Rating Rationale
November 09, 2017 | Mumbai
Pearl Global Industries Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.396 Crore (Enhanced from Rs.324 Crore)
Long Term Rating CRISIL BBB/Stable (Outlook revised from 'Positive' and Rating reaffirmed)
Short Term Rating CRISIL A3+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term facilities of Pearl Global Industries Ltd (PGIL; part of the PGIL group) to 'Stable' from 'Positive', while reaffirming the rating at 'CRISIL BBB'; the rating on the short-term facilities has been reaffirmed at 'CRISIL A3+'.
 
The outlook revision reflects lower-than-expected ramp-up in operations at the newly built capacities leading to decline in operating margin of the group by 50 basis points (at 4.47% in fiscal 2017) from a year earlier, also contrary to CRISIL's expectation of improvement. Rating action also factors in the higher-than-anticipated capital expenditure (capex) undertaken recently. This coupled with weakening demand may lead to an elongated ramp-up period, resulting in subdued operating efficiencies over the medium term. Thus, timely and successful ramp up of operations should support operating margin to rebound and will remain a key monitorable.
 
The ratings, however, continue to take comfort from PGIL's longstanding relationships with key brands and established position in the global network. Operating income is likely to continue to witness steady growth of 5-6% over the medium term backed by addition of new customers and repeat orders from existing customers.  In the absence of any major debt-funded capex plans coupled with strong accrual and efficient working capital management, financial risk profile should remain healthy.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of PGIL and its seven subsidiaries: DSSP Global Ltd (Hong Kong), Pearl Apparel Fashions Ltd (erstwhile Lerros Fashions India Ltd), Norp Knit Industries Ltd (Bangladesh), Pearl Global (HK) Ltd (Hong Kong), Pearl Global Fareast Ltd (Hong Kong), Pixel Industries Ltd (India), and PT Pinnacle Apparels. All these companies are collectively referred to as the PGIL group.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the readymade garments industry and global network
Benefits from the promoters' near three decade-long experience in the industry and established relationships with suppliers and customers should support business. The company supplies readymade garments (RMG) to large established brands such as GAP, Kohl's, Esprit and Gerry Weber International. The benefits include repeat orders from customers, setting up of manufacturing facilities in different countries deriving geographical advantages. Presence in India, Bangladesh, Indonesia, and Hong Kong leads to better control on procurement, marketing, and finance and ensures quality of output. Growth in operating income remains stable at 9% and touched Rs 1530.6 crore in fiscal 2017.
 
* Healthy financial risk profile
Networth, healthy at Rs 377.4 crore as on March 31, 2017, is expected to increase with steady accretion to reserve. Total outside liabilities to tangible networth (TOL/TNW) ratio weakened to 1.54 times as on March 31, 2017 from 1.35 times as on March 31, 2014, owing to significant debt-funded capex incurred. However, operations continue to be efficiently managed as reflected in gross current assets of 124 days. In the absence of any further debt-funded capex plans, repayment of existing debt coupled with low incremental working capital requirement, gearing is expected to improve to below 1.4 times over the medium term. The debt protection metrics were healthy: interest coverage and net cash accrual to total debt ratios were 3.9 times and 0.17 time in fiscal 2017; expected to remain at similar levels over the medium term.
 
Weaknesses
* Exposure to volatility in raw material prices
Cotton yarn (of coarser counts), alone accounts for 60% of the PGIL group's operating costs and is the key raw material used for manufacturing fabric by RMG manufacturers. Hence, cotton/cotton yarn prices influence the operating margin of RMG manufacturers. Furthermore, cotton is a seasonal commodity and its availability is dependent on monsoon; timely cotton procurement is critical for players.
 
* Susceptibility to risks regarding ramp-up of operations at new facilities
Capex programmes have been undertaken at Chennai, Bengaluru and Gurugram in order to increase manufacturing capacity and cater to rising demand. Also, operations of two small units in Chennai are being consolidated into one. All the newly set up units are partially operational and the slow ramp up has been exerting pressure on operating profitability. The stabilisation of operations in the new units and improvement in profitability will remain key rating sensitivity factors.
Outlook: Stable

CRISIL believes PGIL group will benefit from its established position in the RMG industry and its healthy financial risk profile. The outlook may be revised to 'Positive' if working capital management is efficient and steady revenue growth and high profitability strengthen cash accrual. The outlook may be revised to 'Negative' if further delay in ramp-up of operations from the new units exert pressure on revenue and operating profitability, leading to low cash accrual or if any large capex is undertaken.

About the Group

The PGIL group, established in 1989 by Mr Deepak Seth, manufactures RMGs, which are supplied to established global retail brands. The group comprises seven entities, with PGIL being the flagship company. PGIL is listed on the National Stock Exchange and Bombay Stock Exchange.

Key Financial Indicators
As on/for the period ended March 31   2017 2016
Revenue Rs crore 1530.6 1402.1
Profit after tax (PAT) Rs crore 34.8 36.5
PAT margin % 2.28 2.61
Adjusted debt/Adjusted networth Times 0.86 0.73
Interest coverage Times 3.91 4.08

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 crore)
Rating assigned  with outlook
NA Bank guarantee NA NA NA 7.0 CRISIL A3+
NA Bills discounting NA NA NA 17.0 CRISIL BBB/Stable
NA Export packing credit* NA NA NA 53.5 CRISIL BBB/Stable
NA Export packing credit# NA NA NA 22.5 CRISIL BBB/Stable
NA Export packing credit^ NA NA NA 57.5 CRISIL BBB/Stable
NA Export packing credit& NA NA NA 25.0 CRISIL BBB/Stable
NA Letter of credit@ NA NA NA 138.5 CRISIL A3+
NA Term loan NA NA Feb-2019 11.2 CRISIL BBB/Stable
NA Proposed packing credit NA NA NA 30 CRISIL A3+
NA Proposed term loan NA NA NA 33.8 CRISIL BBB/Stable
*100% interchangeable with Cash Credit and Working capital demand loan
#100% interchangeable with Cash Credit, Working capital demand loan and Bill Discounting
^100% interchangeable with Cash Credit, Working capital demand loan, Bill Discounting, Letter of Credit and Bank Guarantee
&100% interchangeable with Cash Credit, Working capital demand loan and Bill Discounting
@Interchangeable with Bank Guarantee of upto Rs. 5 crore
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  250.5  CRISIL BBB/Stable/ CRISIL A3+    No Rating Change  22-11-16  CRISIL BBB/Positive/ CRISIL A3+  24-08-15  CRISIL BBB/Stable/ CRISIL A3+    No Rating Change  CRISIL BBB-/Stable/ CRISIL A3 
Non Fund-based Bank Facilities  LT/ST  145.5  CRISIL A3+    No Rating Change    No Rating Change  24-08-15  CRISIL A3+    No Rating Change  CRISIL A3 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 7 CRISIL A3+ Bank Guarantee 8 CRISIL A3+
Bill Discounting 17 CRISIL BBB/Stable Bill Discounting 25 CRISIL A3+
Export Packing Credit* 53.5 CRISIL BBB/Stable Export Packing Credit 138.5 CRISIL A3+
Proposed Packing Credit 30 CRISIL A3+ Proposed Export Packing Credit 8.5 CRISIL A3+
Proposed Term Loan 33.8 CRISIL BBB/Stable Proposed Letter of Credit 6 CRISIL A3+
Term Loan 11.2 CRISIL BBB/Stable Proposed Term Loan 4.8 CRISIL BBB/Positive
Export Packing Credit# 22.5 CRISIL BBB/Stable Term Loan 11.2 CRISIL BBB/Positive
Export Packing Credit^ 57.5 CRISIL BBB/Stable Letter of Credit 122 CRISIL A3+
Export Packing Credit& 25 CRISIL BBB/Stable      
Letter of Credit@ 138.5 CRISIL A3+      
Total 396   Total 324 --
*100% interchangeable with Cash Credit and Working capital demand loan
#100% interchangeable with Cash Credit, Working capital demand loan and Bill Discounting
^100% interchangeable with Cash Credit, Working capital demand loan, Bill Discounting, Letter of Credit and Bank Guarantee
&100% interchangeable with Cash Credit, Working capital demand loan and Bill Discounting
@Interchangeable with Bank Guarantee of upto Rs. 5 crore
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 Cotton Textile Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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