August 28, 2020

Sohanlal Laxminarayan: [ICRA]BB- (Stable) assigned

Summary of rating action Current Rated Amount Instrument* Rating Action (Rs. crore) Fund-based- cash credit 4.50 [ICRA]BB- (Stable); Assigned Non-fund-based- bank guarantee 5.00 [ICRA]BB- (Stable); Assigned Unallocated limits 0.30 [ICRA]BB- (Stable); Assigned Total 9.80 *Instrument details are provided in Annexure-1

Rationale The assigned rating factors in the track record of Sohanlal Laxminarayan (SL) in the distributorship business and a significant experience of its promoter in the distribution of mobile handsets for over a decade. The rating also derives comfort from SL’s robust distribution network and a sizeable growth in the firm’s revenue in FY2020 owing to its tie-up with Mobiles India Private Limited (OMIPL) for a sole distributorship of brand products in Odisha for offline sales.

The rating is, however, constrained by the entity’s high revenue concentration risk as it currently deals with the Realme brand only and SL’s annual distributorship contract with OMIPL that exposes the entity to contract renewal risk. The rating also factors in SL’s modest financial profile, marked by a low profitability inherent in the trading nature of its business and its modest tangible net worth, leading to a highly leveraged capital structure. The rating further considers the intense competition in the industry due to the presence of various domestic and global players and increasing online sales. Changes and uncertainty in the regulatory framework and policies, rapidly changing customer preferences and the risk of technological obsolescence also constrain the rating. The rating further considers the risks arising from the proprietorship status of the firm including the risk of capital withdrawal.

The Stable outlook on the [ICRA]BB- rating reflects ICRA’s opinion that SL would continue to benefit from its established distribution network and a favourable demand outlook for .

Key rating drivers and their description

Credit strengths Extensive experience of promoter and established track record of the company in distributorship business – The promoter has been involved in mobile handset distributorship for more than a decade. The entity was earlier involved in distribution of mobile handsets of Micromax, , VIVO, Itel and Tecno brands. Currently, SL deals with the Realme brand only as an exclusive distributor of smartphones, associated accessories and television sets (recently launched).

Robust distribution network for mobile handsets – The entity has a wide distribution network for sale of mobile handsets. It has a network of over 450 retailers and 18 dealers across Odisha, at present. The robust distribution network built over the years is likely to support SL’s revenue stream, going forward.

Sizeable growth in revenues in FY2020 – SL’s revenue increased sharply to Rs. 127.06 crore in FY2020 from Rs. 20.77 crore in FY2019 after the commencement of the distribution of Realme brand, which has gained a significant market 1

footprint in the smartphone industry in the recent past. SL’s status as the sole distributor for offline sales of Realme brand in Odisha renders operational strength to the firm. The firm’s turnover is likely to improve further in the current fiscal, notwithstanding a challenging operating environment due to the Covid-19 pandemic.

Credit challenges Exposure to revenue concentration risk – Around 90% of the firm’s revenues in FY2020 were derived from sale of a single brand, Realme. Going forward, SL’s entire sales would be contributed by the Realme brand as it has discontinued distribution of other brands, thus keeping the revenue concentration at a high level.

Contract renewal risk – SL’s distributorship agreement with OMIPL is renewed on an annual basis. Such a short-term agreement exposes the firm to contract renewal risk. Termination of the distribution contract by the principal may adversely impact the business profile of the firm.

Low profitability because of inherently low margins in trading business and intense competition – SL’s operating margin remained low in the range of 0.75% to 1.60% during FY2015 to FY2020, owing to the inherently low profit margins in the trading nature of its business. The entity also faces stiff competition due to the presence of various domestic and global players in the smartphone industry and from online sales channel for the same brand (Realme).

Modest tangible net worth led to a high gearing – The entity has a highly leveraged capital structure, as reflected by a gearing of 2.40 times as on March 31, 2020, due to its low tangible net worth (Rs. 2.67 crore as on March 31, 2020) vis-a- vis its debt level.

Risks associated with SL’s status as a proprietorship firm – Given SL’s constitution as a proprietorship firm, SL remains exposed to discrete risks including the possibility of sizeable capital withdrawal and/or business discontinuity. Liquidity position: Adequate

SL’s liquidity is adequate. Reduced working capital requirement post association with Realme supported the entity’s cash flow from operations (Rs. 1.50 crore in FY2020), notwithstanding a modest fund flow from operations (Rs. 0.33 crore in FY2020). The average utilisation of the firm’s fund-based working capital limit remained low in the recent months. Additionally, a nominal long-term debt repayment obligation (for vehicle loan) and a moderate level of free cash balance (Rs. 3.84 crore as on March 31, 2020) are likely to support the entity’s liquidity position.

Rating sensitivities Positive triggers – A sizeable growth in revenues and profits as well as an improvement in the tangible net worth of the firm may lead to a rating upgrade. Negative triggers – The rating may be downgraded if SL’s sales volume declines on a sustained basis due to weak performance of the brand (Realme) and/or if any unfavourable change or discontinuation of the agreement with the principal impacts its business risk profile. Analytical approach

Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not Applicable Consolidation/Standalone The ratings are based on the standalone financial results of the entity.

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About the company SL, a proprietorship firm, was established in 1957 by Late Manohar Lal Agarwal, the grandfather of the present proprietor, Mr. Sumit Ku. Agarwal. The firm was involved in trading of various products in the past. Currently, SL is the authorised sole distributor of OPPO Mobiles India Pvt. Ltd. for selling Realme brand products (mainly mobile handsets, its associated accessories like earphones, bluetooth headset, speakers, power banks and television sets) in Odisha through offline channels. The entity started with distribution of products under the Realme brand from March 2019. Previously, SL was a distributor of Micromax mobile phones and other brands like Panasonic, VIVO, Itel and Tecno brands. Currently, it is an exclusive distributor of Realme brand and caters to around 450 retailers and 18 dealers.

Key financial indicators FY2018 (audited) FY2019 (audited) FY2020 (provisional) Operating Income (Rs. crore) 41.00 20.77 127.06 PAT (Rs. crore) 0.11 0.10 0.33 OPBDIT/OI (%) 0.87% 1.60% 0.75% PAT/OI (%) 0.28% 0.48% 0.26%

Total Outside Liabilities/Tangible Net 2.81 2.78 3.05 Worth (times) Total Debt/OPBDIT (times) 9.07 17.71 6.71 Interest Coverage (times) 1.26 1.31 1.63

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2021) Rating History for the Past 3 Years Amount Rating FY2020 FY2019 FY2018 Instrument Amount Outstanding Type Rated 28-08-2020 - - -

Fund-based- [ICRA]BB- 1 Long Term 4.50 - - - - working (Stable) capital Non-fund- [ICRA]BB- 2 Long Term 5.00 - - - - based- bank (Stable) guarantee Unallocated [ICRA]BB- 3 Long Term 0.30 - - - - limits (Stable) Amount in Rs. crore

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

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Annexure-1: Instrument details Date of Amount Issuance / Coupon Rated Current Rating and ISIN Instrument Name Sanction Rate Maturity Date (Rs. crore) Outlook Fund-based- working NA NA NA NA 4.50 [ICRA]BB- (Stable) capital Non-fund-based – NA NA NA NA 5.00 [ICRA]BB- (Stable) Bank guarantee NA Unallocated Limits NA NA NA 0.30 [ICRA]BB- (Stable)

Source: Sohanlal Laxminarayan

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ANALYST CONTACTS Mr. K Ravichandran Mr. Sujoy Saha +91 44 4596 4301 +91 33 7150 1184 [email protected] [email protected]

Mr. Sovanlal Biswas Ms. Shiksha Sureka +91 33 7150 1181 +91 33 7150 1148 [email protected] [email protected]

RELATIONSHIP CONTACT Mr. 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:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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