Detailed Rationale

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

 

The ratings upgrade factors in improvement in the business risk profile, as indicated by healthy and sustained growth in revenue. Revenue increased 76% in fiscal 2023 to Rs 4,509 crore led by 32% growth in the jewellery business and almost 280% rise in low-margin bullion sales, supported by higher volumes and realisation. During the first five months of fiscal 2024, PNG reported revenue of Rs 2,175 crore led by strong double-digit value and volume growth in both the gold jewellery and gold 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 against 4.4% in fiscal 2022, led by one-time write off of Rs 52 crore on account of closure of its loss-making subsidiaries located in Dubai (PN Gadgil Jewellers DMCC and PNG Jewellers LLC). Adjusting for it, the operating margin for fiscal 2023 was ~4%. Operating profitability is expected to remain comfortable and upwards of 4% over the medium term. Debt protection metrics are improving with ramp-up in scale and rise in profitability, as seen in increase in interest coverage ratio to 3.8 times in fiscal 2023 from 3.4 times in fiscal 2022; and continuous reduction in 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.

 

The ratings continue to reflect the PNG group's established market position in the jewellery retailing sector due to strong established brand and experienced management, robust financial risk profile and prudent risk management practices.

 

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

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of PNG and its subsidiaries. CRISIL Ratings has also combined the joint venture (JV) - PNG Jewellers LLC to the extent of PNG’s shareholding. These entities have been consolidated and are collectively referred to as the PNG group, as they have operational and financial linkages.

 

CRISIL Ratings has made adjustments for promoters' preference shares; 75% of the preference shares have been treated as equity and 25% as debt.

 

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

 

Please refer to 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 a significant presence in Pune, Mumbai and other parts of Maharashtra. The Purushottam Narayan Gadgil brand has been in existence for more than 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 company is currently headed by Mr Saurabh Gadgil, who has experience of more than 20 years. PNG currently operates 21 owned and 11 franchise retail outlets in India and one outlet in the US.

 

Improving operating efficiency

PNG’s financial risk profile has been improving, which combined with increased scale of operations, has resulted in improvement in net cash accrual to Rs 115 crore in fiscal 2023 from Rs 91 crore in fiscal 2022 and Rs 19 crore in fiscal 2021. Domestic sales continue to be strong with the PNG group focusing on capturing new customer segments and growth of store sales with no plans for store expansion currently.

 

Furthermore, 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 JV, 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 group’s US subsidiary has become profitable.

 

Prudent working capital management

The company follows inventory replenishment model to hedge itself from any volatility in gold prices. The company has resorted to weekly replenishment of inventory from the previous monthly replenishment model. Additionally, it has focused on various inventory management practices which have resulted in decrease in inventory and simultaneously improvement in the working capital cycle. Gross current assets (GCAs) reduced to 62 days in fiscal 2023 (against 114 days in fiscal 2022) on account of reduced inventory from 105 days in fiscal 2022 to 50 days in fiscal 2023.

 

Weakness:

Moderate, though improving, financial risk profile

Sizeable expansion programme in fiscals 2015 and 2016 led to significant deterioration in the financial profile of the company. However, over the last few years, debt protection metrics have improved, aided by improving store level profitability, modest capital expenditure (capex) and repayment of debt. The group’s consolidated debt is expected to be below Rs 400 crore, over the medium term, with no significant capex lined up in the near term and debt being primarily used to support inventory. 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 remains 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 decrease in operating margin from 4.4% in fiscal 2022 to 2.8% in fiscal 2023. In the absence of this write-off, operating margin would remain stable at around 4%.

 

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 the import of gold, 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 re-started and the 80:20 rule was scrapped. Demonetisation and 1% excise duty impacted growth in fiscal 2017. Furthermore, since January 2016, the government has mandated jewellers to collect PAN card 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 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 regulation remain a key monitorable for the sector.

Liquidity: Adequate

Liquidity is supported by average bank limit utilisation of 85% over the 12 months through June 2023 and improving cash generation. Expected annual cash accrual of Rs 130 crore will be sufficient to meet debt obligation of ~Rs 20 crore and modest capex over the medium term.

Outlook: Stable

CRISIL Ratings believes that PNG’s credit profile will benefit from its established market position and improving operating efficiency over the medium term.

Rating Sensitivity Factors

Upward factors:

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

 

Downward factors:

• Decline in 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
• Deterioration in debt protection metrics with interest coverage ratio weakening to 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 established as a proprietorship firm, P.N. Gadgil & Co, in 1958 and reconstituted as a partnership firm, P.N. Gadgil Jewellers. It was reconstituted as a private limited company with effect from December 2013. As on April 5, 2023, the company has become a limited entity. The company has 21 owned and 11 franchise stores in India and one outlet in the US as of March 2023. 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