Press Release

Micromax Informatics Limited January 29, 2021 Ratings Amount Facilities/Instruments Ratings Rating Action (Rs. crore) Rating removed from ISSUER NOT CARE BBB-; Stable COOPERATING category and Long Term Bank Facilities 5.39 (Triple B Minus; Revised from CARE BB+; Stable; Outlook: Stable ) (Double B Plus; Outlook: Stable) Rating removed from ISSUER NOT 394.61 CARE A3 COOPERATING category and Short Term Bank Facilities (Enhanced from (A Three ) Revised from CARE A4+; (A Four 256.11) Plus) 400.00 Total Bank Facilities (Rs. Four Hundred Crore Only) *Details of instruments/facilities in Annexure-1

In the absence of minimum information required for the purpose of rating, CARE was unable to express an opinion on the ratings of Micromax Informatics Limited and in line with the extant SEBI guidelines, CARE revised the rating of bonk facilities of the company to 'CARE BB+; Stable; ISSUER NOT COOPERATING/CARE A4+; ISSUER NOT COOPERATING'. However, the company has now submitted the requisite information to CARE. CARE has carried out a full review of the ratings and the rating stand at 'CARE BBB-; Stable/CARE A3.

Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Micromax Informatics Limited (MMIL) continue to factor in the extensive experience of the promoters, wide distribution and established brand name and improved financial risk profile characterized by low overall gearing and comfortable debt coverage indicators. The ratings are however constrained by working capital intensive nature of business, decline in scale of operation albeit improvement in profitability margins and highly competitive Indian mobile handset industry. The ratings are also constrained by reliance on third-party suppliers for products/services and exposure to foreign exchange fluctuation risks.

Rating Sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade:  Sustained improvement in scale of operations and ROCE above 17%.  Wider acceptability of newly launched models and regaining the market share.  Reduction of gross current assets below 100 days and improvement in liquidity.

Negative Factors- Factors that could lead to negative rating action/downgrade:  Decline in profitability and ROCE below 9%.  Elongation of gross current assets above 200 days leading to stretched liquidity.

Detailed description of the key rating drivers

Key Rating Strengths Experienced promoter: The promoters of MMIL have an engineering background with an average experience of more than 10 years each in the information technology and industry. Mr. Vikas Jain (Director and Chief Financial Officer) has done Masters in Mechanical Designs from Gannon University (USA), he has more than 13 years of international experience. The board is supported by well qualified and experienced management team.

Wide distribution network and established brand name: MMIL has a well-established distribution and support-service network with 432 distributors, 44,260 retailers and 824 services touch points as on March 31, 2020spread across various cities and towns including Tier 2 and Tier 3 towns of the country. The company has shifted to 2-tier distribution model wherein there is better reach and penetration for segment. It does real time monitoring of handsets from ‘import till activation’ stage which provides necessary data to analyse the sales pattern and provides better control over

1 CARE Ratings Limited

Press Release

inventory. Further, it has diversified product portfolio which includes mobile handsets, LED TVs, Air Conditioner (ACs), etc in the consumer durables. During FY20 (refers to the period from April 1 to March 31), the top 10 customers of the company contributed to 15.55% (PY: 36.04%) of the total revenue.

Improved financial risk profile: The financial risk profile of the company is characterized by low overall gearing and comfortable debt coverage indicators. As on March 31, 2020, the overall gearing of the company improved and stood at 0.03x as compared to 0.27x as on March 31, 2019. The improvement in gearing was on account of adoption of cash and carry model and procurement of 90% of the components domestically as compared to 50% imports during FY19 which led to substantial reduction in off-balance sheet exposure. The coverage indicators significantly improved and stood comfortable with interest coverage and total debt to PBILDT of 12.31x and 0.27x as on March 31, 2020 against 1.05x and 9.68x respectively as on March 31, 2019.

Key Rating Weaknesses Decline in scale of operations albeit improvement in profitability margins: The total operating income of MMIL declined by 55% y-o-y from Rs. 3,026 crore to Rs. 1,351 crore in FY20. The decline was mainly on account of lower sales of smart phones due to increased competition from Chinese players. The PBILDT margin of the company significantly improved from 0.59% in FY19 to 6.55% in FY20 owing to consistent decrease in cost of fixed overheads and increased prices for the feature phones announced before Cocid-19 induced lockdown. Further, the PAT margin also improved from 4.80% in FY19 to 9.90% in FY20 on account of lower interest expense. Further, it reported total sales of 575.50 crores during 9MFY21 (refers to the period from April 1 to March 31) which has remained substantially low owing to company’s focus and reorganization to launch new range of smart phones to make a comeback in the Indian smart phone segment which is expected to get a major fillip from ‘Make in ’, boycott of Chinese products and the production linked incentive scheme recently announced by the government (with benefits accruing to group entity Bhagwati Products Ltd – rated CARE BBB-; Stable/ CARE A3). However, there has been an uptick in demand during Nov- Dec 2020 with the launch of new models by Micromax and its sustainability in the near to medium term remains to be seen. Working capital intensive nature of operations: During FY20, the operating cycle of MMIL moderated to 176 days from 122 days in FY19 on account of increase in average collection period to 304 days during FY20 from 119 days in FY19. The collection period elongated due to increase in debtors that mainly constitutes receivable from Chhattisgarh government. There is a tri-party agreement between Chhattisgarh government (CG), Reliance Jio (RJ) and Micromax for distributing 50 lakh smartphones to women and students of the state. The company sells chip to CG (debtor) and procures smart phones from Reliance Jio (creditor). As per the agreement, an escrow account has been set up wherein Reliance directly gets paid only after the collection is deposited by CG in the escrow account and hence the chances of cash flow mismatch is remote.

Highly competitive Indian handset industry: The Indian mobile handset industry is marked by high degree of competition with the market being highly price sensitive and value driven. The industry is fragmented with both domestic and foreign players, which has led to stiff price competition. Given the huge opportunity in smart phones and low entry barriers, many new players have entered the industry. Aggressive online sales recorded by new players and stiff competition faced by domestic players has substantially changed the market share picture in the industry. The sector is also exposed to Intellectual Property (IP) challenges raising the chances of infringement and IP conflicts. In order to diversify, MMIL also derives modest revenue by providing the services of providing space for pre-embedding and activation of Value Added Services (VAS) applications on the handsets and tablets sold by it. Further, MMIL has also diversified into consumer including LED TV which it has been selling in the domestic markets.

Reliance on third-party suppliers for product: MMIL does not have its own manufacturing plant. The company procures most of its products including mobile handsets, data cards, tablets, LED TVs etc. from Bhagwati Products Limited (BPL, rated CARE BBB-; Stable/CARE A3). The company has entered into agreements with Original Equipment Manufacturers (OEMs) for the procurement of components for its products such as for memory card, etc. The R&D team of the company provides the design inputs to OEMs. It relies on suppliers to manage the supply chain and ensure timely delivery of products while the company’s in-house logistics department monitors them on a real-time basis, thereby exposing MMIL to ensuing risk emanating from the dependence on third-party suppliers.

Susceptibility to foreign exchange fluctuation risk: MMIL meets most of its requirement for purchases from Bhagwati Products Limited while the remaining requirement is met through direct imports. Thus, the company remains susceptible to fluctuation in foreign exchange. It has been partly managing the risk by entering into forward contracts and by passing-on the price rise to the consumers, yet with the majority of the product portfolio being imported and in

2 CARE Ratings Limited

Press Release

the absence of natural hedge, the company remains exposed to vagaries of foreign exchange fluctuations. During FY20, the company reported foreign exchange gain of Rs. 5.20 crore on foreign currency transactions (PY: Loss- Rs. 9.06 crore).

Liquidity: Adequate: MMIL has adequate liquidity position supported by steady cash accruals of around Rs.96.93 crore during FY20. The company has projected cash accrual of Rs. 42.19 crore during FY21 against which it has no long-term debt repayment obligation. It has comfortable current ratio of 1.39x as on March 31, 2020. The operating cycle of the company moderated to 176 days in FY20 (PY: 122 days) on account of higher collection period. The average working capital utilization remained nil during the trailing 12 months ended November, 2020. It has not availed any moratorium under RBI’s Covid-19 relief package. Further, the company has healthy collections of Rs. 477 crore in 9MFY21.

Analytical approach: Standalone

Applicable Criteria CARE's criteria on rating outlook and credit watch CARE's policy on default recognition Liquidity Analysis of Non-Financial Sector CARE's rating methodology on financial ratios – Non-financial sector CARE's Rating Methodology- Wholesale Trading CARE's Rating Methodology- Short Term Instruments

About the Company MMIL incorporated in March 2000, was promoted by first generation entrepreneurs, namely Mr. Rajesh Agarwal, Mr. Rahul Sharma, Mr. Sumeet Kumar and Mr. Vikas Jain, having background in engineering, IT and telecommunications industry. The promoters hold 92.61% stake in the company as on March 31, 2020, while remaining share (7.39%) is held by PE Investors. The company was initially in business of manufacturing of fixed wireless terminals and phones. From January-2008, the company began the business of trading and marketing of mobile handsets, tablets, accessories, data cards etc. under the brand name of ‘Micromax’. Later MMIL also added LED TVs, computer monitors etc. in its product portfolio. Brief Financials (Rs. crore) FY19 (A) FY20 (A) Total operating income 3026.15 1350.89 PBILDT 17.83 88.52 PAT 145.23 133.76 Overall gearing (times) 0.27 0.03 Interest coverage (times) 1.05 12.31 A: Audited; Status of non-cooperation with previous CRA: NA Any other information: N.A Rating History for last three years: Please refer Annexure-2 Covenants of rated instrument / facility: Detailed explanation of covenants of the rated instruments/facilities is given in Annexure-3 Complexity level of various instruments rated for this company: Annexure 4

Annexure-1: Details of Instruments/Facilities Size of the Rating assigned Name of the Date of Coupon Maturity Issue along with Rating Instrument Issuance Rate Date (Rs. crore) Outlook Non-fund-based-Short CARE A3 - - - 394.61 Term Fund-based - LT-Cash CARE BBB-; Stable - - - 5.39 Credit

3 CARE Ratings Limited

Press Release

Annexure-2: Rating History of last three years Current Ratings Rating history Date(s) & Date(s) & Date(s) & Name of the Type Rating Sr. Amount Date(s) & Rating(s) Rating(s) Rating(s) Instrument/Bank No. Outstanding Rating(s) assigned assigned assigned assigned Facilities (Rs. crore) in 2020-2021 in 2019- in 2018- in 2017-

2020 2019 2018 1)CARE A4+; ISSUER NOT COOPERATING* 1)CARE A3 1)CARE A2 CARE (06-Nov-20) Non-fund-based- (04-Apr- (06-Apr- 1. ST 394.61 A3 2)CARE A3; ISSUER - Short Term 19) 18) NOT

COOPERATING* (07-May-20)

1)CARE BB+; Stable; ISSUER NOT 1)CARE 1)CARE COOPERATING* CARE BBB; BBB+; (06-Nov-20) Fund-based - LT- BBB-; Stable Stable 2. LT 5.39 2)CARE BBB-; - Cash Credit Stable (04-Apr- (06-Apr- Negative; ISSUER 19) 18) NOT

COOPERATING* (07-May-20)

Annexure-3: Detailed explanation of covenants of the rated instrument / facilities: NA

Annexure 4: Complexity level of various instruments rated for this company Sr. Name of the Instrument Complexity Level No. 1. Fund-based - LT-Cash Credit Simple 2. Non-fund-based-Short Term Simple

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

4 CARE Ratings Limited

Press Release

Contact us Media Contact Mradul Mishra Contact no. – +91-22-6837 4424 Email ID – [email protected]

Analyst Contact Sachin Mathur Contact no. - +91-11-45333206 Email ID- [email protected]

Business Development Contact Ms. 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.

Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating. Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

**For detailed Rationale Report and subscription information, please contact us at www.careratings.com

5 CARE Ratings Limited