Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable/CRISIL A2+’ ratings on the bank loan facilities of P N Gadgil Jewellers Limited (PNG; formerly known as P.N. Gadgil Jewellers Pvt Ltd)

 

The ratings continue to reflect the established market position of the PNG group in the jewellery retail sector, backed by the strong Purushottam Narayan Gadgil brand and experienced management. The ratings also factor in the robust financial risk profile and prudent risk management practices followed by the company.

 

Revenue has grown by 76% to Rs 4,509 crore in fiscal 2023, led by 32% rise in jewellery sales and 280% rise in low-margin bullion sales, supported by higher volume and realisations. During the first nine months of fiscal 2024, PNG reported revenue of Rs 4,534 crore, led by strong double-digit value and healthy volume growth in both the gold jewellery and bullion segments. The company is expected to sustain healthy double-digit revenue growth over the medium term.

 

Operating margin declined to 2.8% in fiscal 2023, from 4.4% in fiscal 2022, led by one-time write-off of Rs 52 crore, following closure of loss-making subsidiaries in Dubai (PN Gadgil Jewellers DMCC and PNG Jewellers LLC). Post adjustments, the margin was around 4% in fiscal 2023 and is expected to remain comfortable above 4% over the medium term. Debt protection metrics are improving with ramp-up in scale and profitability, as seen in interest coverage ratio of 3.8 times in fiscal 2023 (3.4 times in fiscal 2022); and steady improvement in the total outside liabilities to tangible networth (TOLTNW) ratio to 2.21 times as on March 31, 2023 (3.9 times as on March 31, 2022). These ratios are expected to improve further over the medium term.

 

CRISIL Ratings notes that PNG has filed the Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India, for an initial public offering (IPO) in March 2024. The proposed IPO consists of a fresh issue (up to Rs 850 crore). Successful completion of IPO and utilisation of proceeds to reduce debt would enhance the debt metrics and will be a key monitorable.

 

These strengths are partially offset by susceptibility of operating margin to volatility in gold prices, intense competition and regulatory changes in the gold jewellery segment.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of PNG and its subsidiaries. These entities have been consolidated and are collectively referred to as the PNG group, as they have operational and financial linkages.

 

CRISIL Ratings has adjusted for preference shares held by the promoters; 75% of preference shares have been treated as equity and 25% as debt for fiscal 2023. However, as confirmed by the company, PNG has converted all preference shares into equity in the ratio of 1:1 in January 2024.

 

Gold on loan schemes availed by the company in the past have been treated as debt.

 

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:

• Established market position in the jewellery industry with a strong brand and experienced management: The PNG group is an established player in the gold, silver and diamond business, with significant presence in Pune, Mumbai and other parts of Maharashtra. The Purushottam Narayan Gadgil brand has been in existence for over 192 years and is well-recognised in and around Pune and Sangli in Maharashtra. It was started in 1832 in Sangli, by Mr Ganesh Narayan Gadgil. Mr Purushottam Narayan Gadgil expanded the brand to Pune in 1958. The current promoter,  Mr Saurabh Gadgil has experience of more than 20 years in the gold jewellery business. PNG currently operates 23 owned and 13 franchise retail outlets in India and one outlet in the US.

 

• Improving operating efficiency: Net cash accrual rose to Rs 115 crore in fiscal 2023, from Rs 91 crore in fiscal 2022 and Rs 19 crore in fiscal 2021, led by improvement in the financial risk profile and increase in scale of operations. Domestic sales were robust as the group remained focused on tapping new customer segments and growing sales at existing outlets.

 

The group has either sold off or discontinued operations of loss-making entities. It sold Style Quotient Jewellery Pvt Ltd in fiscal 2018 and its joint venture, Anant Mauli Jewellers, in fiscal 2019. It also discontinued operations of GDPL in fiscal 2018. In fiscal 2023, it discontinued its operations in the Middle East. The US subsidiary has become profitable.

 

• Prudent working capital management: The company follows the inventory replenishment model to hedge itself from any volatility in gold prices. It has started replenishing inventory on a weekly basis, as against the earlier practice of monthly replenishment. Various practices followed by the company have led to decrease in inventory and thus, enhanced the working capital cycle. Gross current assets reduced to 62 days as on March 31, 2023 (against 114 days as on March 31, 2022), as inventory came down to 50 days from 105 days over the same period.

 

Weaknesses:

• Moderate, though improving, financial risk profile: Sizeable expansion programme in fiscals 2015 and 2016 weakened the financial risk profile significantly. However, over the last few years, debt protection metrics have improved, aided by better store-level profitability, modest capital expenditure (capex) and debt repayment. Debt protection metrics were healthy, with interest coverage and net cash accrual to adjusted debt ratios of 3.7 times and 0.4 time, respectively, in fiscal 2023, compared to 3.3 times and 0.3 time, respectively, in fiscal 2022. Going forward, steady accretion to reserves remain critical for further strengthening of the metrics.

 

Furthermore, in fiscal 2023, the company closed its loss-making subsidiaries (PN Gadgil Jewellers DMCC and PNG Jewellers LLC) located in Dubai and recorded a one-time write off expense of Rs 52 crore, which led to a drop in operating margin to 2.8% in fiscal 2023 from 4.4% in fiscal 2022. Excluding this write-off, the margin would remain stable around 4%.

 

PNG has filed the DRHP with SEBI for an initial public offering (IPO) in March 2024. The proposed IPO, which entails a fresh issue to raise upto Rs 850 crore will support the networth, growing scale of operations and expansion plans of the company.

 

• Susceptibility to regulatory risks in the jewellery industry: The jewellery sector has seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb gold imports, the government introduced the 80:20 rule, discontinued the gold-on-lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold-on-loan scheme was restarted and the 80:20 rule was scrapped. Demonetisation and imposition of 1% excise duty impacted growth in fiscal 2017. Furthermore, since January 2016, the government has mandated all jewellers to collect details of the permanent account number from customers for all purchases beyond Rs 2 lakh. The government has also introduced the sovereign gold bond scheme to shift consumer preferences away from physical gold. In fiscal 2023, the government hiked the import duty on gold from 7.5% to 12.5%. Some of these regulatory changes have moderated the company's operating performance in the past. Changes in government regulations remain a key monitorable for the sector.

Liquidity: Adequate

Liquidity is supported by expected annual cash accrual of above Rs 150 crore, which should comfortably cover the term debt obligation of around Rs 20 crore and modest capex over the medium term.  Bank limit utilisation averaged around 90% over the 12 months through March 2024.

Outlook: Stable

CRISIL Ratings believes PNG will continue to benefit from its established market position in the gold jewellery business and its improving operating efficiency.

Rating Sensitivity factors

Upward factors:

• Substantial improvement in business performance, resulting in steady double-digit revenue growth and increase in operating margin to 5-6% on a sustained basis
• Sustained improvement in capital structure, driven by healthy cash generation
• Significant improvement in liquidity, especially in the form of unutilised bank lines

 

Downward factors:

• Weakening of operating performance due to volatile business conditions, impacting cash generation
• Weaker-than-expected performance of subsidiaries and further exposure of the parent company to group entities
• Weakening of debt protection metrics with interest coverage ratio below 1.8 times

About the Group

Established in 1832, PNG is one of the oldest retailers of gold, silver and diamond jewellery in Maharashtra. The company was set up as a proprietorship firm, PN Gadgil & Co, in 1958 and reconstituted as a partnership, PN Gadgil Jewellers. It was further reconstituted as a private limited company with effect from December 2013. As on April 5, 2023, the company has become a limited entity. It has 23 owned and 13 franchise stores in India and one outlet in the US as of March 2024. In fiscal 2023, PNG closed its business in the UAE. Operations are managed by Mr Saurabh Gadgil and Mr Parag Gadgil.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31*	Unit	2023	2022
Revenue	Rs.Crore	4509	2557
Profit After Tax (PAT)	Rs.Crore	94	70
PAT Margin	%	2.1	2.7
Adjusted debt/adjusted networth	Times	0.8	1.2
Interest coverage	Times	3.8	3.4

*CRISIL Ratings Adjusted

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Name of entities	Extent of consolidation	Rationale for consolidation
PN Gadgil Jewellers DMCC*	Full	Strong managerial, operational and financial linkages
Gadgil Diamonds Pvt Ltd	Full	Strong managerial, operational and financial linkages
PNG Jewellers INC	Full	Strong managerial, operational and financial linkages
PNG Jewellers LLC*	49%	Strong managerial, operational and financial linkages

*Company has closed down Dubai operations which were earlier routed through PN Gadgil Jewellers DMCC & PNG Jewellers LLC