| Pepe Jeans India Limited | ||||
| Rated amount enhanced | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL has reaffirmed its ‘CRISIL BBB/Negative’ rating on the long-term bank facility of Pepe Jeans India Ltd (PJIL).
The rating continues to factor in the company’s subdued fiscal 2020 performance (operating income was Rs 403 crore while EBITDA margin was 6.8%). Operating income is expected to decline by 25-35% due to slower-than-anticipated recovery in demand for products (mainly include jeans, shirts and trousers) in FY21. Operating margin may also be impacted and is expected to decline by 100-200 basis points in fiscal 2021. This, along with reduced scale of operations, will lead to a sharp reduction in net cash accrual in fiscal 2021.
For the first seven months of fiscal 2021, revenue was Rs 128 crore at an operating loss of 6.75% on account of higher fixed costs, which will be partially absorbed in the second-half of the fiscal. PJIL had adopted various cost-saving measures, which curbed the losses. Though inventory is moderate at around Rs 101 crore as on October 2020, receivables increased to Rs 371 crore from Rs 339 crore as on March 31, 2020. Working capital cycle is, however, largely supported by the parent and its associate concerns in the form of outstanding trade payables of Rs 70 crore owed by PJIL to them (mainly deferred royalty); and incremental equity infusion. Improvement in working capital intensity will remain a key rating driver over the medium term and hence will be monitored closely.
Despite the impact of Covid-19 on the company’s business, financial risk profile is expected to remain strong on the back of equity infusion of Rs 43 crore by its parent, leading to healthy capital structure and adequate liquidity.
The rating continues to reflect PJIL’s established presence in the domestic menswear segment, high brand recall, strong and large distribution network, and a comfortable financial risk profile because of healthy networth and capital structure. These strengths are partially offset by weakening operating efficiency, large working capital requirement, exposure to intense competition, and vulnerability to changes in fashion trends. |
Key Rating Drivers & Detailed Description Strengths: * Strong market position: PJIL has an established presence in the domestic menswear segment, driven by its flagship brands – Pepe, Pepe Jeans, and Pepe Jeans London. The company has a wide presence across India through multiple sales channels. Market position is likely to remain stable over the medium term.
* Comfortable financial risk profile: Networth had declined to Rs 223 crore as on March 31, 2020, from Rs 242 crore as on March 31, 2019, owing to a one-time provision of Rs 32 crore for sales returns and discounts with respect to pandemic impact in fiscal 2020. Nevertheless, networth is supported by equity infusion of Rs 43 crore by the parent. Capital structure is expected to remain strong with gearing of less than 0.5 time and total outside liabilities to tangible networth ratio of below 1 time, over the medium term. Reliance on external debt has been Rs 80-90 crore in the five months through October 2020 owing to continuous decline in operating profitability. This also led to deterioration in debt protection metrics: interest coverage ratio is expected to be around 1.5 times while net cash accrual to adjusted debt ratio is likely to remain at around 0.1 time for fiscal 2021.
Weakness: * Declining operating efficiency: Operating profitability (adjusted for provision) had dropped to 6.76% in fiscal 2020 from 11.9% in the previous fiscal. Exposure to intense competition from domestic and international players in the branded apparel segment is reducing realisations. Furthermore, stretched working capital cycle had led to a fall in return on capital employed (RoCE) to 8% in fiscal 2020 from 18% in fiscal 2019. The RoCE is expected to remain below average owing to expected low profitability in fiscal 2021. Intense competition amid the company’s intent to reduce working capital cycle may continue to exert pressure on operating profitability because of higher discounts, and shall remain a key monitorable over the medium term.
* Working capital-intensive operations: Working capital cycle had stretched in the last four fiscals due to increasing share of business from large-format stores and franchisee channels, which function on sale and return mode; payment to PJIL is made only after secondary sale at these stores. Gross current assets (GCAs) increased to 392 days as on March 31, 2020, from 360 days as on March 31, 2019, because of rise in receivables to 285 days from 269 days and increase in inventory to 116 days from 99 days. Large working capital requirement has resulted in higher reliance on external borrowings. Although the management has taken active steps to improve working capital cycle, a significant impact of the same is yet to be seen. Total inventory stood at Rs 101.3 crore (of which inventory more than 6 months stood at Rs 56.4 crore) as of October 2020; receivables stood at Rs 371 crore. CRISIL shall continue to monitor working capital cycle. |
Liquidity Adequate Cash accrual is expected to be below Rs 5 crore in fiscal 2021. However, liquidity will remain strong in the absence of any term debt obligation. Bank limit was utilised on an average of 90.51% in the six months through October 2020. However, this was cushioned by equity infusion of Rs 43 crore by the parent in September 2020. Support from associate concerns is received in the form of deferred royalty payments (Rs 19.65 crore in fiscal 2020 and Rs 24 crore in fiscal 2019). Also, the company will be enhancing its working capital line from the banks in the near term, which would cushion liquidity further. |
Outlook Negative CRISIL believes with demand recovery post-opening up of the economy, PJIL is expected to improve its operating performance. Nevertheless impact of the pandemic like others in the industry has been severe and may take longer for recovery. The company is expected to maintain its strong financial risk profile over the medium term, backed by adequate liquidity, healthy gearing and nil term debt. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company PJIL manufactures readymade garments and accessories for women, men, teens, and juniors under the Pepe, Pepe Jeans London and Pepe Jeans brands. The company is headquartered in Mumbai. Pepe Jeans Europe B.V holds 94% stake in PJIL. |
Key Financial Indicators
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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)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||
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