Rating Rationale
June 29, 2018 | Mumbai
PC Jeweller Limited
Long-term rating downgraded to 'CRISIL A/Negative' ; ratings removed from 'Watch negative'
 
Rating Action
Total Bank Loan Facilities Rated Rs.3937 Crore
Long Term Rating CRISIL A/Negative (Downgraded from 'CRISIL A+/Watch Negative'; Removed from 'Rating Watch with Negative Implications')
Short Term Rating CRISIL A1 (Removed from 'Rating Watch with Negative Implications'; Rating reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on the bank facilities of PC Jeweller Limited (PCJ; part of the PCJ group) from 'Rating Watch with Negative Implications' and downgraded the long term rating to 'CRISIL A' from 'CRISIL A+' while the short term rating has been reaffirmed at 'CRISIL A1'. CRISIL has also assigned the 'Negative' outlook on the long-term rating.

The rating action is based on the significant impairment in PCJ's financial flexibility following the sharp erosion in its market capitalisation since February 2018.  CRISIL believes that PCJ's ability to raise funds for retail store expansion and/or future working capital requirements will be a challenge over the medium term, although management does not intend to contract additional debt over the medium term. In addition, their share buyback programme of Rs. 424 crore announced recently may somewhat restrict their available liquidity over the near term. The revision in the rating outlook to 'negative' factors possibility of a further rating downgrade in case PCJ's share buyback programme puts liquidity pressure on the group's already large working capital intensive operations.

The ratings continue to reflect PCJ group's established market position in manufacturing and retailing gold and diamond studded jewellery business and a comfortable capital structure.  These strengths are partially offset by working capital-intensive operations and exposure to regulatory risks.

Analytical Approach

CRISIL has combined the business and financial risk profiles of PCJ and those of its four wholly owned subsidiaries'PC Universal Pvt Ltd, Transforming Retail Pvt Ltd, Luxury Products Trendsetter Pvt Ltd, and PC Global Jewellers DMCC, collectively referred to as the PCJ group as there are business and operational synergies among the entities. Moreover, PCJ had extended inter-corporate advances to these entities as they currently do not have sanctioned bank limits of their own.

Key Rating Drivers & Detailed Description
Strengths
* Established market position:
The group has an established market position and a strong brand image in North India. As on March 31, 2018, it had 92 stores. Operations have been aggressively expanded from 3 stores in fiscal 2008, taking the PCJ brand to new geographies. The strong brand is backed by the experience, of more than 25 years of the promoters, Mr Padam Chand Gupta and Mr Balram Garg. Addition of new stores has led to a compound annual growth rate (CAGR) of around 16% in revenue over the five fiscals through 2018.

* Comfortable capital structure:
The total outside liabilities to tangible networth ratio was at 1.3 times as on March 31, 2018. Debt protection metrics are above average: the interest coverage ratio was 3.2 times, while the net cash accrual to adjusted debt ratio was 47% for fiscal 2018. With low capex plans, the capital structure should remain comfortable over the medium term, supported by steady cash accrual.

Weaknesses
* Large working capital requirement:
Operations are working capital intensive because of large inventory required to be maintained across stores. Jewellery retailers typically have to maintain considerable inventories of gold and other precious commodities in a variety of designs, so as to meet customer requirement. The group had inventory of 222 days as on March 31, 2018. Despite addition of new stores, inventory is expected at 200-210 days over the medium term as 20 out of 22 stores are planned to be opened under franchisee model in Fiscal 2019. On account of large credit of up to 180 days offered to overseas buyers, receivables are expected at 50-60 days and gross current assets at around 300 days, over this period.

* Exposure to regulatory risks in the jewellery industry:
The jewellery sector depends a lot on imports of gold. Such imports form an important part of India's foreign exchange outgo and of the current account deficit (CAD). In the past, the government has undertaken several regulatory measures to curb the import of gold to control the CAD which include:
* increase in import duty to 10% from 2%
* introduction of the 80:20 rule (scrapped in fiscal 2015)
* discontinuation of the gold-on-loan scheme (restarted in fiscal 2015)
* modification of the gold deposit scheme; introduction of excise duty of 1%
* requirement of permanent account number (PAN) card for purchases of over Rs 2 lakh
* introduction of the sovereign gold bond scheme to shift consumer preference away from physical gold.

The introduction of the goods and service tax is, however, expected to benefit organised jewellers including PCJ over the medium term. Nevertheless, performance of these players will continue to be exposed to regulatory risks.
Outlook: Negative

CRISIL believes PCJ's liquidity profile will remain constrained over the medium term owing to its large share buyback programme. The rating may be downgraded if buy back of shares or increased working capital requirements due to store expansion puts further pressure on the liquidity profile of the group. The outlook may be revised to 'Stable' in case the liquidity situation envisaged is better than CRISIL's expectations because of healthy business growth and efficient working capital management.

About the Group

PCJ was established by Mr P C Gupta in 2005 in Karol Bagh, Delhi. The company manufactures, retails, and exports jewellery. Its product range includes gold, diamond, and other jewellery, and silver articles.

The company currently has four subsidiaries PC Universal Pvt Ltd, Transforming Retail Pvt Ltd, Luxury Products Trendsetter Pvt Ltd, and PC Jeweller DMCC (incorporated in Dubai).

On a standalone basis, net profit for Fiscal 2018 was Rs 567.4 crore on net sales of Rs 9485.5 crore, against net profit of Rs 430.5 crore on net sales of Rs 8099.4 crore, for Fiscal 2017.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 9612 8474
Profit After Tax (PAT) Rs. Cr. 535.6 421
PAT Margin % 5.6 5.0
Adjusted Debt/Adjusted Net worth Times 0.28 0.22
Interest coverage Times 3.2 2.63

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 Fund-Based Facilities NA NA NA 2197.14 CRISIL A/Negative
NA Foreign Exchange Forward NA NA NA 53.76 CRISIL A1
NA Non-Fund Based Limit NA NA NA 1274.03 CRISIL A1
NA Long Term Loan NA 11.85 31-Mar-2021 87 CRISIL A/Negative
NA Proposed Standby Line of Credit NA NA NA 67.25 CRISIL A/Negative
NA Standby Line of Credit NA NA NA 107.75 CRISIL A/Negative
NA Proposed Fund-Based Bank Limits NA NA NA 128.83 CRISIL A/Negative
NA Proposed Non Fund based limits NA NA NA 21.24 CRISIL A1
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    --    --    --    --  06-08-15  Withdrawal  CRISIL A1 
                    27-03-15  CRISIL A1   
Fund-based Bank Facilities  LT/ST  2641.73  CRISIL A/Negative/ CRISIL A1  03-05-18  CRISIL A+/Watch Negative/ CRISIL A1/Watch Negative  10-08-17  CRISIL A+/Stable/ CRISIL A1  23-12-16  CRISIL A/Stable/ CRISIL A1  06-08-15  CRISIL A/Stable/ CRISIL A1  CRISIL A/Stable 
                12-10-16  CRISIL A/Stable/ CRISIL A1  27-03-15  CRISIL A/Stable/ CRISIL A1   
                02-02-16  CRISIL A/Stable/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST  1295.27  CRISIL A1  03-05-18  CRISIL A1/Watch Negative  10-08-17  CRISIL A1  23-12-16  CRISIL A1  06-08-15  CRISIL A1  CRISIL A/Stable/ CRISIL A1 
                12-10-16  CRISIL A/Stable/ CRISIL A1  27-03-15  CRISIL A1   
                02-02-16  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
Foreign Exchange Forward 53.76 CRISIL A1 Foreign Exchange Forward 53.76 CRISIL A1/Placed on 'Rating Watch with Negative Implications
Fund-Based Facilities 2197.14 CRISIL A/Negative Fund-Based Facilities 2197.14 CRISIL A+/Placed on 'Rating Watch with Negative Implications'
Long Term Loan 87 CRISIL A/Negative Long Term Loan 87 CRISIL A+/Placed on 'Rating Watch with Negative Implications'
Non-Fund Based Limit 1274.03 CRISIL A1 Non-Fund Based Limit 1274.03 CRISIL A1/Placed on 'Rating Watch with Negative Implications
Proposed Fund-Based Bank Limits 128.83 CRISIL A/Negative Proposed Fund-Based Bank Limits 128.83 CRISIL A+/Placed on 'Rating Watch with Negative Implications'
Proposed Non Fund based limits 21.24 CRISIL A1 Proposed Non Fund based limits 21.24 CRISIL A1/Placed on 'Rating Watch with Negative Implications
Proposed Standby Line of Credit 67.25 CRISIL A/Negative Proposed Standby Line of Credit 67.25 CRISIL A+/Placed on 'Rating Watch with Negative Implications'
Standby Line of Credit 107.75 CRISIL A/Negative Standby Line of Credit 107.75 CRISIL A+/Placed on 'Rating Watch with Negative Implications'
Total 3937 -- Total 3937 --
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
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
The Rating Process

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