Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities of Creative Newtech Ltd (CNL, formerly known as Creative Peripherals and Distribution Ltd) to ‘CRISIL BBB+/Stable/CRISIL A2’ from ‘CRISIL BBB/Stable/CRISIL A3+’

 

The rating action reflects the improvement in the overall credit risk profile driven by increasing scale of operations while managing its working capital cycle and strong improvement in financial risk profile. Operating income increased to Rs 1646 crores in fiscal 2024 from Rs 1348 crores in fiscal 2023, and is expected to sustain the steady growth in scale as reflected by first quarter revenues of Rs 277 crores ending June 2024. The overall improvement in the scale of operations has been driven by the addition of brands, products, and customers.. Although operating margins have moderated to 2.43% in fiscal 2024 (2.83% last year), increasing revenues while maintaining the working capital cycle with gross current assets around 63 days has supported the business risk profile of the company. Operating margins are expected to remain in the range of 2.5% to 3% over the medium term.

 

The rating action also factors in the improvement in the financial risk profile led by accretion to reserves along with the equity infusion made in fiscal 2024 by the company by way of preferential issues to promoter and non promoter group of around Rs 80 crores. The same combined with limited dependence on external borrowings for working capital requirements has led to the improvement in the capital structure leading to TOLANW to around 0.59 times as on March 31, 2024 (1.53 times a year ago).

 

The ratings reflect the extensive experience of the promoter in the distribution of computer peripherals and consumer electronics, the company’s diversified product portfolio, established relationships with principal suppliers, efficient working capital management and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition, low operating margin and customer concentration in revenue.

Analytical Approach

While arriving at the ratings, CRISIL Ratings has evaluated standalone business and financial risk profile of the CNL.

 

Unsecured loan of Rs 2 lakhs as on March 31, 2024  from the promoter has been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoter and a diversified product offering:  The promoter has more than two decades of experience in the consumer electronics business which has helped establish a clientele across multiple channels including small retailers, large format retailers and e-commerce players. The extensive experience helps in stocking decisions and addition of products to increase sales which is also reflected in the company having more than 25 principals and variety of product in its portfolio.  Steady order flow from the customers has led to steady growth in revenue at CAGR of 47% for the last three fiscals ended FY 2024 with revenues improving to Rs 1646 crores in fiscal 2024 from Rs 932 crores in fiscal 2022. CRISIL Ratings believes extensive promoter experience backed by a experience professional team should continue to support the business risk profile of the company.

 

Further, the company is an exclusive distributor across India for various products for reputed brands such as Cooler Master, Honeywell, Olympus, Philips, Samsung, Transcend and Viewsonic across information technology (IT), imaging, lifestyle and security segments. The company also has a distribution agreement with Fujifilm. The company has established relations with suppliers and is an exclusive distributor for many of its suppliers, which has helped scale up operations. They receive compensation for any price revision or obsolescence of products, helping it manage inventory. The diversified product offerings reduce the risk of slowdown in demand for a single product

 

• Efficient working capital requirement:  The working capital cycle is efficiently managed, as reflected in gross current assets (GCAs) of 63 days as on March 31, 2024 (64 days as on March 31,2023), with receivables of 26 days and inventory of 15 days for fiscal 2024 (19 days and 22 days respectively for fiscal 2023). The quick cash conversion cycle and strong relationships with vendors ensure limited inventory risk. The working capital cycle is partly supported by payables of 10 days. Diversified clientele, limited credit exposure to a single customer and low credit period safeguard against counterparty credit risk.  The working capital cycle is expected to improve and will remain a key monitorable over the medium term.

 

• Comfortable financial risk profile: Financial risk profile is marked with improved net worth of Rs 210 crores as on March 31, 2024 (Rs 100 crores a year ago) this was driven by the healthy accretion to the reserves along with the equity infusion by the way of preferential issue. This has led to the improvement in the capital structure of the company as reflected in the gearing and total outside liability to adjusted net worth ratio of 0.35 times and 0.59 times as on March 31, 2024 (0.89 times and 1.53 times a year ago). Debt protection metrics were adequate, reflected in interest coverage and net cash accrual to total debt ratios of above 4 times and 0.43 times for fiscal 2024 (4.1 times and 0.24 time, respectively, in fiscal 2023 The financial risk profile will remain healthy over the medium term owing to steady accretion to reserve and limited reliance on external borrowing.

 

Weaknesses:

• Customer concentration in revenue:  Though the revenue increased significantly to Rs 1646 crores in fiscal 2023, around 66% comes from a single overseas customer against 60% in fiscal 2023 which continues to contribute around 60% of revenues in Q1 of fiscal 2025. Any loss of business or change in strategy in key commercial terms of the principal customer can adversely impact the credit risk profile of CNL.

 

• Exposure to intense competition and low operating margins:  Intense competition in the consumer electronics distribution business because of low entry barriers, as indicated by negligible capital requirement, leads to stiff pricing competition among players, impacting scalability. The operating margin is typically low in the distribution business because of limited value addition. CNL had an operating margin of 2.5-4.0% in the three fiscals through 2024. The low operating margin leaves cash accrual highly vulnerable to changes in operating cost. Revisions in terms with vendors or pressure to enhance margin sharing with the distribution network amid intense competition will remain key monitorable

Liquidity: Adequate

Bank limit utilization is moderate at around 55 percent for the past twelve months ended Aug 2024. Cash accruals are expected to be over Rs 22 to 24 crores which are sufficient against term debt obligation of Rs 2 crore over the medium term. Current ratio are healthy at 2 times on March 31, 2024. Cash and cash equivalents are estimated at about Rs 17 crore as on March 31, 2024. The promoters are likely to extend support in the form of equity and unsecured loans to meet its working capital requirements and repayment obligations.

Outlook: Stable

CRISIL Ratings believes that CNL will continue to benefit over the medium term from the extensive industry experience of its promoters and its established relationships with principals.

Rating sensitivity factors

Upward factors:

• Reduction in customer concentration to less than 45% from each customer
• Sustained double digit revenue growth and stable operating margin leading to higher than anticipated net cash accrual
• Continued efficient working capital cycle and comfortable financial risk profile.

 

Downward factors:

• Any decline in the scale of operations or a decline in the operating margins leading to cash accruals below Rs 15 crores.
• Stretched working capital cycle, weakening the financial risk profile and liquidity

About the Company

Set up in 1992 by Mr Ketan Patel, CNL is a distributor of consumer electronic goods in the information technology, imaging, lifestyle and security segments for brands such as GoPro, Honeywell, Olympus, Philips, Samsung, Transcend and Viewsonic. The company is based in Mumbai and is listed on the National Stock Exchange.

Any other information: Not Applicable