Rating Rationale
August 26, 2020 | Mumbai
P.N.Gadgil Jewellers Private Limited
Ratings migrated to 'CRISIL BBB+/Stable/CRISIL A2'
 
Rating Action
Total Bank Loan Facilities Rated Rs.359 Crore
Long Term Rating CRISIL BBB+/Stable (Migrated from 'CRISIL BB+/Stable ISSUER NOT COOPERATING'*)
Short Term Rating CRISIL A2 (Migrated from 'CRISIL A4+ ISSUER NOT COOPERATING'*)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Issuer did not cooperate; based on best-available information
Detailed Rationale

Due to inadequate information and in line with the Securities and Exchange Board of India guidelines, CRISIL had migrated its bank loan rating on P.N.Gadgil Jewellers Private Limited (PNG) to 'CRISIL BB+/Stable/CRISIL A4+ Issuer Not Cooperating'. However, PNG's management has started sharing information necessary for a comprehensive review of the rating. Consequently, CRISIL has migrated its rating on PNG from 'CRISIL BB+/Stable/CRISIL A4+ Issuer Not Cooperating to 'CRISIL BBB+/Stable/CRISIL A2'.
 
The ratings reflects PNG group's established market position in the jewellery retailing sector due to strong brand & experienced management, improving operating efficiency and prudent risk management practices. These strengths are partially offset by moderate financial risk profile and susceptibility to regulatory risks associated with the jewellery industry.
 
CRISIL expects PNG group's operating performance to moderate in fiscal 2021 due to impact of covid-19 pandemic, with normalcy returning in the fourth quarter of current fiscal. Operating income is expected to de-grow by 15-20% in fiscal 2021, while operating margin is expected to contract by 50-75 basis points on account of store shut downs and lower footfalls. However, sales recovery has been encouraging post covid, as the company reported sales of Rs 222 crore on a standalone basis for the month of June 2020, which was in line with same month last year.
 
For fiscal 2020, the group's operating income was flat with revenue estimated at over Rs 2,400 crore compared to Rs.2,465 crore in fiscal 2019; while operating margin is estimated to have contracted by 40-50 basis points to 3.1%. This was mainly on account of weak demand due to surge in gold prices, hike in import duties, slowdown in economy and store closures in the fourth quarter of the fiscal.
 
CRISIL expects the financial risk profile to improve over the medium term, with gearing of under 2 times and interest coverage ratio of around 3 times, which will be driven by reducing leverage, prudent expansion and improving operating performance of subsidiaries.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of PNG, and its subsidiaries. CRISIL has also combined the joint venture (JV) PNG Jewellers LLC to the extent of PNG's shareholding. These entities have been consolidated and are collectively referred to as the PNG group, as they have operational and financial linkages.
 
CRISIL has made adjustments for promoters' preference shares; 75% of the preference shares have been treated as equity and 25% as debt.
 
CRISIL has amortised the goodwill arising from the acquisition of PNG Jewellers INC and Gadgil Diamonds Private Limited (GDPL) amounting to Rs 34 crore, over a period of five years starting fiscal 2017.
 
Please refer to Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position in the jewellery industry with a strong brand and experienced management
PNG group is an established player in the gold, silver and diamond business, with significant presence in Pune, Mumbai and other parts of Maharashtra. The Purushottam Narayan Gadgil brand has been in existence for more than 150 years and is well-recognised in and around Pune and Sangli (Maharashtra). It was started in 1832 in Sangli by Mr Ganesh Narayan Gadgil; Mr Purushottam Narayan Gadgil expanded the brand into Pune in 1958. The company is currently headed by Mr Saurabh Gadgil, who has experience of more than 20 years. PNG currently operates 23 retail outlets in India and one outlet each in the United Arab Emirates (UAE) and United States of America (US).

* Improving operating efficiency
PNG's operating efficiency has been improving, supported by the increasing proportion of broken even stores in the domestic market. As of fiscal 2020, 12 out of the 14 stores added since fiscal 2015 have achieved breakeven at the profit before tax (PBT) level, against 5 out of 11 stores in fiscal 2017. This is significant considering that fiscal 2020 was impacted by slowdown in demand due to hike in import duty, surge in gold prices and store closures due to covid-19 pandemic.

Store additions in the last few years have been prudent with only 1 to 2 stores being added per year. This has resulted in improvement in net cash accruals at the consolidated level, estimated at over Rs 30 crore in fiscal 2020 from Rs 16 crore in fiscal 2017. Furthermore, the group has either sold off or discontinued operations of loss making entities. It sold Style Quotient Jewellery Private Limited in fiscal 2018 and its JV, Ananat Mauli Jewellers in fiscal 2019; while it discontinued operations of GDPL in fiscal 2018.

* Prudent risk management policies
The company follows the inventory replenishment model, as prevalent in the retail jewellery business. The company has prudent inventory management policy with moderate inventory of 100-115 days with an optimum inventory of gold per showroom. The group maintains lower inventory than its peers. Hedging practices protect profitability from fluctuations in gold prices.

Weaknesses:
* Moderate financial risk profile
Sizeable expansion programme in fiscals 2015 and 2016 led to significant deterioration in financial profile of the company. However, over last few years, debt protection metrics have improved, aided by improving store level profitability, modest capital expenditure capitaand repayment of debt. The group's consolidated debt is estimated to have reduced to Rs 308 crore in fiscal 2020 from Rs 410 crore in fiscal 2017, which has resulted in improvement in gearing and interest coverage ratios to 1.9 times and 2.1 times respectively in fiscal 2020 from 3.5 times and 1.5 times respectively in fiscal 2017. CRISIL expects financial risk profile to improve over the medium term with gearing of under 2 times and interest coverage ratio of around 3 times.

* Susceptibility to regulatory risks in the jewellery industry
The jewellery sector has seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued the gold on lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold on loan scheme was re-started and the 80:20 rule was scrapped. Furthermore, since January 2016, the government has mandated jewellers to collect PAN card for all purchases beyond Rs 2 lakh. The government has also introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Import duty on gold was increased by 2.5% in fiscal 2020. Some of these regulatory changes had moderated the company's operating performance in the past. CRISIL believes that PNG will remain susceptible to changing regulatory norms.
Liquidity Adequate

Liquidity is adequate with bank limit utilisation of 90% over last twelve months ending June 2020. Net cash accruals of Rs 25-40 crore per annum will be sufficient to meet repayments of Rs 12-17 crore, over the medium term. Furthermore, the company has availed moratorium on its bank facilities which is expected to support liquidity in the near term.

Outlook: Stable

CRISIL believes that PNG's credit profile will benefit by its established market position and improving operating efficiency over the medium term. However, the store closures due to covid-19 outbreak is expected to negatively impact the operating performance of the company in the near term.

Rating Sensitivity Factors:
Upward Factors:
* Stronger than expected operating performance reflected by significantly higher cash accruals
* Sustained improvement in financial risk profile and debt protection metrics; for instance, interest cover improves to over 3 times.
* Improvement in liquidity position, especially in the form of unutilised bank lines

Downward Factors:
* Decline in operating performance, due to volatile business conditions, impacting cash generation
* Weaker than expected performance of subsidiaries
* Sustained reduction in interest cover to below 1.8 times
* Weakening of liquidity.

About the Company

Established in 1832, PNG is one of the oldest retailers of gold, silver, and diamond jewellery in Maharashtra. The company was established as a proprietorship firm, P.N. Gadgil & Co, in 1958 and reconstituted as a partnership firm, P.N. Gadgil Jewellers. It was reconstituted as a private limited company with effect from December 2013. The company has 23 showrooms in India and is also present in the US and UAE through its group entities. Operations are managed by Mr Saurabh Gadgil and Mr Parag Gadgil.

Key Financial Indicators (Consolidated)
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs.Cr 2465 2449
Profit After Tax (PAT) Rs.Cr 9 -3
PAT Margin % 0.4 -0.1
Adjusted debt/adjusted networth Times 2.3 3.3
Interest coverage Times 1.9 1.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity Level Rating assigned with outlook
NA Working Capital Demand Loan NA NA NA 65.00 NA CRISIL BBB+/Stable
NA Cash Credit NA NA NA 133.00 NA CRISIL BBB+/Stable
NA Letter of Credit & Bank Guarantee NA NA NA 20.00 NA CRISIL A2
NA Term Loan NA NA Jan-2024 30.55 NA CRISIL BBB+/Stable
NA Term Loan NA NA Jun-2024 50 NA CRISIL BBB+/Stable
NA Term Loan NA NA May-2024 8.0 NA CRISIL BBB+/Stable
NA Term Loan NA NA Feb-2024 5.0 NA CRISIL BBB+/Stable
NA Proposed LongTerm Bank Loan Facility NA NA NA 47.45 NA CRISIL BBB+/Stable
 
Annexure - List of Entities Consolidated
Name of entities Extent of consolidation Rationale for consolidation
PN Gadgil Jewellers DMCC Full Strong managerial, operational, and financial linkages
Gadgil Diamonds Pvt Ltd Full Strong managerial, operational, and financial linkages
PNG Jewellers INC Full Strong managerial, operational, and financial linkages
PNG Jewellers LLC 49% Strong managerial, operational, and financial linkages
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  339.00  CRISIL BBB+/Stable  07-04-20  CRISIL BB+/Stable (Issuer Not Cooperating)*  23-10-19  CRISIL BBB/Stable (Issuer Not Cooperating)*  01-08-18  CRISIL BBB+/Negative  31-05-17  Withdrawn  CRISIL BBB+/Negative 
                12-01-18  CRISIL BBB+/Negative       
Non Fund-based Bank Facilities  LT/ST  20.00  CRISIL A2  07-04-20  CRISIL A4+ (Issuer Not Cooperating)*  23-10-19  CRISIL A3+ (Issuer Not Cooperating)*  01-08-18  CRISIL A2  31-05-17  Withdrawn  CRISIL A2 
                12-01-18  CRISIL A2       
All amounts are in Rs.Cr.
*Issuer did not cooperate; based on best-available information
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 133 CRISIL BBB+/Stable Cash Credit 120 CRISIL BB+/Stable/Issuer Not Cooperating
Letter of credit & Bank Guarantee 20 CRISIL A2 Letter of credit & Bank Guarantee 75 CRISIL A4+/Issuer Not Cooperating
Proposed Long Term Bank Loan Facility 47.45 CRISIL BBB+/Stable Term Loan 74 CRISIL BB+/Stable/Issuer Not Cooperating
Term Loan 93.55 CRISIL BBB+/Stable Working Capital Demand Loan 90 CRISIL BB+/Stable/Issuer Not Cooperating
Working Capital Demand Loan 65 CRISIL BBB+/Stable -- 0 --
Total 359 -- Total 359 --
Links to related criteria
Assessing Information Adequacy Risk
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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