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Press Release Micromax Informatics Limited 20 July, 2020 Rating Assigned

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Press Release Micromax Informatics Limited 20 July, 2020 Rating Assigned Press Release Micromax Informatics Limited 20 July, 2020 Rating Assigned Total Bank Facilities Rated* Rs. 140.00 Cr. Long Term Rating ACUITE BBB-/Stable (Assigned) Short Term Rating ACUITE A3 (Assigned) * Refer Annexure for details Rating Rationale Acuité has assigned the long term rating of ‘ACUITE BBB-’ (read as ACUITE triple B minus) and short term rating of ‘ACUITE A3’ (read as ACUITE A three) on the Rs.140.00 crore bank facilities of Micromax Informatics Limited. The outlook is ‘Stable’. A Delhi based company, Micromax Informatics Limited (MIL) was established in 2000 with the business of manufacturing of fixed wireless terminals and phones and supplying to the telecom industry. In 2008, the company started with trading of mobile phone, tablet and mobile accessories under the brand name of ‘Micromax’. In 2012, the company also diversified its product profile towards trading of LED TV, washing machine and air-conditioner under the same brand. Currently, the company is managed by the directors, Mr. Rajesh Agarwal, Mr. Rahul Sharma, Mr. Sumeet Kumar and Mr. Vikas Jain. The company has pan India presence through its network of 500 distributors and 800 service centres. Analytical Approach: Acuité has considered the standalone business and financial risk profile of MIL while arriving at the rating. Key Rating Drivers: Strengths Established track record of operation and experienced management The promoters of the company, Mr. Rahul Sharma, Mr. Sumeet Kumar, Mr. Vikas Jain and Mr. Rajesh Agarwal have a background in engineering with an industry experience of more than a decade each in the technology and telecommunications industry. The management of MIL is supported by a team of experienced and qualified professionals who are involved in the day to day operations. The long-standing experience of the promoters has helped the company to diversify its product mix and geographical reach. Comfortable financial risk profile The financial risk profile of the company is marked by strong net worth, very low gearing and strong debt protection metrics. The net worth of the company stood healthy at Rs.765.98 crore in FY2020 (Prov.) as compared to Rs.633.60 crore in FY2019. This improvement in networth is mainly due to the retention of current year profit during FY2020 (Prov.). The gearing of the company stood at 0.04 times in the past two years till FY’20 (Prov.). The total debt of Rs.29.16 crore in FY2020 (Prov.) mainly consists of short term debt. Interest coverage ratio (ICR) stood at 14.34 times in FY2020 (Prov.) as against 3.99 times in FY2019. The net cash accrual to total debt (NCA/TD) stood at 4.59 times in FY 2020 (Prov.) as compared to 5.66 times in the previous year. Acuité believes the financial risk profile of the company will be comfortable over the medium term based on the steady and comfortable net cash accruals against no long term debt obligation. The financial risk profile of the company is also supported by no major capex over the medium term. Established brand presence and wide distribution network MIL sells all its products, viz. smartphone, feature phone, LED TVs, air-Conditioner, washing machine under the brand name of ‘Micromax’ which has been able to build an established brand presence among the Indian mobile phone brands catering to various group of people especially in category A and B cities, and LED TV’s, air-conditioner and washing machine in the mid-range category. The company also has a wide distribution network consisting of about 800 distributors across the country along with 1200 service centres in A, B & C category cities through various online platforms along with various offline stores and showrooms. The distributors have been associated with the ‘Micromax’ brand for more than a decade. Acuité believes that Acuité Ratings & Research Limited www.acuite.in MIL’s wide distribution reach and penetration in smaller cities would continue over the medium term. However, the company’s ability to rebuild its market share in the mobile phone segment with new launches and alluring to the young generation would remain a key business monitorable. Weaknesses Declining revenue trend The revenue of the company has continuously declined during the period under study. The revenue of the company has significantly reduced to Rs.2469.96 crore in FY2019 as against of Rs.4348.84 crore in the previous year. The revenue of the company has further decreased to Rs.1026.43 crore in FY2020 (Prov.). The reduction in revenue is mainly on account of decline in the sale of smartphone due to stiff competition from Chinese brands such as Xiaomi, Oppo and Vivo. The company has been continuously facing high competition in the price segment from the Chinese brands. This led to a sharp fall in their market share in the smart phone category. To mitigate this, the company has started focusing on feature phones, which are much lower in terms of pricing. The company has also diversified its product mix to include LED TV, washing machine and air-conditioner and extend their geographical reach. Moreover, MIL is expected to launch new models in the mobile phone segment in the coming months. Going forward, Acuité believes, that the success of the new launches along with sustenance of demand in the consumer electronics segment would be crucial for their revival. Working capital intensive nature operation The working capital intensive nature of operation of the company is marked by high gross current asset (GCA) days of 368 in FY2020 (Prov.) as compared to 234 days in FY2019. This high GCA day emanates from the high debtor of 260 days in FY2020 (Prov.) as compared to 152 days in the previous year. The increase in debtor days is due to pending receivables from Chhattishgarh Infotech & Promotion Society (part of Chhattishgarh Govt.). However, this has been partially offset by a corresponding creditor against the tripartite agreement between Chhattishgarh Govt., Reliance Jio Infocomm Limited and MIL. Moreover, the inventory days of MIL stood comfortable at 48 days in FY2020 (Prov.) and 34 days in FY2019, respectively. The high GCA days of the company are also due to higher other current assets of Rs.135.56 crore in FY2020 (Prov.) as compared to Rs.195.04 crore in FY2019. This is mainly comprising of indirect tax recoverable of Rs.127.02 crore in FY2020 (Prov.) and Rs.125.72 crore in FY2019 respectively. Intense competition from existing players The mobile handset segment in India is characterised by a highly competitive landscape with well- entrenched players like Samsung and Apple at the high end of the market and Micromax, Oppo, Xiaomi and Vivo at the mid to lower-end segment. The competitive intensity has increased on account of import of Chinese handsets. The entry of new service providers like Reliance Jio with 4G enabled technology has resulted in a large number of users migrating to mobile handsets with 4G enabled features. The disruption in the market has enabled Chinese players to meet the demands of the value-conscious Indian consumer. Such technological shifts result in a realignment of the market share for existing players and increase the pace of obsolescence of existing models based on older technologies. Apart from mobile handsets, MIL is also present in the consumer electronics segment such as LED TV, washing machine and air-conditioners which are items characterised by longer product lifecycles and value for money proposition. The brand equity and ability to provide quality after-sales services over the life of the product are key demand drivers for this segment. Well established players like Samsung, Sony, LG & Panasonic have their presence across electronic product categories which further strengthens brand recall value and imparts diversity to their revenue profile. Rating Sensitivity Scaling up of operations while improving their profitability margin Sustenance of their conservative capital structure Working capital management Material Covenant None Liquidity Position: Adequate Acuité believes that the company has adequate liquidity marked by healthy net cash accruals in FY2020 (Prov.) of Rs.132.63 crore as against nil yearly debt obligations. The cash accruals of the company are estimated to remain in the range of around Rs. 39.50 crore to Rs. 47.24 crore during 2021-22 against nil long term debt obligations. The Gross Current Asset (GCA) days stood high at 368 days in FY2020 (Prov.). The bank Acuité Ratings & Research Limited www.acuite.in limit remained unutilized by the company for the last six months ended June 2020. The current ratio of the company stood at 1.62 times as on March 31, 2020 (Prov.). The liquidity position of the company is also supported by the fixed deposit with bank of Rs.92.60 crore and free cash of Rs.16.95 crore as on 31st March, 2020 (Prov.). Acuite believes that the liquidity of the company is likely to remain adequate over the medium term on account of steady cash accruals against no long debt repayments over the medium term. Outlook: Stable Acuité believes that the company will continue to benefit over the medium term from its management’s extensive experience and established presence in the mobile phone industry. The outlook may be revised to 'Positive' if there is a substantial increase in the company's revenues along with improvement in their profitability margins. Conversely, the outlook may be revised to 'Negative' in case of a further decline in turnover levels and profitability margins, or significant deterioration in its capital structure most likely because of a stretch in its working capital cycle. About the Rated Entity - Key Financials Unit FY20 (Prov.) FY19 (Actual) Operating Income Rs. Cr. 1026.43 2469.96 PAT Rs.
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