GRT Jewellers (India) Private Limited

December 26, 2018

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Long term: Term loans 125.33 125.33 [ICRA]A+ (Positive); Reaffirmed Long term / short term: Fund based [ICRA]A+ (Positive) / 1,050.00 1,050.00 limits [ICRA]A1+; Reaffirmed Short term: Fund based limits 50.00 50.00 [ICRA]A1+; Reaffirmed Short term: Non-fund based limits 135.00 135.00 [ICRA]A1+; Reaffirmed Short term: Fund based / Non-fund (1,556.00) (1,556.00) [ICRA]A1+; Reaffirmed based sub-limits Short term: Fund based / Non-fund (USD 5 MIO) # (USD 5 MIO) # [ICRA]A1+; Reaffirmed based sub-limits Total 1,360.33 1,360.33 *Instrument details are provided in Annexure-1 # Although the facility is denominated in foreign currency, ICRA’s rating for the same is on the national scale as distinct from an international rating scale

Rationale The ratings reaffirmation factors in GRT’s position as one of the leading jewellery retailers in South India aided by its established brand image, the promoter’s vast experience in the jewellery retail business, and favourable demand potential for organised players supported by greater push for formalisation of the industry. Following a healthy 20.3% sales growth in FY2018, the GRT Group1 has clocked sales growth of 10.9% YoY during H1 FY2019 despite a subdued demand scenario due to elevated gold prices. The growth has been supported by stable footfall on the back of brand strength, faster stock rotations and strong operating efficiencies. The ratings continue to be supported by the GRT Group’s healthy financial profile marked by healthy cash accruals, high net worth and stable debt protection and coverage metrics.

The ratings, however, remain constrained by the high geographical concentration on Chennai and Tamil Nadu markets, and pricing pressure due to heightened competition in the industry and the limited value addition resulting in low operating margins. Nevertheless, the Group’s increasing focus on Tier II / III markets for expansion resulting in lower operating costs, with its system-driven hedging practices and increasing usage of low-cost gold metal loans (GML) is expected to support margin expansion, going forward. The ratings also factor the inherent regulation-related risks in the industry, which has impacted the retailers’ performance in the past.

ICRA notes that the GRT Group is in the midst of a large capital expenditure (capex) programme towards solar power segment, with a cumulative spend of ~Rs. 588 crore between FY2016 and FY2019. With the capex being partly debt funded, the return on capital employed (RoCE) levels and debt indicators are expected to be moderately stretched till FY2020. That said, the investments in solar segment are expected to provide business diversification besides large tax benefits in the near term and steady source of revenues over the long term.

1 includes GRT Jewellers (India) Private Limited, G R Thanga Maligai (Firm), G R Thanga Maligai and Sons and GRT Silverwares

Outlook: Positive ICRA believes that the GRT Group’s revenue growth will be supported by the favourable demand outlook for organised jewellery retailers with the Government’s push for transparency through various regulatory measures, including the implementation of Goods and Service Tax (GST). The ratings may be upgraded with sustained improvement in financial profile as reflected by an improvement in RoCE and debt indicators. The outlook may be revised to Stable with any sharp deterioration in cash accruals or debt protection metrics.

Key rating drivers Credit strengths Strong brand image and established market presence in South India – Supported by the promoter’s extensive experience and its five-decade-long presence, the GRT Group is one of the leading players in the jewellery retail segment in South India, which ensures superior brand recall among customers. This is reflected in its steadily increasing sales volumes which grew by 4.8% year on year during H1 FY2019 despite weak industry sentiments due to rising gold prices and increasing competition by way of aggressive store expansions from other industry players. The GRT Group has 46 showrooms as of September 2018 and plans to add six to eight showrooms in the next three years.

Healthy financial profile – The GRT Group’s financial profile has remained strong over the years and is marked by its large scale, healthy cash accruals, high net worth and stable debt protection and coverage metrics. While the operating margins are low due to increasing competition and higher concentration on the low value-additive gold jewellery sales, the implementation of various cost-control measures, increased usage of low-cost GML and tax savings from solar investments shall support expansion in net margins going forward. Though the retail industry is highly working capital intensive, the Group’s stock rotations being best in the industry (given the strong footfalls), leads to efficient management of working capital.

Favourable demand outlook for organised retailers – Over the medium to long term, the gold jewellery demand is likely to be supported by the culture, evolving lifestyle, growing disposable income, favourable demographic dividend and increasing penetration of the organised sector. Increasing regulatory restrictions aimed towards greater transparency and higher compliance costs have been resulting in a sizeable churn in the unorganised segment, benefiting the organised players. While the demand-supply metrics remain vulnerable to any policy initiatives of the Government, ICRA notes that these regulations result in enhanced formalisation of the sector, supporting organised retailers. GRT, in particular, remains well positioned to tap the incremental demand, given its wide presence, brand name and strong hedging practices.

Credit challenges High geographical-concentration risk – The GRT Group derived ~51% of its revenues from Chennai in H1 FY2019 followed by ~26% in the rest of Tamil Nadu, and the balance from Andhra Pradesh and Karnataka. Hence, it remains exposed to high geographical-concentration risks. The Group remains conservative in terms of future store expansions and targets expansion in the Tier II / III cities in South India, which should mitigate concentration risk to some extent. With a major share of revenues derived from Tamil Nadu, a market with higher preference for non-studded jewellery, the scope for significant margin expansion is limited.

Exposure to regulatory risks – In the past, regulatory measures like restriction on bullion imports, limited access to GML, mandatory Permanent Account Number disclosure on transactions, imposition of excise duty etc. impacted gold jewellery retailers. While the measures favour increased organised trade, the same temporarily impact on demand- supply, as witnessed in the past.

Debt indicators and RoCE levels to moderate in near term with large debt-funded capex underway in solar segment – With the Group level business diversification plans, the GRT Group entered into the solar energy segment in FY2016 and has commissioned projects of ~123 MW capacity as of September 2018. The Group is in the midst of commissioning ~165 MW of solar projects before March 2019. The total project cost of ~Rs. 660 crore is invested with a debt:equity ratio of ~70:30. Accordingly, the rise in debt levels is expected to moderate the RoCE levels and capitalisation indicators till FY2020.

Liquidity position The GRT Group’s liquidity position remained comfortable with free cash and liquid investments of Rs. 235 crore and net cash accruals of Rs. 352.4 crore in FY2018. While the average working capital utilisation as a percentage of sanctioned limits increased to ~85% during the 12-month period ended September 2018 (~75% during the corresponding previous period ended September 2017), the Group has been increasing the usage of GML, resulting in interest cost savings. Despite the large debt- funded capex and large repayment obligations on the solar projects’ term loans in the medium term, ICRA believes that the GRT Group’s liquidity position will remain comfortable supported by sustained revenue growth across business segments.

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for Gold Jewellery Retail Industry Parent/Group Support Nil For arriving at the ratings, ICRA has consolidated the financials of the various Consolidation / Standalone group entities (as mentioned in Annexure-2) given the close business, financial and managerial linkages among them.

About the company GJIPL commenced jewellery retail operations in 2006 with a showroom in Chennai. The company entered into jewellery business as a part of the Group’s strategic initiative to diversify it market base, as the jewellery business was concentrated in Chennai till then. The company currently has 44 showrooms and plans to further increase the number of showrooms going forward. All future expansions of the Group across markets would come under this entity. About the Group GRT Group, a closely held group with presence in jewellery retailing, hospitality and renewable energy sectors, has an established presence in the jewellery retail industry in South India, where it has been involved in retailing of gold and studded jewellery over the past five decades. From being an entity with presence only in Chennai, the Group has diversified geographically with expansions across southern states in the recent past. The Group currently derives around 90% of its revenues from the gold jewellery sales with the rest from sale of silver, coins and studded jewellery.

Key financial indicators (audited) Consolidated FY2017 FY2018 Operating Income (Rs. crore) 12,297.2 14,788.9 PAT (Rs. crore) 198.9 288.5 OPBDIT/OI (%) 3.6% 3.7% RoCE (%) 10.1% 11.2%

Total Debt/TNW (times) 3.2 3.3 Net Debt / TNW (times) 0.7 0.9 Total Debt/OPBDIT (times) 8.9 9.0 Net Debt / OPBDIT (times) 1.9 2.4 Interest Coverage (times) 2.0 2.5

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years

Chronology of Rating History for the Current Rating (FY2019) Past 3 Years Date & Date & Date & Date & Rating in Rating in Rating in Amount Amount Rating FY2018 FY2017 FY2016 Rated Outstanding December December January December Instrument Type (Rs. crore) (Rs. crore) 2018 2017 2017 2015 1 Term loans Long 125.33 125.33 [ICRA]A+ [ICRA]A+ [ICRA]A+ [ICRA]A+ term (Positive) (Positive) (Stable) (Stable) 2 Fund based limits Long 1,050.00 1,050.00 [ICRA]A+ [ICRA]A+ [ICRA]A+ - term / (Positive) / (Positive) / (Stable) / short [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ term 3 Fund based limits Short 50.00 50.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ - term 4 Non fund based Short 135.00 135.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ - limits term 5 Fund based / Non Short (1,556.00) (1,556.00) [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ fund based sub- term limits 6 Fund based / Non Short (USD 5 MIO) (USD 5 MIO) [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ fund based sub- term limits

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN No Instrument Name Sanction Rate Date (Rs. crore) and Outlook NA Term loan-1 FY2015 NA FY2025 20.77 [ICRA]A+ (Positive) NA Term loan-2 FY2015 NA FY2025 29.56 [ICRA]A+ (Positive) NA Term loan-3 FY2017 NA FY2027 75.00 [ICRA]A+ (Positive) [ICRA]A+(Positive)/ NA Cash credit / WCDL - - - 1,050.00 [ICRA] A1+ NA Short term loan - - - 50.00 [ICRA]A1+ NA Bank Guarantee - - - 35.00 [ICRA]A1+ NA SBLC/PCFC/EPC/EBD - - - 100.00 [ICRA]A1+ NA Gold Metal loan (sub-limit) - - - (478.00) [ICRA]A1+ NA WCDL (sub-limit) - - - (335.00) [ICRA]A1+ NA PCFC/EPC/EBD (sub-limit) - - - (270.00) [ICRA]A1+ NA BG / SBLC (sub-limit) - - - (473.00) [ICRA]A1+ NA SBLC (sub-limit) - - - USD 5 mio [ICRA]A1+ Source: GRT Jewellers (India) Private Limited

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach GRT Jewellers (India) Private Limited 100.00% Full Consolidation G R Thanga Maligai (Firm) 100.00% Full Consolidation G R Thanga Maligai and Sons 100.00% Full Consolidation GRT Silverwares 100.00% Full Consolidation

ANALYST CONTACTS Subrata Ray K Srikumar +91 22 6114 3408 +91 44 4596 4318 [email protected] [email protected]

Hemamalini S C +91 44 4596 4311 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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