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JAYALAKSHMI JEWELLERS PVT LIMITED
Ratings
Facilities Amount (Rs. crore) Ratings1 Remarks
Long term Bank Facilities 19.00 CARE BB (Double B) Assigned
Total Facilities 19.00
Rating Rationale
The rating is constrained by small scale of operations, closely held business, highly fragmented and competitive industry, exposure to volatility in gold prices, working capital intensive nature of business, low profitability margins and counterparty risk. The rating also takes into consideration the execution risk in respect of the ongoing project which is to be partly debt funded leading to likely deterioration of capital structure of the company. However, the rating is underpinned by the experience of promoter and positive outlook for jewellery industry. The ability of JJPL to successfully market its products to corporate Jewellers after commissioning of the own manufacturing facility, mitigate inventory holding risk, manage counterparty risk, improve margins amid severe competition and maintain comfortable capital structure would be the key rating sensitivities.
Background
Jayalakshmi Jewellers Private Limited (JJPL) was incorporated on Dec 6, 2007 by Mr. M.J.V.V.D. Prakash in Secunderabad. It is engaged in manufacturing & trading of Hallmark certified Gold Jewellery and gold bullion sales. The manufacturing of jewellery is carried out through job workers. JJPL is setting up its own manufacturing facility at Secunderabad with installed capacity of 540 KGPA, which is expected to commence operations in January 2012. Mr. Prakash is the Managing director and looks after day to day activities of the company.
Credit Risk Assessment
Experience of promoters and closely held business: Prior to promoting JJPL, for around two decades, Mr. Prakash was in the business of manufacturing Gold Jewellery on job work basis for various wholesalers and retailers in the coastal Andhra Pradesh. He holds a certificate in respect of Diamond Identification & Grading from Indian Diamond Institute, Surat. He also holds memberships of Federation of Indian Chambers and Industry (FICCI), World Gold Council (WGC), Gem & Jewellery Export Promotion Council and All India Gems & Jewellery Trade Federation.
JJPL is a closely held business with 100% share holding with Mr. Prakash and his family members. All the major decisions are taken by Mr. Prakash himself.
Positive outlook for Jewellery industry, especially for organised players: Gold is considered to be status symbol and also one of the preferred investments against inflation. With the rising population, income levels and increasing popularity for branded Jewellery; the demand for gold is expected to increase which augurs well for the organised players.
Presence in highly competitive and fragmented industry; this along with small scale of operations and lack of own manufacturing facility resulting in low profitability margins: Jewellery industry is highly competitive with large number of small and unorganised players which is increasing every year. With increasing demand for certified and branded Jewellery, the competition among the organised players is intense, squeezing the profitability margins.
With a total income of Rs.79 cr and networth of Rs.2.56 cr, JJPL’s scale of operations is small compared to some of the organised players in the industry. Moreover, JJPL does not have its own manufacturing facility and is solely dependent on the job workers for manufacturing jewellery which results in higher production costs and low profitability margins.
Working capital intensive nature of business and exposure to volatility in gold prices: There is no fixed selling price in Jewellery industry. Sales are on the prevailing market prices which have been very volatile during the past two years. Being a supplier to the retailers, JJPL has to maintain huge inventory for display and also give credit to retailers. This exposes the company to price volatility risk. However, this risk is mitigated to some extent by way of purchase of the same quantity of gold as sales on the day of actual sales realisation.
1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications
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Counter party risk: JJPL supplies Jewellery to the retailers who are known to the promoters or have a good reputation in the market. It does not get any security or deposit against the credit extended. This exposes JJPL to counter party risk. Given the low scale of operations, thin margins and working capital intensive nature of business, any delay or default by the counterparties can have significant impact on the financials of the company.
Ongoing project exposing JPPL to execution risk and likely deterioration in its capital structure: Looking at the positive outlook for jewellery industry, JJPL is setting up its own manufacturing facility of Emerald and plain jewellery with installed capacity of 540 KGPA. The proposed manufacturing facility is at Secunderabad, which is considered to be a hub of Emerald jewellery
It has already constructed a building for the manufacturing facilities funded though its internal accruals and unsecured loans from the promoter. JJPL has placed an order for machinery worth Rs.1.40cr for which it has applied for a term loan of Rs.1.05cr. The plant is expected to commence operations from Jan 2012.
The facility will help JJPL in manufacturing light weighted Jewellery with high quality art and finishing. It will also help in controlling the costs of manufacturing, especially the wastage of raw material and increase the profitability margin, which will help JJPL in attracting branded Jewellery players. However in order to capture the organized and branded retailers, JJPL would require to maintain huge stocks in hand which is expected to result in increase in overall gearing along with increase in the price variation risk of gold. JJPL has also applied for working capital loans of Rs.18.00cr to fund the additional working capital requirements after commencement of operations of the new facility.
Prospects:
The prospects of JJPL would depend on its ability to successfully market its products to corporate Jewellers after commissioning of the own manufacturing facility, mitigate inventory holding risk and manage counterparty risk. Improvement in margins amid severe competition and mintaining comfortable capital structure would also be crucial, going forward.
Financial Performance (Rs. Cr)
For the period ended/ as at March 31, 2009 2010 2011
Particulars (12m, A) (12m, A) (12m, A)
Income from Operations 41.12 80.26 79.29
PBILDT 0.41 0.55 0.79
Depreciation 0.00 0.02 0.11
Interest 0.00 0.01 0.20
PBT 0.41 0.52 0.48
PAT (After def Tax) 0.28 0.35 0.33
Gross Cash Accruals 0.28 0.41 0.47
Financial Position
Equity Share capital 0.69 1.51 1.51
Tangible Net Worth 0.98 2.20 2.56
Unsecured loans from promoter 0.00 1.07 1.48
Total Capital Employed 0.98 3.27 4.22
Key Ratios
Growth (%)
Growth in total income 433.32 95.18 (1.21)
Growth in PAT 2707.41 23.62 (4.24)
Profitability (%)
PBILDT / Total Income 1.00 0.69 0.99
PAT / Total Income 0.68 0.43 0.42
ROCE 82.27 24.82 18.03
Average Cost of borrowing 0.00 1.07 13.81
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For the period ended/ as at March 31, 2009 2010 2011
Particulars (12m, A) (12m, A) (12m, A) Solvency
Long Term
Debt Equity Ratio 0.00 0.49 0.65
Overall Gearing 0.00 0.49 0.65
Adjusted debt equity ratio* 0.00 0.00 0.04
Adjusted overall gearing ratio* 0.00 0.00 0.04
Interest coverage (times) 118.72 95.58 4.02
Term Debt/GCA 0.00 2.59 3.50
Liquidity
Current ratio 1.16 3.44 3.35
Quick ratio 1.14 3.29 3.17
Average Inventory (days) 1 0 1
Avg. Colln. Period (days) 55 20 12
Average Creditors (days) 54 15 2
Operating cycle (days) 2 6 11
Note: * Adjusted debt to equity and overall gearing are calculated by considering unsecured loans as quasi equity
DISCLAIMER
CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings 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.
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