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Nalli Silk Sarees Private Limited April 08, 2020 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) 80.00 CARE BBB+; Stable Long term Bank Facilities Assigned (Triple B Plus; Outlook: Stable) 80.00 Total Facilities (Rs. Eighty Crore only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of Nalli Silk Saree Private Limited (NSSPL) takes into account experienced promoters in retailing of textile goods, long operational track record and strong brand image of ‘Nalli’, geographically diversified revenue stream, moderate financial risk profile, comfortable liquidity profile and operating cycle. The rating is, however, constrained by declining revenue from jewellery retailing and competitive landscape in retail business and impact of covid 19 inhibiting the overall operations of the company. Key Rating Sensitivities Positive Factors  Increase in the scale of operations with lower dependence on showrooms located at and .  Improvement in profitability margins (PBILDT) in the range of 9%-10%. Negative Factors  Drop in PBILDT margins below 5%.  To renew the leases rentals in timely manner.  Any debt-funded capex leading to a sharp deterioration of capital structure.

Detailed description of the key rating drivers Key Rating Strengths Experienced promoters in retailing of textile goods Padma Shri Nalli Kuppuswami Chetti and his son Mr. Ramanathan, possess vast experience of nearly 6 decades & 3 decades respectively in the textile retailing business. Mr Kuppuswami Chetti has been in the business from 1956 Apart from being an industrialist, he also presides over several arts/cultural clubs and is also present in the governing body of institutions/universities besides being member of the Central Silk Board, ; Indo Australian Chamber and Indo Japan Chamber. He was conferred upon with the title of Padma Shri by the President of in 2003 for the contribution to the national trade, industry and fine arts & culture. Mr Ramanathan, has been instrumental in the growth and geographic expansion of Nalli Trust (NT). He oversees the day-to-day operations. Currently, the fifth generation members of the family, Ms Lavanya (MBA Graduate from Harvard Business School) and Mr Niranth, daughter and son of Mr Ramanathan, are also part of the management team, supported by experienced professionals such as Mr. K V Balasubramanian, CFO who has been with the group for over 2 decades.

Long operational track record and strong brand image of ‘Nalli’ Nalli group commenced the business with ‘Nalli Silk Sarees’ brand (NSS) by opening retail stores in Delhi (1991), Bangalore (1994) and (1996). NSS stores offer a range of sarees from traditional silks to lightweight versions and designer sarees. It also offers an apparel line for women and ready-to-wear menswear (with a sizeable private-label collection), costume jewellery & accessories and soft furnishings. In the year 2002, ‘Nalli Lifestyle’ brand was launched, offering readymade garments (RMG) for children and men. Subsequently, ‘Nalli Next’ sub-brand was launched, offering premium products in an upscale ambience catering to the changing trends of the urban segment and these stores stock a very selective range of hand-picked designer sarees and collection of home-furnishings.

Takeover of trading division of Nalli Trust M/s Nalli Trust (NT) was constituted as a Trust (Association of Persons) in order to expand the geographical presence of the well renowned brand image of ‘Nalli’ in markets other than that of Chennai and South India. During FY19, NSSPL purchased the entire trading division of NT through a slump sale as per business transfer agreement dated April 11, 2018. The total purchase consideration paid for acquiring the trading division of NT is Rs. 92.30 crores. However, NT represented by Ramanathan Nalli holds 97% in NSSPL. NSSPL has purchased the trading division of NT to mitigate the Capital withdrawal risk associated with NT being a trust and to enforce better corporate governance.

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Geographically diversified revenue stream Over the years the group has expanded the geographical presence of the well renowned brand image of ‘Nalli’ in markets other than that of Chennai and South India by opening retail stores in Delhi (1991), Bangalore (1994) and Mumbai (1996). As on Dec 31, 2019, NSSPL has 28 textile retail showrooms and one jewellery showroom, spread across 11 cities (Delhi, Mumbai, Bangalore, Chennai, , , , , , , and Puducherry).

Established relationship with a large supplier base NSSPL has benefitted from the established relationship built by NCC over the past eight decades. Over the past generations, NCC has helped these suppliers develop expertise on handloom based weaving of silk sarees, which has led to a strong bonding between the suppliers and the entity, allowing it source clothing at competitive rates. NSSPL, by virtue of the product diversification strategy has also built a strong relationship with vendors and currently has access to a supplier base of over 3,000 suppliers. NSSPL ascertains that design inputs from other Nalli stores trickle down to the suppliers and gets the required merchandise with a minimal turnaround time, owing to the long and established relationship with the supplier base. The company also makes new designs through its in house design team with inputs from customers also factored in. Besides, the Nalli group has other companies such as Nalli Silk Processing Pvt Ltd., Nalli Silk Creations, Nalli Silk Sarees which also procure textile goods from the established supplier base of NCC and NSSPL. The suppliers always maintain a stock of new sarees and other dress materials which can be delivered to NSSPL within 2 days in case of a new order. The vast network of suppliers also helps NSSPL in procuring all kinds and varieties of silk sarees. NSSPL has thus been able to serve attract both premium and price conscious buyers with sarees for both customer segments.

Moderate financial risk profile The total operating revenue of the company stood at Rs. 507.61 crore during FY19. About 95% of the revenue is generated though the textile segment whereas jewellery segment contributes 5% to the total operating income during FY19. The majority of revenue is from the textile segment due to its strong brand image in India, especially South India. The PBILDT margin of the company during FY19 stood at 7.98% as the operating cost structure is predominantly made up of the cost of traded goods wherein the company’s control on the cost and mark-up price on goods sold would influence the profitability levels. The profitability remains at moderate levels owing to high reliance on labour, as weaving of silk sarees is preferred to be done through manual process. Further, due to high interest and depreciation the PAT margins stood moderately at 3.80% during FY19.

Comfortable capital structure During FY19, the debt profile of the company majorly comprised of term loans and working capital borrowings. The company has availed term loans from HDFC Bank to take over the movable assets from NT. Capital structure of the company stood comfortable marked by overall gearing of 0.74x as on March 31, 2019. Nalli group has practiced a moderate expansion model wherein among the 29 stores, 13 stores are on own premises and 16 stores on rented premises. Further, the company enters into short term lease agreements and has no lock in period for any of the rented premises. Operating leases entered by the company are cancellable on giving prior notice of one to three months. This along with low reliance on working capital borrowings due to the favourable operating cycle has resulted in moderate leverage indicators for NSSPL. The debt coverage ratios also stood comfortable represented by interest coverage ratio and total debt to GCA which stood at 4.50x and 1.53 during FY19 respectively.

Favourable operating cycle During FY19, the company had a favourable working capital cycle owing to creditor days which stood at 62 days during FY19. The company gets a credit period of about 45-60 days from the suppliers. Further, the average collection was minimal at 3 days in FY19 due to the cash & carry nature of the business. In case of the textile retailing business, NSSPL has been able to maintain inventory holding period of about two months which is low considering its nature of business. The same can be attributed to the longstanding relationship with its wide supplier base which allows to source products at short notice and also ensure prompt sale of stocked inventory which acts as testimony to its brand name. The cash and carry nature of the business and the credit period from suppliers lend a certain degree of comfort to the liquidity profile.

Key Rating Weaknesses Declining revenue from jewellery retailing: Nalli group commenced its retail jewellery business in Sep 2012 to leverage upon the existing customer base who purchase jewellery & sarees together for marriages & auspicious occasions, by opening the showroom by the name of ‘Nalli Jewellers’, next to the flagship store i.e., NCC in the commercial hub of T Nagar, Chennai. Revenue from jewellery division of the group (now acquired by NSSPL) has been declining over the years and stood at Rs. 24.07 crore during FY19 as against Rs. 60 crore during FY15. NSSPL has restricted its level of operations in the jewellery segment as the management is more inclined to expand its textile division.

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Competitive landscape in retail business In the silk saree retailing segment, though there are a number of regional and online players offering silk sarees and similar products, the Nalli brand having carved a niche place for its brand and NSSPL has continued to benefit from the same. Even though NSSPL has diversified with sub-brands, it is set in people’s minds as a silk saree retailer and the brand still has limited awareness and appeal among the non-traditional, younger audience. But the entity’s strong brand image in silk sarees has helped it to manage competition by attracting healthy footfalls.

Liquidity profile (Strong) The liquidity position of the company is strong with total cash and bank balance of Rs. 43.33 crore as on March 31, 2019 and Rs. 56.76 as on Sep 30, 2019. Further, the company had a total working capital limit of Rs.75 crore and the utilization of the limits has been moderate at 30.96% during the past 12 month period ended December 2019. Moreover, the company has sufficient funds generated through cash flow from operations and the unutilized working capital borrowing to repay the term debt obligation of the company for FY20 amounting to Rs. 2.64 crore.

Analytical approach: Standalone

Applicable Criteria Criteria on assigning 'outlook' and 'credit watch' to Credit Ratings CARE's Policy on Default Recognition Financial ratios - Non-Financial Sector CARE’s methodology for service sector CARE’s methodology for organized retail companies

About the Company Nalli Silk Saree Private Limited (NSSPL) is engaged in retailing of silk sarees, cloth and piece-goods, women’s apparels, ready- to-wear menswear, jewellery, accessories. As on Dec 31, 2019, Nalli operates 29 showrooms, spread across 11 cities (Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Coimbatore, Kolkata, Kanchipuram, Ahmedabad, Kochi and Puducherry). Textile retailing is the major contributor to the revenues of NSSPL with a contribution of 95% in FY19. NSSPL belongs to Chennai based ‘Nalli’ group. During FY19, NSSPL purchased the entire trading division of NT through a slump sale as per business transfer agreement dated April 11, 2018. The total purchase consideration paid for acquiring the trading division of NT is Rs. 92.30 crores. However, NT represented by Ramanathan Nalli holds 97% in NSSPL.

Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total operating income 1.30 507.61 PBILDT 0.16 40.49 PAT 0.11 19.27 Overall gearing (times) 0.00 0.74 Interest coverage (times) 62.25 4.50 A: Audited

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities Name of the Date of Coupon Maturity Size of the Rating assigned Instrument Issuance Rate Date Issue along with Rating (Rs. crore) Outlook Fund-based-Long Term - - January 2025 5.00 CARE BBB+; Stable

Fund-based - LT-Cash - - - 75.00 CARE BBB+; Stable Credit

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Annexure-2: Rating History of last three years Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & Facilities Outstanding Rating(s) Rating(s) Rating(s) Rating(s) (Rs. crore) assigned in assigned in assigned in assigned in 2019-2020 2018-2019 2017-2018 2016-2017 1. Fund-based-Long Term LT 5.00 CARE - - - - BBB+; Stable 2. Fund-based - LT-Cash LT 75.00 CARE - - - - Credit BBB+; Stable Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications. Contact us Media Contact Name-Mradul Mishra Contact no. – +91-22-6837 4424 Email ID – [email protected]

Analyst Contact Group Head Name – D Naveen Kumar Group Head Contact no. - 040-67937416 Group Head Email ID - [email protected]

Relationship Contact Name: Ramesh Bob Contact no. : 040- 40102030 Email ID: [email protected]

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