfalls are expected to be slow because of potential patrons continuing to restrict their non-essential movement in public places, restriction on maximum number of people in malls and delay in resumption of multiplexes etc. However, these risks are partially mitigated by extensive steps taken by the company to reduce its costs for the year like rent waiver received during lockdown and renegotiation for rest of the year, reduction of employee cost and other non-critical expenditure. This is expected to reduce the losses due to lockdown to large extent. It is expected that MHPL with its cost reduction strategy along with estimated slow recovery in the industry will lead to decline in profitability and impact liquidity but is likely to be able to meet it its business liquidity requirements and maturing debts in the year. Liquidity profile will also draw comfort from promoters' ability to bring in funds to meet its short term exigencies. That said, the ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.
 
The ratings continues to reflect the extensive experience of the promoters in the food and beverages (F&B) industry, the company's association with established brands, and its healthy profitability along with rising scale of operations. The strengths are partially offset by exposure to risks related to stabilisation of operations of new restaurants, and to intense competition.

Analytical Approach

Unsecured loans of Rs 13.32 crore as on June, 2020 from the promoters and related parties have been treated as neither debt nor equity as they are expected to remain in the business and are subordinated to external debt.

Key Rating Drivers & Detailed Description
Strengths: 
* Promoters' extensive experience: Promoters Mr Rishi Bajoria and Stellar Concepts Pvt Ltd (Stellar Concepts) have experience of more than a decade in the F&B business. Stellar Concepts is the master franchisee for Chili's Restaurant in North and East India and has been providing support to MHPL for setting up restaurants. Mr Rishi Bajoria is the master franchisee for Subway in East India. The promoters' domain expertise has helped them start three restaurants for Chili's in Kolkata and 1 at Bhubaneswar. They have also started one outlet for Auntie Anne's and Cinnabon at Bhubaneshwar (they had another unit in Kolkata which has been closed since September, 2019). MHPL will continue to benefit from the promoters' experience.­­­
 
* Healthy profitability and ramp-up of operations: Profitability has been healthy, reflected in EBIDTA (earnings before interest, tax, depreciation, and amortisation) margin of 12.5% in fiscal 2019 (estimated at 12% in fiscal 2020) against 14.4% in the previous fiscal 2018. Profitability in fiscal 2018 was higher as MHPL had some rent reversal in the year for previous year as the mall was getting renovated in the period and footfall naturally were lower. Revenue rose to Rs 33.38 crore in fiscal 2019 from Rs 25.31 crore in the previous fiscal. In fiscal 2020 the revenue is estimated to have slightly declined to ~Rs 30 crore due to COVID 19 pandemic in the last quarter. Lockdowns declared in the fiscal 2021 has largely impacted revenue and profitability of the company in Q1 of fiscal 2021 and is expected that overall profitability in fiscal 2021 will be around 9% with almost 50% revenue in comparison to last year. The profitability could thereafter restore to its previous level with revival of the demand as the pandemic eases out.
 
Weaknesses:
* Exposure to intense competition
Given the low entry barriers in the F&B industry, MHPL faces competition from food chains, established restaurant brands, and unorganised players. Players in niche segments constantly feel the need to modify their offerings and rebrand themselves to retain market share.
 
* Exposure to risks related to stabilisation of operations of new units: MHPL is trying to expand its business to Colombo, Sri Lanka, by setting up a Chili's restaurant. The company will face risks related to entry into a new country, and with people having different taste preference. It may take some time to adapt the menu and price according to the local population, which will increase the gestation period. Also, increased marketing spend will be needed to attract customers to the brand in the region. Therefore, MHPL will remain exposed to risks related to stabilisation of operations in a new geography and will remain key sensitivity factor.
Liquidity Stretched

Liquidity profile of MHPL is expected to be stretched in fiscal 2021 and thereafter expected to remain adequate. This deterioration in liquidity is expected due to impact on the business and its revenue in the fiscal due to COVID pandemic lockdown and lower footfall post resumption. In fiscal 2020 the company is estimated to have generated accruals of ~Rs 2.3 crore against maturing debts of Rs 1.5 crore. In fiscal 2021 the accruals are expected to fall to around Rs 1.2 crore and might tightly match with repayment obligation of Rs 1.2 crore and any mismatch will be supported by promoters. Thereafter accruals should be around Rs 2.5-2.6 crore annually against maturing debts of Rs 1.8-2 crore annually. Bank limits of Rs 1.6 crore (enhanced from Rs 1 crore from January 2020) were used at an average of 64% in last 12 months through May, 2020 (almost fully used in last three months). Current ratio is estimted to be adequate at around 1.1 times as on March 31, 2020.

Outlook: Negative

CRISIL believes MHPL's business risk profile will be adversely impacted on account of expected lower footfall due to COVID-19 pandemic and social distancing normal in place at malls .

Rating Sensitivity factors
Upward Factors
* Quick revival of the business, post resumption of operations and stabilization of Sri Lanka unit.
* Improvement in scale of operation at an upward of Rs 35 crore along with sustenance of profitability.
 
Downward Factors
* Decline in scale of operation along with profitability below expectation leading to accruals of below Rs 1 crore.
* Delay in stabilization of new unit along with additional support provided by MHPL during its initial days of operation impacting financial profile of the company.
* Any additional debt increasing the gearing to above 2 times.
About the Company

MHPL was incorporated in 2010 and is promoted by Mr Rishi Bajoria and Stellar Concepts. It is a franchisee of Chili's, Auntie Anne's, and Cinnabon in East India. It has four Chili's restaurants (with plan to set up one in Sri Lanka) and 2 Auntie Anne's & Cinnabon restaurants each.

Key Financial Indicators
Particulars Unit 2019 2020
Revenue Rs. Cr. 33.38 25.31
Profit After Tax Rs. Cr. 0.6 0.75
PAT Margin % 1.8 3
Adjusted Debt/Adjusted Net worth Times 2.38 1.74
Interest coverage Times 2 2.2

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 Long Term Loan NA NA Mar-2023 5.1 CRISIL BB+/Negative
NA Overdraft NA NA NA 1.6 CRISIL A4+
NA Proposed Long Term Bank Loan Facility NA NA NA 3.3 CRISIL BB+/Negative
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  10.00  CRISIL BB+/Negative/ CRISIL A4+      30-03-19  CRISIL BB+/Stable/ CRISIL A4+    --    --  -- 
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
Long Term Loan 5.1 CRISIL BB+/Negative Long Term Loan 8.7 CRISIL BB+/Stable
Overdraft 1.6 CRISIL A4+ Overdraft 1 CRISIL A4+
Proposed Long Term Bank Loan Facility 3.3 CRISIL BB+/Negative Proposed Long Term Bank Loan Facility .3 CRISIL BB+/Stable
Total 10 -- Total 10 --
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 Bank Loan Ratings
CRISILs Criteria for rating short term debt

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