| Vedant Fashions Limited | ||||
| Ratings Reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the long-term bank facilities and commercial paper of Vedant Fashions Limited (VFL; Formerly known as Vedant Fashions Private Limited).
The ratings continue to reflect the healthy business risk profile of the company and its debt-free operations. The company has a strong brand, Manyavar, in the ethnic wear segment. It recorded revenue of Rs 1,008 crore in fiscal 2022, higher than the pre-Covid turnover of Rs 918 crore in fiscal 2020, despite the second and third waves of the pandemic. The resilient business model of franchisee-owned and franchisee-operated (FOFO) outlets helped to improve profitability to around 48%.
80-90% of revenue still comes from Manyavar brand which is men’s wear. Scale up of operations of other brands Mohey, Tamev, Manthan and Meebaz leading to diversification of products which contributes 10-15% of turnover, constrains the market position.
Return on capital employed (RoCE) is estimated at 45% in fiscal 2022, which is higher than that of most players in the retail sector. Cash accrual is estimated at Rs 190 crore in fiscal 2022, and liquidity was around Rs 585 crore as on April 30, 2022. Moreover, the bank limit was unutilised, gearing was nil as on the same date and the interest coverage ratio was strong at 19.54 times in fiscal 2022. The company maintains 25-30% of receivables as security deposit, which is equivalent to the cost of goods sold and hence mitigates inventory loss.
With the number of weddings expected to be higher in fiscal 2023 (due to postponement of weddings from fiscal 2022, no restriction on number of people attending the wedding, availability of more auspicious dates throughout the year and increased vaccination) and festival sales, the performance of the company will be robust over the medium term. Profitability, financial risk profile and liquidity will be sustained in the absence of capital expenditure (capex) plans.
The ratings also reflect VFL’s established presence in the men's ethnic clothing segment, strong operating efficiency and healthy financial risk profile. These strengths are partially offset by susceptibility to intense competition and large working capital requirement. |
Key Rating Drivers & Detailed Description Strengths: Established market position: The business risk profile is underpinned by the company’s strong brand in the ethnic wear segment and large retail footprint through more than 595 exclusive brand outlets (EBOs) across the country. This enabled the company to generate turnover of Rs 1,008 crore in fiscal 2022 despite the second and third waves of the pandemic. Demand for kurtas and sherwanis was sustained during the festival and marriage seasons even during the pandemic.
Strong operating efficiency: Though the turnover declined owing to lockdown and lesser weddings during the pandemic, the operating margin was healthy around 31% over the three fiscals through 2021. In fiscal 2022, earnings before interest, tax, depreciation and amortisation were around 48% aided by healthy turnover and economies of scale. The FOFO model enabled the company to stay resilient and sustain profitability. Furthermore, VFL was able to renegotiate rentals (paid on one-fifth of the stores) and save on advertisement and travel costs.
Robust financial risk profile: Networth is strong, estimated at Rs 1,084 crore as on March 31, 2022. Absence of gearing and healthy profitability led to strong debt protection metrics, reflected in estimated interest coverage ratio of 19.54 times in fiscal 2022.
Weakness: Susceptibility to intense competition and economic downturns: Changes in fashion trends and exposure to intense competition constrain the business risk profile, limiting scalability. Players such as VFL need to constantly innovate and adapt to changing client preferences while maintaining brand identity and product quality. Also, economic downturns affect consumer spending on lifestyle items, such as clothing. Further, being present majorly in men’s wear segment constrains the market position. Diversification and scale up of women and kids wear will be monitorable.
Large working capital requirement: Gross current assets increased to an estimated 244 days as on March 31, 2022, from 366 days a year earlier, on account of change in the store format to FOFO in fiscals 2017 and 2018, from FOFO, company-owned and company-operated, and company owned and franchisee-operated models. Receivables rose to 247 days as on March 31, 2021, but 25-30% were security deposits. The receivables moderated to 142 days as on March 31, 2022, driven by increase in sales. |
Liquidity: Strong Bank limit utilisation was nil during the 12 months through March 2022. Expected cash accrual over Rs 300 crore per annum against nil yearly term debt obligation over the medium term will cushion the liquidity. The company declared dividend of Rs 5 per share in fiscal 2022. Current ratio was healthy at 2.7 times as on March 31, 2022. Moreover, the company had cash and bank balance and liquid investments of around Rs 585 crore as on April 30, 2022, in the form of debentures, bonds and mutual funds. Adequate financial flexibility will cushion the business risk profile during adverse conditions or downturns. |
Outlook: Stable VFL will continue to benefit from healthy brand recognition, pan-India presence, established market position and strong financial risk profile. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company VFL was set up as a proprietorship firm by members of the Kolkata-based Modi family members; the firm was reconstituted as a private limited company in 2002. The company manufactures and retails ethnic wear for men and women. It markets its clothing through EBOs and multibrand outlets under the brands Manyavar and Mohey.
The company got listed on the Bombay Stock Exchange and the National Stock Exchange in February 2022. |
Key Financial Indicators
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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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||
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Criteria Details
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