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Lava International Limited (Revised) May 11, 2020 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) CARE BBB; Stable Revised from CARE BBB+; Long term Bank Facilities 324.55 (Triple B; Outlook:Stable) Stable(Triple B Plus) CARE A3+ Revised from CARE A2 (A Short term Bank Facilities 975.00 (A Three Plus) Two) 1299.55 (Rs. One Thousand Two Hundred Total Facilities and Ninety- Nine Crore and Fifty- Five lakhs Only) Details of instruments/facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The revision in the ratings assigned to the bank facilities of Lava International Limited (Lava) takes into account the decline in the operational performance of the company and moderation in the liquidity profile of the company as reflected by decline in free cash and bank balance. The ratings also take into cognizance considerable underachievement in the profitability of FY19 as against the figures envisaged during the last rating exercise. The ratings also factor in intense competition in the mobile handset industry, inherent risks related to the nature of business operations which include reliance on third-party suppliers for products/services and its susceptibility to foreign exchange fluctuation risk. The ratings, however, continue to derive strength from experienced promoters and management teams, a wide distribution network, and comfortable financial risk profile. Going forward, profitable scale-up of operations with efficient working capital management and adapting to changing consumer preferences and technological evolutions shall remain the key rating sensitivities.

Rating Sensitivities

Positive factors  Sustained increase in operating income beyond Rs. 4000 Cr.  Sustained improvement in PBILDT margin above 6.5%. Negative Factors  Sustained decline in operating income beyond Rs. 2000 Cr.  Decline in PBILDT margin below 3%.  Increase in working capital cycle beyond 100 days.

Detailed description of the key rating drivers Key Rating Strengths Experienced Promoters and management team Lava is promoted by Mr. Hari Om Rai, Mr. Shailendra Nath Rai, Mr. Vishal Sehgal and Mr. Sunil Bhalla. Mr. Hari Om Rai, Chairman and MD of the company is co-chairing the task force for “Make in ” program of the Government of India. All the promoters are part of the Board of Directors of the company and have background in engineering and management studies with wide experience in various fields. The board is ably supported by a team of highly qualified and experienced people from telecom and consumer durable industry.

Wide distribution network and streamlined business operations; albeit rationalisation of distribution channel Lava has a well-established distribution model and support-service network consisting of 1,100+ distributors, who further distribute products to 1,10,000+ and micro-distributors across India along with 42 Carrying & Forwarding agents providing sales and distribution support. Due to strong distribution channel, feedback about the models reaches to R&D team fast, helping them with adapting to designing and technology trend

Comfortable Capital Structure and debt coverage indicators Lava’s capital structure continues to remain comfortable as on March 31, 2019 (Aud) as well as March 31, 2020 (Provisional) on account of healthy net worth and low debt. The company’s term debt has decreased from Rs. 68.10 crore as on March 31,

1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited

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2018 to Rs.27.08 crore as on March 31, 2019 after repayment of ~ Rs. 41 cr in FY19 resulting in decrease in debt-equity ratio to 0.08 (PY: 0.13). Also, LC backed creditors of the company decreased from Rs. 429.05 crore as on March 31, 2018 to Rs.218.56 as on March 31, 2019 and to Rs. 174.70 cr as on March 31, 2020. Due to which the overall gearing (including LC backed creditors) has improved and stood at 0.34x as on March 31, 2019 (0.66x times as on March 31, 2018) and 0.32x as on March 31, 2020 (Prov).

Key Rating Weakness

Moderation in growth in the operations Income: The total operating income of the company declined by 7% during FY19 to Rs. 3083 crore from Rs. 3310 cr in FY18. The moderation in the income was primarily on account of decline in the Average selling price of its handset though the volume remained stable during FY19. Lava has been facing continuous decline in its realization owing to competition in the market from various Chinese players. The revenue has further moderated by 37% during FY20 (prov) primarily on account of change in product mix due to shift in focus from smart phone to leading to decline in average selling price of its products. This has helped company to improve its profitability during FY20.

Profitability: The PBILDT margin witnessed deterioration of 115 bps during FY19. The PBILDT margins of the company have been under pressure and has reduced from 7.20% in FY17 to 3.21% in FY19 on account of continuous fall in average sales price of its handsets. Furthermore, there has been a significant underachievement of PBILDT during FY19 as against the envisaged figures during last rating exercise. However, the PBILDT margin has improved to 4.85% in FY20 (Prov) an improvement from FY19 (A) (PY: 3.22%). The company has been focusing more on feature phones (where it has been able to do more localization) in order to increase its profitability margins. During H1FY19 the company manufactured 7.16 million feature phones and 2 million smart phones while during H1FY20 it manufactured 7.33 million feature phones and only 0.86 million smart phones.

Moderation in Liquidity The liquidity position of the company stood moderate as on March 31, 2019 and has been on a declining trend since last three years. The free Cash and bank balance of the company stands at Rs. 115.59 crore as on March 31st 2019 (PY: Rs. 306.19 crore). The same reduced further to Rs.67.36 crore as on December 31, 2019. The operating cycle of the company has increased to 54 days in FY19 from 44 days in FY18 due to higher collection period which has increased to 74 days (PY: 60 days). It has further increased to 107 days during FY20 (prov) on account of continued rise in collection period which was due to higher credit period required in trading of mobile accessories business in which the company entered in last two years. Furthermore, the debtors for more than six months have increased considerably thereby indicating a large amount of capital stuck in the operating cycle and exposing the company to higher counterparty risk.

Reliance on third-party suppliers for its majority of raw material requirement Lava is dependent on the third party suppliers for its raw material requirements. This is on account of undeveloped ecosystem of production capacities and technology at present in the country. As per the business model, it now started manufacturing the products from the Completely Knocked Down units (CKDs) to produce Completely Built Units (CBUs). Despite that, as majority of sourcing is being made through third-party vendors located in China/Hong-Kong, it exposes the company to inherent risks. However, with recent developments in the manufacturing capacities of company and company’s increased focus on manufacturing handsets in India it has stared procuring approx. 30% raw material locally. Going forward, the reliance of the company on supplier for raw material is expected to reduce further.

Foreign Exchange exposure Lava is exposed to foreign exchange rate risk on account of import of CKDs and CBUs from OEM partners based in China/Hong Kong. As a policy, the company maintains buffer (of 2-3%) in prices for any adverse forex movement; further, based on the management’s insights and market information, the company enters into hedging to cover part of its foreign exchange risk. Due to the currency fluctuations company reported exchange rate loss of Rs. 11.01 crore during FY19 (Rs.4.99 crore in FY18). Furthermore, the company tends to pass-on the increase in cost by increasing the price of the handsets.

Highly competitive Indian handset industry and Intellectual Property Issues The Indian mobile handset industry is marked by high level of competition with the market being highly price sensitive and value driven. The industry is fragmented with both domestic and foreign players competing, leading to stiff price competition. Given the huge opportunity in smart phones and low entry barriers, many new players have entered the industry. Aggressive online and offline sales recorded by new players like , and Vivo has substantially altered the market share scenario in the industry. However the risk is mitigated to some extent as Lava is primarily engaged in feature

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Press Release phone segment and is focussing on securing orders from International and domestic markets to maintain its position in the industry. The sector is also exposed to Intellectual Property (IP) challenges raising the chances of infringement and IP conflicts. Lava is building its R&D capabilities and following backward integration strategy in order to work towards designing and manufacturing the entire range of Lava mobiles in India. Liquidity: Adequate The liquidity profile remains adequate characterized by sufficient cushion in accruals vis-à-vis repayment obligations. The working capital limits remain are utilized by 80 % for the last 12 months ended on January, 2020 and had free cash balance of Rs. 115.59 crore as on March 31st 2019 (PY: Rs. 306.19 crore) and Rs.67.36 crore as on December 31, 2019. The company has availed moratorium facility as per RBI- COVID-19 guidelines.

Analytical approach: Standalone

Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology- Manufacturing Companies Financial ratios – Non-Financial Sector

About the Company Incorporated in 2009, Lava is promoted by Mr Hari Om Rai, Mr Sunil Bhalla, Mr Shailendra Nath Rai and Mr Vishal Sehgal. The company is engaged into designing, manufacturing, assembling, trading and distribution of mobile handsets, tablets and accessories under the brands ‘Lava’ and ‘’. The company has set-up assembling unit for assembling of handsets in Noida (Uttar Pradesh) with the total production capacity of around 48 million handsets per annum as on March 31, 2020. Lava also has 4 SMT lines with a capacity of around 9 million circuits per annum. Lava also has a wholly-owned subsidiary Lava International (H.K.) Limited (Lava HK) based in Hong Kong through which Lava exports mobile handsets to , , , , Dubai Singapore etc.

Brief Financials (Rs. crore) FY18 (A) FY19 (A) FY20(Prov) Total operating income 3310.10 3083.01 1963.49 PBILDT 144.47 99.22 95.31 PAT 70.65 19.82 29.39 Overall gearing (times) 0.66 0.34 0.32 Interest coverage (times) 3.80 2.78 2.95 A: Audited, Prov: Provisional

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 Issue Rating assigned Instrument Issuance Rate Date (Rs. crore) along with Rating Outlook Non-fund-based- - - - 975.00 CARE A3+ Short Term Fund-based - LT-Cash - - - 250.00 CARE BBB; Stable Credit Fund-based - LT-Term - - Aug 2021 74.55 CARE BBB; Stable Loan

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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 2020-2021 2019-2020 2018-2019 2017-2018 1. Non-fund-based- ST 975.00 CARE A3+ - - 1)CARE A2 1)CARE A1 Short Term (31-Dec-18) (26-Feb-18)

2. Fund-based - LT-Cash LT 250.00 CARE - - 1)CARE 1)CARE A; Credit BBB; BBB+; Stable Stable Stable (26-Feb-18) (31-Dec-18)

3. Fund-based - LT-Term LT 74.55 CARE - - 1)CARE 1)CARE A; Loan BBB; BBB+; Stable Stable Stable (26-Feb-18) (31-Dec-18)

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: Name: Nitesh Ranjan Contact no.: +91-11- 45333239 Email ID: [email protected] Business Development Contact: Name: Swati Agrawal Contact no. : +91-11-4533 3200 Email ID: [email protected]

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

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