Key Rating Drivers & Detailed Description

Strengths:

Longstanding experience of the promoters in the carpet manufacturing industry: The founders, Mr F H Oakley, Mr F H Bowden and Mr J A L Taylor, and their family had been associated with the carpet manufacturing industry for more than a century. The current promoters (the Kolkata-based Luxmi group) have been managing the business with around 51% ownership for the last two decades. The Luxmi group, which is the 100% owner (from October, 2020) of the Obeetee group, inherited a healthy knowledge base from the founders in addition to its own experience of two decades. This has helped the promoters develop healthy relationships with its customers in USA and Europe and in the domestic market with institutional buyers. Also, the promoters have established healthy relationships with over 25,000 individual local craftsmen who carry out the manufacturing activity and have developed a strong quality management mechanism through timely and continuous supervision of work. This has resulted in healthy acceptance of products by customers and low rejections in the manufacturing process. The promoters have also tied up with key suppliers, who help them maintain timely supply of raw material.

Healthy reputation of products manufactured: The Obeetee group is one of the largest manufacturers of handmade carpets in India. It became the world’s first licensee of Woolmark for hand-knotted carpets in 1969. Products manufactured by the Obeetee group attract repeat customers in overseas markets because of their quality. This is reflected in the group’s decade-long associations with its customers.

Strong financial risk profile: Financial risk profile is healthy, as reflected in strong networth of around Rs 327 crore as on March 31, 2020 (around Rs 322 crore a year earlier). Also, as the reliance on external debt has remained in control, gearing stood at 0.32 time as on March 31, 2020 (0.34 time a year earlier). This has resulted in healthy debt protection metrics, as indicated by interest coverage and net cash accrual to adjusted debt ratios of 5.6 times and 0.26 time, respectively, in fiscal 2020. However, the metrics had weakened from 16 times and 0.49 time, respectively, in fiscal 2019 because of decline in profitability and are expected to improve along with better profitability over the medium term in the absence of any debt-funded capital expenditure (capex).

Weakness:

Range-bound scale of operations: The scale of operations has remained range-bound, indicated by revenue of Rs 510-555 crore over the four fiscals through 2020. Revenue is expected to remain at similar levels in fiscal 2021, registering compounded annual growth rate of only 3.5% over the five years through fiscal 2020 even after addition of various value-added products. The group has tried to expand in the retail market through its retail wing (OI and ORPL) but could not provide any major boost to the scale of operations.

MMPL was incorporated in 2017 to diversify the business to other home furnishings through the home furniture division. However, the furniture division has not been able to provide the expected boost (revenue contributed by the division was Rs 15.7 crore in fiscal 2020 and Rs 9.31 crore in fiscal 2019). Improvement in revenue will remain a key sensitivity factor.

Non-profitable diversification in the furniture business: The furniture division of the group had not reached breakeven point until fiscal 2020, with net operating loss of around Rs 15 crore and 10 crore in fiscals 2020 and 2019, respectively. This also eats up profit from the carpet division. Such losses occurred because the business was in its early stages and the market had not matured enough. However, timely breakeven in the division and scaling up of operations will be key monitorables.

Volatility in profitability: Profitability has remained volatile, with earnings before interest, taxes, depreciation and amortisation hovering at 7.7-19.4% over the five fiscals through 2020. This is because prices of the raw material (wool) are volatile and the group is not able to pass on the increase to its customers. Also, since fiscal 2020, the group has seen increase in the employee cost (contributing to around 16.5% of the revenue from around 12.5% in the previous fiscal), which led to profitability of 7.68% in the fiscal compared with 13.87% in fiscal 2019. Better absorption of fixed cost and frequent passing on of raw material cost increase could be driving factors over the medium term.

Large working capital requirement: Operations are working capital-intensive, as reflected in gross current assets of 215 days as on March 31, 2020 (201 days a year earlier), driven by inventory of 90-120 days (because of the diversified products offered) and receivables of 80-90 days. The suppliers provide credit of 60-90 days. With range-bound revenue over the years, the working capital cycle has been stretched, with an increase in receivables and creditors. In fiscals 2014 and 2015, receivables were 50-60 days and inventory was around 90 days. However, the group has been able to maintain total outside liabilities to tangible networth ratio of around 0.55 time over the years.

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.

About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK


About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 95,000 MSMEs have been rated by us.

CRISIL PRIVACY NOTICE

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the “Company) you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view the Company’s Customer Privacy at https://www.spglobal.com/privacy

Last updated: April 2016

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL

CRISIL uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011 to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL's use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: www.crisil.com/ratings/credit-rating-scale.html