Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Monte Carlo Fashions Ltd (MCFL).

 

The rating continues to reflect healthy business risk profile with established market position and strong financial risk profile. These strengths are partly offset by improving-albeit-limited geographic diversification, seasonality in the business, large working capital requirement and exposure to intense competition in the apparel industry.

 

Operating performance of the company moderated during fiscal 2024 with operating income decreasing by 5% and the earnings before interest taxes depreciation amortization (EBITDA) margin reducing to 13.7% during fiscal 2024 from 19.7% during fiscal 2023 on account of sluggishness in demand, increase in the sales returns and higher discounts provided by the company to liquidate the inventory. The growth in total operating income is expected to remain flat in fiscal 2025 and will remain at 8-10% from fiscal 2026 onwards with pickup in demand. The operating margins are expected to recover to 17-18% in fiscal 2025 on account of corrective measures being taken by the management such as closing loss making stores, opening newer stores (with less lease payments), reducing the discounts by ~10% etc. Revenue growth and recovery of EBITDA margin will be a key monitorable.

 

However, the financial risk profile, although partly impacted during fiscal 2024 is expected to remain strong over the medium term with recovery of operating performance. Adjusted interest coverage, though reduced to 4.2 times in fiscal 2024 from 8.9 times in fiscal 2023, is expected to remain above 4.5 - 5 times over the medium term. The capital structure is expected to remain comfortable on account of no major capex plan and the gearing ratio is expected to remain below 0.50 times over the medium term (0.5 and 0.4 time as on March 2024 and March 2023 respectively).

Analytical Approach

CRISIL Ratings has considered standalone financial and business risk profiles of MCFL. The lease liabilities are considered as debt since these leases are part of the business and company has an obligation to pay lease rentals.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile with established market position: MCFL has an established market position with Monte Carlo being one of the leading industry player in the summer and winter wear market. The company had strong distribution and retail network with 411 exclusive brand outlets (EBOs) , 2116 multi-brand stores (MBOs), 902 national chain stores (NCS) and 422 other type of stores as on March 31, 2024. The company derived 55% revenue from the cotton segment, 28% from the woollen wear segment while other segments contribute the balance as on March 31, 2024.

 

In terms of channels, the company derived 41% revenue from EBOs, 28% from MBOs and remaining from NCS and online in fiscal 2024.

 

• Strong financial risk profile: The financial risk profile, although partly impacted during fiscal 2024, is expected to remain strong with healthy net cash accruals, comfortable debt protection metrics and strong liquidity. The net cash accruals are expected to remain around Rs. 80-130 cr in medium term on account of recovery of operating performance as against nil long term debt obligations. Adjusted interest coverage, though reduced to 4.2 times in fiscal 2024 from 8.9 times in fiscal 2023, is expected to remain above 4.5 - 5 times over the medium term. The capital structure is expected to remain comfortable on account of no major capex plan and the gearing ratio is expected to remain below 0.50 times over the medium term (0.5 and 0.4 time as on March 2024 and March 2023 respectively).

 

Weaknesses:

• Exposure to intense competition in the apparel segment, seasonality and limited geographical diversity: MCFL caters to highly price- and quality-conscious customers and has dominant position in the winter wear segment. The competitive landscape for the apparel sector remains high. Competition in the company’s key product segment is becoming intense, notwithstanding the strong growth momentum. The company has been ramping its distribution network to sustain growth and maintain brand awareness. Furthermore, the ever-changing nature of trends makes it imperative to revamp the portfolio periodically. The company’s ability to constantly innovate and update its portfolio will, therefore, remain a key monitorable. The strong brand equity of Monte Carlo should continue to benefit MCFL over the medium term.

 

MCFL over the years has been improving its geographical diversification by opening new stores in the south, western and central region. However, with lower number of stores present in west and central region currently, the overall share of revenue from these regions was low at 20% (of revenue) indicating concentration to north and east region. Further, revenue of MCFL exhibit seasonality in its revenue as demand for its products spikes in winter (Q3) and due to festivities. Any impact in demand due to a weak winter season may adversely impact demand and hence overall sales.

 

• Large working capital requirement: GCAs stood at 291 days in fiscal 2024 (290 days in fiscal 2023) owing to high inventory of 173 days (187 days in fiscal 2023) and debtor days of 127 days (124 days in fiscal 2023). The high debtor and inventory days are partly offset by creditor days of 79 days in fiscal 2024 (111 days in fiscal 2023). Going forward, GCAs are expected to remain around similar levels given the nature of operations and seasonality in demand, leading to maintaining of large inventory for stock keeping units at its stores at the start of winter and summer season. The debtor days also remains high with credit period of over 90 days given to its distributors for selling in MBOs although the company uses outright sale model for some its channels mitigating the inventory risk. MCFL’s ability to maintain working capital cycle will remain a key monitorable.

Liquidity: Strong

Unencumbered cash and equivalents including liquid investments stood at ~Rs. 190 crore as on March 31, 2024. The average bank limit utilisation for MCFL stood at 46% for the 12 months period through March 2024. The company has nil long-term debt obligation and the company no capex plans over the medium term. Existing cash and equivalents, unutilised bank lines along with annual net cash accruals should cover the incremental working capital over the medium term.

Outlook: Stable

MCFL will continue to benefit from its healthy business and financial risk profiles, and established market position.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth of 20-25%, supported by better geographical diversification and brand diversification, leading to increasing scale of operations and net cash accrual over Rs 200 crore on a sustained basis
• Sustained improvement of the profitability with EBITDA margin remaining above 20%.
• Sustenance of strong financial risk profile including the liquidity position.

 

Downward factors

• Weakening of the operating performance with sluggish revenue growth and/or sustenance of EBITDA margin below 15%, impacting cash accruals
• Higher than expected debt funded capex weakening of the financial risk profile.
• Sustained increase in working capital cycle and or higher than expected dividend outgo weakening the liquidity position

About the Company

MCFL was incorporated in 2008 as a wholly owned subsidiary of Oswal Woollen Mills Ltd (OWML), the flagship company of the Nahar group. MCFL was demerged from OWML in 2011. The company is an apparel retailer and manufacturers of woolen and cotton garments for men, women and kids. The brand Monte Carlo is renowned for winter wear. The company also has other brands such as Cloak and Decker, Alpha and Rock-It. Monte Carlo was listed on BSE and NSE in December 2014.

 

MCFL is a part of the Nahar group of companies that includes OWML, Nahar Spinning Mills Ltd (rated CRISIL A/Negative/CRISIL A1) and Nahar Industrial Enterprises Ltd (rated CRISIL A-/Negative/CRISIL A2+), which has extensive experience in the textile and apparel industries. MCFL operates on an arm’s length basis with its group companies.

Key Financial Indicators*

As on/for the period ended March 31	Units	2024	2023
Operating Income	Rs crore	1,061	1,118
Profit after tax (PAT)	Rs crore	61	132
PAT margin	%	5.7	11.8
Adjusted debt/adjusted networth	Times	0.5	0.4
Adjusted Interest coverage	Times	4.2	8.9

*as per analytical adjustments made by CRISIL Ratings

Any other information: Not applicable