Press Release Sabyasachi Couture February 05, 2021 Ratings Amount Facilities Ratings1 Rating Action (Rs. crore) CARE A- (Under Credit watch with Positive Placed on Credit watch Long Term Bank 3.33 Implications) with Positive Facilities (Reduced from 4.00) (Single A Minus) (Under Credit watch with Implications Positive Implications) CARE A- / CARE A2+ Long Term / Short (Under Credit watch with Positive Placed on Credit watch Term Bank 60.00 Implications) with Positive Facilities (Single A Minus / A Two Plus) (Under Credit Implications watch with Positive Implications) 63.33 Total Facilities (Rs. Sixty-Three Crore and Thirty-Three Lakhs Only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers CARE has placed the ratings assigned to the Bank Facilities of Sabyasachi Couture (SC) on ‘Credit watch with positive implications’ following the announcement of strategic partnership with Aditya Birla Fashion and Retail Ltd (ABFRL), part of Mr. Kumar Mangalam Birla led Aditya Birla group. ABFRL shall acquire 51% interest in the firm at a cost of approximately Rs.398 crore out of which Rs.75 crore shall be infused in the firm. CARE will take a view on the rating once the exact implication on the credit profile of SC is clear. The ratings continue to draw strength from established brand name of Sabyasachi in the luxury couture segment, diversified product portfolio, national and global collaborations and exposures leading to brand building and popularity, improved financial performance in FY20 (refers to the period April 01 to March 31) with moderation in current year due to suspension of operation on account of outbreak of Covid-19, comfortable financial risk profile and comfortable liquidity position. The rating are however constrained by modest scale of operations as catering to a niche segment of consumers, inventory risk associated with the fashion industry, working capital intensive nature of operations, competition from other players in the industry and risk associated with plagiarism and medium-term consumption slow-down in the economy accentuated by the pandemic; albeit good long-term growth prospects of branded apparel business. Rating Sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade: Improvement in operating cycle below 50 days due to better inventory management. Completion of stake sale and infusion of Rs.75 crore in the proposed LLP. Negative Factors- Factors that could lead to negative rating action/downgrade: Decrease in PBILDT margin below 5%. Deterioration in overall gearing ratio beyond 0.7x. Detailed description of the key rating drivers Key Rating Strengths Strategic partnership with ABFRL SC has entered into a strategic partnership with ABFRL whereby ABFRL shall acquire 51% interest in SC at a consideration of approximately Rs.398 crore out of which Rs.75 crore shall be infused in the firm. The fund infusion shall lead to improved financial flexibility with stronger liquidity and capital structure providing headroom for expansion plans. The creative and strategic rights will be retained by Mr. Sabyasachi Mukherjee. The transaction is expected to be completed within 30-45 days subject to necessary statutory approvals and signing of definitive agreements. Aditya Birla group enjoys a leading presence across several business segments including metals, cement, financial services, textiles, etc. ABFRL is one of the leading fashion company, engaged in branded apparel business comprising Madura Fashion and Pantaloons divisions. ABFRL on the other hand, shall expand further in its Indian Ethnic Wear segment through this acquisition. 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release Established brand name in the luxury couture segment Sabyasachi started his eponymous label in the year 1999. He is an established fashion designer in India with a product portfolio of bridal couture, apparel for men, accessories, jewellery for women and men. He has a strong foothold in the Indian film and television industry. Sabyasachi first forayed into films which earned him critical acclaim along with the National Award in 2005 for the best costume designer for a feature film. Since then, he has designed costumes for various Bollywood movies. He is one of the Associate Designer Members of Fashion Design Council of India and youngest member of the National Museum of Indian Cinema. His designs have been donned by various celebrities across the globe. He has been a part of television through his show Band Baaja Bride airing on NDTV Goodtimes, a lifestyle channel. Diversified product portfolio SC has a diversified product portfolio with products ranging from apparel and accessories for both men and women. Further in July 2017, Sabyasachi launched his jewellery line which includes fine jewellery, heritage jewellery and Men’s Jewellery The jewellery range is designed by Sabyasachi and is manufactured through job workers by way of exclusive contracts. Other jewellery collaborations include ‘Zanyah’ an exclusive line of diamond jewellery with Forevermark. National and global collaborations and exposures leading to brand building and popularity Sabyasachi has also entered into various national and international collaborations leading to brand building and product diversification. His collaborations are with French shoe designer Christian Louboutin for launching Bater and Firdaus shoe collection, Pottery Barn, Thomas Goode & Co, Asian Paints, L’Oreal Paris and recently with H&M. Sabyasachi has 6 international multi-brand franchisees, 4 in USA and 2 in UK. Improved financial performance in FY20 with moderation in current year due to suspension of operation on account of COVID-19 The scale of operation remained moderate with y-o-y growth of ~8% in operating income of FY20 to Rs.275 crore. The sale from jewellery segment of SC (combined) has registered a y-o-y growth of 48% to Rs.115.36 crore in FY20 as against Rs.78.53 crore in FY19. However, apparel sales registered y-o-y de-growth of 9.81% to Rs.156 crore in FY20 from Rs.173 crore in FY19. However, due to closure of stores and workshops till December 2020 on account of COVID-19 induced lockdown, the firm achieved revenue of Rs.70 crore (standalone) in 9MFY21. The PBILDT margin of SC improved to 21.89% in FY20 as against 9.14% in FY19 due to higher sale of higher margin product and reduction in cost of goods sold. Further, partner’s remuneration also reduced from Rs.23 crore in FY19 to Rs.9 crore in FY20. Consequently, PBT and PAT level and margins improved despite increase in capital charge and extraordinary expense. GCA was comfortable at Rs.32.41 crore vis-à-vis debt repayment obligation of Rs.0.87 crore in FY20. In order to counter loss of sales in FY21, SC took various cost control measures such as closure of stores and workshops, salary cuts at higher level, rental concessions, etc. Despite various cost rationalization efforts, the revenue and profitability of the firm is expected to be muted in FY21 due to lower demand on the back of low consumer spending. The performance shall witness improvement from FY22 onwards with normalcy in situation. Comfortable debt protection metrics The capital structure of SC on combined basis and standalone basis is adequate characterized by low debt and comfortable debt protection metrics. Despite increase in term loan, the overall gearing of SC improved to 0.19x as on March 31, 2020 vis- à-vis 0.25x as on March 31, 2019 on account of lower working capital borrowing coupled with scheduled repayment of vehicle loan. Also, the tangible net worth of SC has increased from Rs.77.71 crore as on March 31, 2019 to Rs.96.41 crore as on March 31, 2020 due accretion of profits to net worth and ploughing back of partners’ remuneration.The overall gearing ratio on combined remained in line with SC (standalone) and improved to 0.18x as on March 31, 2020 vis-à-vis 0.24x as on March 31, 2019 . Going forward with infusion of fund by way of stake sale of 51% in SC to ABFRL, the financial flexibility and capital structure is expected to improve. Key Rating Weaknesses Constitution as a partnership concern with risk of capital withdrawal SC is constituted as a partnership firm. The capital in case of such business models are subject to the risk of being withdrawn from the business at the time of personal contingency. Further, a partnership is also exposed to the risk of business being dissolved in case of death/retirement/insolvency of the partners. However, the partnership firm (SC) shall be converted to LLP with 3 partners from ABFRL and 2 from SC. Inventory risk associated with the fashion industry The fashion industry depends on the latest trends which are ever-changing. There arises a need to refresh products in line with shifting consumer behavior. This leads to fashion items having a small shelf life before consumers move to new colors, design or textures. This may result in inventory of raw materials and finished goods becoming obsolete. This risk is partially mitigated as SC majorly caters to the couture category which includes made to order products. In addition, the firm is installing ERP software to better manage its inventory. The inventory risk is accentuated with presence in jewellery segment. Further in order to ensure liquidation of slow moving jewellery, the firm is organizing exhibitions in February and March 2021. The firm is also expected to benefit from increase in gold prices on inventory held. Out of the total inventory around 80% comprise of jewellery (Rs.54.04 crore as on March 31, 2020). 2 CARE Ratings Limited Press Release Working capital intensive nature of operations The firm’s substantial sale is through its flagship stores in India.