Detailed Rationale

Crisil Ratings has upgraded its rating on the long-term bank facilities of Esprit Stones Ltd (ESL; Formerly known as Esprit Stones Private Limited) to ‘Crisil BB+/Stable’ from ‘Crisil BB/Stable’ and has reaffirmed its ‘Crisil A4+’ rating on the short-term facilities.

 

The ratings upgrade factors in the group’s improved financial risk profile, especially its liquidity, aided by term loan prepayment of Rs 19 crore during fiscal 2025 and moderation in overall bank limit utilization despite increased working capital requirements. Moreover, expected net cash accruals of Rs 35-40 crore per annum starting fiscal 2025-26 shall further aid the working capital requirements over the medium term, as repayment remains moderate at ~Rs 12 crore per annum. Absence of any sizeable debt-funded capital expenditure and likely accretion to reserves shall continue to aid the financial risk profile over the medium term as well.

 

The rating also factors in the group’s steady business risk profile supported by continuous efforts to expand its reach in domestic markets by launching variants such as Platinum Statuario, Palais Grey, Crystal White, etc. Though operating efficiency has moderated amidst increased working capital requirements and less profitable operations of subsidiaries, it remains partly aided by improved scalability, thus aiding net cash accruals. Going forward, steady improvement in business amidst improved operating efficiencies will remain a key monitorable.

 

The ratings reflect the extensive experience of the promoters in the engineered stones industry benefiting business performance and comfortable financial risk profile. These strengths are partially offset by the large working capital requirement and susceptibility to volatility in raw material prices.

Analytical Approach

Crisil Ratings has revised its analytical approach and has combined the business and financial risk profiles of ESL and its subsidiaries, Haique Stones Pvt Ltd (HSPL), Addwaya Chemicals Pvt Ltd (ACPL) and Haique Stones, Inc USA (HSI). The revision in the analytical approach was driven by full operationalization of all group entities with business interlinkages in between all the entities starting fiscal 2024.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoters benefiting business performance: The four-decade-long experience of the promoters in the engineered stones business and the building products industry has enabled them to gain a strong understanding of market dynamics and establish healthy relationships with suppliers and customers. The group benefits from its presence in Udaipur (Rajasthan), which is a marble belt, and caters to customers and service providers in the vicinity. Longstanding associations with top customers ensure a regular flow of orders. The group caters to real estate, hotel and home furnishing customers across the globe, including in the US, Canada and the Middle East, and offers engineered stones varieties such as Matisse gold, magma grey, Marmo Rinaldi, empire grey, and others. Revenue is achieved at Rs 160 crore for the first six months of fiscal 2025 and is projected to be in the range of Rs 300-320 crore for fiscal 2025. Sustained and significant revenue growth will remain monitorable over the medium term.

 

• Comfortable financial risk profile: Capital structure has been strong, led by steady accretion to reserve and low reliance on debt. After listing on August 2, 2024, equity infusion of Rs 50.35 crore has been used to repay debts amounting to Rs 19 crore. Hence, gearing is projected to be low at 0.4-0.6 time and total outside liabilities to adjusted networth (TOLANW) ratio at 1.1-1.4 time, as on March 31, 2025 (against 1.73 times and 2.77 times, respectively, as on March 31, 2024). Debt protection metrics may remain healthy, owing to adequate operating profitability. Interest coverage and net cash accrual to adjusted debt ratios are likely to be in the range of 2.8-3.0 times and 0.2-0.3 time, respectively, in fiscal 2025.  Interest coverage ratio could improve to 7-8 times over the medium term (4.8 times for fiscal 2024).  With steady accretion to reserve and in the absence of any large, debt-funded capital expenditure, the financial risk profile is expected to strengthen in the near term.

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs) have been sizeable at 160-240 days for the three fiscals ended March 31, 2024, driven by stretched receivables and large inventory of 98 days and 93 days, respectively as on March 31, 2024. GCAs are expected to be in the range of 200-210 days over the medium term, due to large receivables and the growing business. Customers are given 90-120 days in the domestic market and 60-90 days in the overseas market. However, the operations are working capital intensive due to a change in payment terms with the US customers, who now import on Delivery Duty Paid (DDP) basis instead of Free on board (FOB) basis earlier. Dependence on bank lines of Rs 65 crore, though improved over the past three months ended Sep’24, averaged high at 93% over past 12 months ended Sep’24. The ability of the management to efficiently manage the working capital cycle, amid business growth, leading to lower dependence on bank lines remains monitorable.

 

• Susceptibility to volatility in raw material prices: One of the key raw materials, polymer resin, is a crude oil derivate, and hence its prices move in tandem with crude oil prices. Although the backward integrations in one plant is operational by group to manufacture resin, still in an adverse market scenario, the group’s ability to pass on any hike in cost to its customers remains critical, as reflected in operating margin of 10.9% and 12.0% in fiscals 2023 and 2024, respectively, against 17.2% in fiscal 2022. This fluctuating margin is due to the lower absorption of fixed overheads on account of subdued revenue. Going forward, steady growth in revenue amidst improved profitability will remain a key rating sensitivity factor for the group.

Liquidity: Stretched

Bank limit utilisation was high, averaging 93% during the 12 months through September 2024. Aside the prepayment of debt of Rs 19 crore, annual net cash accrual of Rs 35-40 crore shall remain comfortable for maturing repayment of ~Rs 12 crore starting fiscal 2026. The surplus will cushion liquidity. The current ratio is likely to be moderate at 1.2-1.4 times as on March 31, 2025 (0.95 time as on March 31, 2024). The promoters are likely to extend equity and unsecured loans to meet the working capital requirement and debt obligation. Cash and bank balance is expected at Rs 5.0-6.0 crore as on March 31, 2025 (Rs 3.43 crore as on March 31, 2024).

Outlook: Stable

Crisil Ratings believes ESL will continue to benefit from the extensive experience of its promoters in the engineered stones business and the building products industry.

Rating sensitivity factors

Upward factors:

• Prudent working capital management leading to moderation in GCA days
• Sustained revenue growth and stable operating margin of over 12-13%, leading to high net cash accrual.
   

Downward factors:

• Stretch in working capital cycle, marked by GCAs of 220-230 days
• Large, debt-funded capex, or further stretch in working capital cycle, impacting the financial risk profile and liquidity

About the Company

Incorporated in 2016 by members of the Lunawath and Gattani families, ESL manufactures engineered quartz slab of premium quality. Bulk of revenue comes from exports. Its facility is in Udaipur, Rajasthan.

 

The group has set up a wholly owned subsidiary to manufacture composite new marble (an artificial stone) in fiscal 2023, which became operational from September 2022.

Any other information: Not Applicable