Rating Rationale
March 29, 2022 | Mumbai
Pepe Jeans India Limited
Rating outlook revised to 'Stable'; Rating reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.90 Crore
Long Term RatingCRISIL BBB/Stable (Outlook revised from 'Negative'; Rating Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised the outlook on the long-term bank facility of Pepe Jeans India Limited (PJIL) to ‘Stable’ from ‘Negative’ while reaffirming the ratings at ‘CRISIL BBB’.

 

The revision in outlook reflects a revival of operations in fiscal 2022, reflected in expected revenue of Rs 350 crore (against Rs 281 crore in fiscal 2021) and an operating margin of around 7% (operating loss of -11% reported in fiscal 2021). This is driven by upliftment of lockdown which was imposed to curb the spread of covid-19. With smooth flow of operations in the medium term, the revenues and operating margins are expected to recover to pre-covid levels. Further, debt protection metrics is also expected to improve to above 3 times with controlled debt levels. Liquidity has also improved with cash accruals of Rs. 17-18 crore estimated in fiscal 2022, compared to cash losses in fiscal 2021. The cash accruals are further expected to improve with increase in revenues and stable operating margins over the medium term.

 

The rating continues to reflect the strong market position of the company in branded apparel industry marked by flagship brand and geographical presence and comfortable financial risk profile of PJIL. These strengths are partially offset by the low operating profits, large working capital requirement and vulnerability to changes in fashion trends and competition in the branded apparel industry. 

Key Rating Drivers & Detailed Description

Strengths:

  • Strong market position in the branded apparel industry: PJIL has an established presence in the domestic menswear segment, driven by its flagship brands, Pepe, Pepe Jeans and Pepe Jeans London and through its diversified geographical presence. The flagship brand, Pepe was launched in 1989 and is among the leading brand in men’s denim segment. It has positioned itself as an aspirational brand and by virtue of its strong international presence has been able to create a strong market position. The company has a wide presence across India through multiple sales channels. Strong market position will continue to benefit the scale of operations of the company over the medium term.

 

  • Comfortable financial risk profile: Networth and total outside liabilities to adjusted networth (TOL/ANW) ratio were healthy at Rs 230 crore and 0.92 time, respectively, as on March 31, 2021, aided by an equity infusion of Rs 43 crore from the parent company, Pepe Jeans Europe BV  in fiscal 2021 to fund the cash losses. TOLANW is likely to improve further to around 0.6 time as on March 31, 2022, led by lower reliance on external debt and improved networth.  Debt protection metrics had weakened in fiscal 2021, with operating losses due to a drop in revenues and high overhead cost. Amidst the smooth flow of operations, the interest coverage ratio and net cash accruals to adjusted debt is expected to be around 3.4 and 0.6 times in fiscal 2022. The debt protection metrics are further expected to improve with increase in operating profits over the medium term.

 

Weaknesses:

  • Low operating margin: Intense competition from several domestic and international players in the branded apparel industry has strained profitability and realisations of players such as PJIL in the past few fiscals. It reported operating losses in fiscal 2021, owing to a significant decline in scale of operations and high overhead cost. Operating margin is expected to be around 7-8% in the medium term driven by smooth scale of operations with easing of curbs and upliftment of restrictions imposed to curb the spread of covid-19. Improvement in profitability remains a key monitorable over the medium term.

 

  • Working capital-intensive operations: Working capital cycle remains stretched as reflected in gross current assets (GCAs) of 544 days as on March 31, 2021, led by large receivables of 402 days and inventory of 122 days. The recievables have remained high as the company follows a SOR (sale or return) business model and hence receivables are realized post-secondary sales to end customers. Also, the company has to maintain higher inventory levels due to SOR model followed.
    However, liquidation of sizeable portion of inventory on the e-commerce platform and faster conversion of receivables are likely to help reduce inventory and receivables to around 80 and 300-315 days, respectively, as on March 31, 2022. Though the working capital operations are expected to improve in the current fiscal, they would continue to remain large over the medium term.

 

  • Vulnerability to increasing competition and changes in fashion trends: PJIL's business is driven by changing fashion trends and aspirations of its target segment are significantly influenced by peers, role models, and the media. The company also faces stiff competition from various domestic and global brands.  Thus, players such as PJIL, need to innovate constantly and adapt to changing preferences of the target segment.

Liquidity: Adequate

Liquidity is marked by sufficient cash accrual and low bank limit utilisation. Expected cash accrual of Rs 18-20 crore in fiscals 2023 and 2024 should comfortably cover the term debt of Rs 3.3 crore per fiscal. Bank limit utilisation averaged around 42% for the 12 months ended February 28, 2022. Current ratio and cash and bank balance were healthy at 1.88 times and Rs 1 crore, respectively, as on March 31, 2021. Low gearing and comfortable networth provide a financial cushion in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believes Pepe will continue to benefit from its established market position and maintain its conservative financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

  • Growth in revenue and operating margin, leading to high cash accrual
  • Better working capital management with gross current assets below 250 days on a sustained basis

 

Downward factors:

  • Stretch in working capital cycle with GCAs exceeding 450 days over the medium term
  • Sustained low profitability, impacting liquidity and financial risk profile

About the Company

PJIL, incorporated in 2011 in Mumbai, manufactures readymade garments and accessories for women, men, teens, and juniors under the Pepe, Pepe Jeans London and Pepe Jeans brands. Pepe Jeans Europe B.V holds 94% stake in PJIL. The day-to-day operations of the company are managed by Mr. Manish Kapoor, Mr. Sartaj Mehta and Mr. Arijit Dutta.

Key Financial Indicators

As on / for the period ended March 31

 

2021

2020

Operating income

Rs crore

281.07

405.69

Reported profit after tax

Rs crore

-46.06

-19.94

PAT margin

%

-12.60

-5.12

Adjusted debt/adjusted networth

Times

0.21

0.35

Interest coverage

Times

-2.66

-0.21

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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) Complexity levels Rating assigned with outlook
NA Cash credit NA NA NA 72 NA CRISIL BBB/Stable
NA Working capital term loan NA NA Mar-2026 13.2 NA CRISIL BBB/Stable
NA Proposed working capital facility NA NA NA 4.8 NA CRISIL BBB/Stable
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 90.0 CRISIL BBB/Stable   -- 12-01-21 CRISIL BBB/Negative 30-12-20 CRISIL BBB/Negative   -- CRISIL BBB+/Stable
      --   -- 07-01-21 CRISIL BBB/Negative 26-03-20 CRISIL BBB/Negative   -- --
      --   --   -- 31-01-20 CRISIL BBB/Stable   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 22 HDFC Bank Limited CRISIL BBB/Stable
Cash Credit 25 RBL Bank Limited CRISIL BBB/Stable
Cash Credit 25 State Bank of India CRISIL BBB/Stable
Proposed Working Capital Facility 4.8 Not Applicable CRISIL BBB/Stable
Working Capital Term Loan 5 HDFC Bank Limited CRISIL BBB/Stable
Working Capital Term Loan 8.2 RBL Bank Limited CRISIL BBB/Stable

This Annexure has been updated on 20-Feb-23 in line with the lender-wise facility details as on 02-Feb-23 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Approach to Recognising Default
Understanding CRISILs Ratings and Rating Scales

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