Ratings Kiran Jewelry Facilities Amount (Rs. crore) Ratings 1 Remarks Long term Bank Facilities *suspension revoked. 135 (Rs. One hundred and thirty five crore only) CARE A (Single A) Revised from CARE A- (Single A Minus) Rating Rationale For arriving at the ratings, CARE has combined the business and financial risk profiles of Kiran Gems Pvt Ltd (KGPL), Kiran Jewelry (KJ) and Kiran Jewels (India) (KJI) due to strong operational & financial linkages and common promoters. The above entities combined are referred as Kiran Group (KG). Based on the combined approach, the ratings of KGPL, KJ and KJI are realigned at CARE A / CARE A2+. The revision in the ratings assigned to the bank facilities of KG factors in the sustained growth in operating income and improved debt coverage metrices. The ratings of KG continue to derive strength from the vast experience of the promoters in the Gems and Jewellery (G&J) industry, established market position of the group, DTC and ALROSA sight-holder status of KGPL, integrated nature of operations supported by global distribution network and longstanding track record of consistent equity support by the promoters. The above-mentioned strengths are, however, tempered by volatility in KG s profitability margins, susceptibility to volatile diamond prices, working capital intensive operations, strong competition from the organized as well as unorganized players in the G&J industry and subdued demand for Cut & Polished Diamonds (CPD) in the export market. The ability of the group to maintain its capital structure and manage its working capital efficiently amidst economic uncertainty in key export markets are the key rating sensitivities. Background Kiran Jewelry (KJ) is a partnership firm engaged in manufacturing and export of diamond studded gold jewellery since July 2007. Kiran Jewlery has been floated by the promoters of Kiran Gems and is part of the Kiran Group. The operations of the Kiran Group are well integrated from sourcing of rough diamonds and cutting & polishing of diamonds to jewellery manufacturing and distribution. Kiran Jewelry sources the polished diamonds of various shapes and sizes primarily from Kiran Gems Pvt Limited. For analysis purpose we have considered the combined business and financial risk profiles of Kiran Gems Pvt Ltd (KGPL), Kiran Jewelry (KJ) and Kiran Jewels (India) (KJI) due to strong operational & financial linkages and common promoters. During FY15, KG s sales mix was as follows: cut & polished diamonds (around 91%) & diamond-studded jewellery (around 9%). During FY15, at the group level, around 95% of the total sales were exports (including diamond dollar account sales) and around 84% of the total purchases were imported. Credit Risk Assessment Experienced promoters The Kiran group has an established presence on account of its expertise in polished diamonds and diamond studded jewellery business and its promoters experience for almost four decades. KGPL, the flagship company of the group was established in 1985 by Mr. Vallabhbhai Patel and Mr. Mavjibhai Patel; it was reconstituted as a private limited company in 2007. KJ (SEZ unit in Surat) and KJI are group companies engaged in manufacturing of diamond studded jewellery. Kiran Group s jewellery division sources the polished diamonds primarily from KGPL. Established market position Over the years, Kiran Group has established its position as dominant exporter of cut and polished diamonds from India. KGPL has been receiving top exporter performance awards for the past seven consecutive years (source: - Gems and Jewellery Export Promotion Council from FY08 to FY14).The turnover of KG increased from Rs.6,176 crore in FY14 to Rs.7,565 crore in FY15 (~23% 1 Complete definitions of the ratings assigned are available at www.careratings.com and other CARE publications 1
yoy growth). Regular supplies of rough diamonds from DTC and ALROSA The group specializes in cutting and polishing diamonds in the range of less than one carat. It has a regular supply of rough diamonds from DTC (around 11% of total purchases in FY15), ALROSA (around 9% in FY15) and Kiran Exports B.V.B.A. (a Kiran Group company; around 46% in FY15). Its DTC sightholder status ensures that the group receives a steady supply of quality rough diamonds. Furthermore, it enables the group to plan production efficiently as the delivery timing and quality of rough supplies are reasonably known to sightholders in advance. This enables the group to service a large customer base efficiently. Integrated operations of the group and global distribution network Kiran Group is integrated across the entire Gems & Jewellery (G&J) value-chain from sourcing rough diamonds to cutting and polishing of rough diamonds to jewellery manufacturing and marketing. In its diamond division, KGPL has the requisite expertise to cut and process a range of rough diamonds in various shapes, colours and clarity. Kiran Group s jewellery division has a vast product offering including rings, earrings, pendants, bracelets, necklaces etc. Kiran Group s jewellery division sources the polished diamonds of various shapes and sizes primarily, from Kiran Gems Pvt Limited. Hence, quality polished diamonds are available on regular basis and at reasonable rates which in turn make the group competitive in the international market. The group draws significant operational efficiencies from its integrated operations and diverse client base across geographies. Kiran Group has marketing offices in Belgium, Dubai, New York and Hong Kong. Continued growth in scale of operations and improved debt coverage metrics The networth of KG stood at around Rs.1,863 crore as on March 31, 2015 (March 31, 2014:-Rs.1,710 crore). Over the last three years, the Kiran group had registered CAGR of around 22% in total income on account of established relationship with the customers and operational efficiencies enjoyed by the group as mentioned above. The PBILDT margin of KG has declined in FY15 primarily on account of decrease in income from the jewellery segment which has higher profitability compared to polished diamond segment. The sale of jewellery has reduced since jewellery manufacturing is being increasingly undertaken through factory establishments in China owned by the promoter group, given the cost advantages of manufacturing in China. The debt profile of the Kiran group is characterized by comfortable interest coverage and moderate liquidity. Overall gearing of the group stood comfortable at a moderate level of 1.12x as on March 31, 2015 (1x as on March 31, 2014) with majority of the borrowings being working capital facilities and no major term debt. The total debt to GCA also improved from 7.15x as on March 31, 2014 to 6.54x as on March 31, 2015. The PBILDT interest coverage increased from 2.94x in FY14 to 3.51x in FY15. Working capital intensive operations Relatively long operating cycle and working capital intensive nature of business is an inherent characteristic of the G&J industry. The operating cycle reduced from 162 days in FY14 to 157 days in FY15 mainly on account of reduction in inventory days. Generally, the company maintains inventory of rough diamonds of 2-3 months and that for polished diamonds is 2-2.5 months. The Company s finished goods comprise vast varieties of cut and polished diamonds with many specification, sizes and shapes. KG in addition to processing of round, brilliant, princess and marquise diamonds also processes baguettes, heart, pear, emerald, cushion and oval shapes. In addition to selling the finished goods through exports and local retail stores, the Company also sells its finished goods on-line, through its own web-site. Accordingly, the Company is required to hold sufficient stock of C&P diamonds for its various buyers spread across the world. Further, bigger size diamonds have to go through the process of GIA certification which takes almost 40-60 days. The GIA certified goods are sold on cash and for other products the credit period given is generally 60-120 days. Majority of the purchases are on cash basis/credit period of around 20-30 days since major procurements are directly from miners wherein payment is made in advance. As a result, KGPL s operations tend to be working capital intensive. Exposure to volatile diamond prices and foreign currency exchange risk Historically, sharp volatility in prices of rough diamonds has been experienced which can affect the profitability of the company. Kiran Group has natural hedge as it imports rough diamonds and exports polished diamonds and diamond studded jewellery. However, the group hedges its foreign loans as well as back to back hedges both its purchases and sales on account of the time lag between the transactions. 2
Intense competition from large number of players in organised and unorganised sector in the CPD industry; and demand being linked to discretionary customer spending in key diamond jewellery markets such as USA, China, etc. The Cut & Polished Diamond (CPD) industry in India is highly fragmented with presence of numerous unorganised players apart from some very large integrated G&J manufacturers leading to high level of competition. Although India plays a prominent role in G&J industry in terms of processing and consumption, it significantly lags behind in mining of gold and diamonds because of meager reserves. The Indian CPD industry is working capital intensive and primarily export-oriented. As per the provisional data released by the Gems & Jewellery Export Promotion Council (GJEPC), total exports of G&J industry increased marginally by 3.7% y-o-y to USD 36.19 billion during FY15 (refers to the period from April 1 to March 31). While gold jewellery exports grew by 17% to USD 9.8 billion in FY15 (primarily on account of a lower base effect due to constrained supply of gold in FY14), the export of CPD fell by 5.5% to USD 23.16 billion during the year. The dip in exports of CPD during FY15 was primarily on account of subdued demand from China/Hong Kong (the second largest diamond jewellery market in the world); although, there was steady demand for CPD from USA (the largest diamond jewellery market). The subdued demand for CPD has continued during Q1FY16 with export of CPD further falling by 7.5% on a y-o-y basis; and the major issue which the diamond trade has faced in the past six to nine months is pressure on its inherently thin profitability margins due to higher rough diamond prices on the one hand (because of largely oligopolistic nature of supply with few diamond mining companies controlling around 70% market share) and subdued polished diamond prices on the other hand (due to over-supply arising out of very large number of diamond cutting & polishing units amidst a sluggish demand scenario). Going forward, larger integrated players with strong sourcing relationships for raw material (e.g. DTC sight holders or those having direct arrangement with other diamond mining companies), those with superior marketing network, geographically diversified clientele and a conservative forex/working capital management policy, are likely to exhibit more stable credit profiles. Abridged Financial Performance [Unaudited (UA) Combined financials of KGPL, KJ and KJI]* For the period ended / as at March 31, 2014 (12m, UA) 2015 (12m, UA) Working Results Income from Continuing Operations 6176.13 7564.89 PBILDT 496.73 582.42 Interest 168.93 165.83 Depreciation 32.47 57.55 PBT 296.13 361.15 PAT 205.56 260.70 Gross Cash Accruals 238.03 318.25 Financial Position Equity Share capital 122.59 110.27 Net Worth ^ 1710.23 1862.63 Total Debt 1702.60 2081.23 -Working Capital 1702.60 1970.61 -Short term loan from related parties - 77.37 -Term Loan - 33.25 Key Ratios Profitability (%) PBILDT / Total OI 8.04 7.70 PAT / Total OI 3.33 3.45 ROCE 14.82 14.32 Solvency(times) Debt Equity Ratio 0.00 0.02 (Rs. Cr) 3
Overall Gearing (Including Acceptances / Creditors on LC) 1.00 1.12 Total Outside Liabilities to Net worth 1.48 1.42 PBILDT Interest Coverage 2.94 3.51 PBIT Interest Coverage 2.75 3.17 Term Debt/GCA 0.00 0.10 Total Debt/GCA 7.15 6.54 Liquidity (times) Current ratio 1.50 1.53 Quick ratio 0.71 0.87 Avg. Collection Period (days) 94 93 Avg. Inventory (days) 116 99 Avg. Creditors (days) 47 35 Op. cycle (days) 162 157 Operating cycle 94 70 ^Considering subordinated interest bearing (6% p.a.) unsecured loans of Rs.103.37 crore as quasi equity *ignoring interparty transactions Financial Performance (Standalone KJ) (Rs. Cr) For the period ended / as at March 31, 2013 2014 2015 (12m, A) (12m, A) (12m, A) Working Results Income from Continuing Operations 545.03 565.50 518.63 PBILDT 103.05 127.89 115.92 Interest 16.86 12.70 10.55 Depreciation 0.81 0.85 0.98 PBT 85.38 114.34 101.90 PAT 71.86 96.24 84.00 Gross Cash Accruals 69.73 93.14 80.55 Financial Position Net Worth/Partners Capital 140.50 178.56 170.55 Total Debt 137.31 113.04 40.86 Key Ratios Profitability (%) PBILDT / Total OI 18.91 22.62 22.35 PAT / Total OI 13.19 17.02 16.20 ROCE 38.17 45.40 47.40 Solvency(times) Debt Equity Ratio 0.00 0.00 0.00 Overall Gearing (Including Acceptances / Creditors on LC) 0.98 0.63 0.24 Total Outside Liabilities to Net worth 1.15 0.78 0.32 PBILDT Interest Coverage 6.11 10.07 10.99 PBIT Interest Coverage 6.06 10.00 10.90 Term Debt/GCA 0.00 0.00 0.00 Total Debt/GCA 1.97 1.21 0.51 Liquidity (times) Current ratio 1.71 2.01 2.86 Quick ratio 1.46 1.77 2.38 4
Avg. Collection Period (days) 156 147 146 Avg. Inventory (days) 35 34 34 Avg. Creditors (days) 18 20 16 Op. cycle (days) 172 161 165 Details of Rated Facilities 1.Long-term facilities Fund Based limits sanctioned by consortium of bankers as at Aug 31, 2015 (Rs. crore) Sr. No. Name of Bank EPC* PSC* Total 1 State Bank of India 3.50 16.50 20.00 2 State Bank of 7.00 33.00 40.00 Hyderabad 3 Bank of India 3.50 16.50 20.00 4 ICICI Bank Ltd 4.00 17.50 21.50 5 Central Bank of India 1.50 7.00 8.50 6 Andhra Bank 4.50 20.50 25.00 Total 24.00 111.00 135.00 * EPC Export Packing Credit; PSC Post Shipment Credit Analyst Contact Name: Ashvini Patil Tel: 022-6754 3431 Email: ashvini.patil@careratings.com (This follows our brief rationale for entity published on 23 October, 2015) 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. In case of partnership/proprietary concerns, the rating assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating 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. 5
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