Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities and fixed deposit programme of P N Gadgil Jewellers Limited (PNG; formerly PN Gadgil Jewellers Pvt Ltd; part of the PNG group) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The ratings upgrade factors in improved financial risk profile, as indicated by a robust capital structure and strong debt protection metrics. Adjusted networth is expected to be over Rs 1,550 crore in fiscal 2025 (up from Rs 500 crore as on March 31, 2024) owing to proceeds of its initial public offering (IPO) and steady accretion to reserves. On September 17, 2024, PNG successfully completed its IPO resulting in fresh equity issuance of Rs 850 crore and an offer for sale of Rs 250 crore. Of the proceeds from the fresh equity issuance, Rs 393 crore will be utilised for setting up 12 new stores in Maharashtra in fiscals 2025 and 2026, Rs 300 crore will be utilised for reducing its term and working capital debt and the remaining funds will be used for general corporate purposes. Debt protection metrics were healthy with gearing at 0.91 time in fiscal 2024 and expected to be below 0.15 time in fiscal 2025 on account of controlled reliance and reduction of external debt.

 

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. PNG is currently the second largest organised jeweller in Maharashtra.

 

After reporting 76% growth in revenue in fiscal 2023, revenue increased 36% to Rs 6,109 crore in fiscal 2024, supported by rise in jewellery and low-margin bullion sales, with healthy volume and higher realisations. The company is expected to sustain strong double-digit growth in turnover over the medium term, driven by expansion plans. Operating margin declined to 2.8% in fiscal 2023 from 4.4% in fiscal 2022, on account of one-time write-off of Rs 52 crore following closure of loss-making subsidiaries in Dubai (PN Gadgil Jewellers DMCC and PNG Jewellers LLC). The operating margin was 4.5% in fiscal 2024. Profitability is expected to remain stable over the medium term, supported by steady, yet improving, gross margin as the company focuses on improving the share of studded sales and cost-efficiency measures.

 

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 and geographical concentration in revenue.

Analytical Approach

CRISIL Ratings has also combined the business and financial risk profiles of PNG and its subsidiaries, as it has operational and financial linkages. With adoption of Ind AS 116 with effect from April 1, 2019, lease liabilities are being treated as debt while related adjustments are made in depreciation and amortisation and interest cost components.

 

Please refer to Annexure - List of Entities Consolidated, which highlights entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy improvement in the financial risk profile

The financial risk profile is expected to further improve, supported by store expansion and expected debt reduction from fresh equity raised. This is expected to improve its leverage position and debt coverage indicators for the company. The company has IPO proceeds of Rs 850 crore, out of which Rs 393 crore is being used to set up 12 new stores in Maharashtra in fiscals 2025 and fiscal 2026. Around Rs 300 crore will be used for debt reduction and the balance will be utilised for general corporate purposes. The company is in the process of fully repaying its long-term debt obligation and reducing working capital borrowing. These factors, along with capital expenditure (capex) of 12 new stores is expected to improve the credit metrics with debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio at 0.5-0.6 time in fiscal 2025, compared to 1.65 times in fiscal 2024. With continuing strong cash generation, the debt protection metrics are expected to improve further over the medium term.

 

• Established market position with strong brand and experienced management

The PNG group is an established player in the gold, silver and diamond jewellery business with a 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 two decades in the gold jewellery business. PNG currently operates 38 retail outlets in India and one store in the US as of July 2024. As of August 2024, the company added 3 additional stores and has plans to add 9 stores in fiscal 2025 and 3 stores in fiscal 2026.

 

• Improving operating efficiency

Net cash accrual rose to Rs 176 crore in fiscal 2024 from Rs 115 crore in fiscal 2023 (Rs 91 crore in fiscal 2022), led by improvement in the financial risk profile and ramp-up in 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 Gadgil Diamonds Pvt Ltd (GDPL) in fiscal 2018. In fiscal 2023, it discontinued its operations in the Middle East. The US subsidiary is profitable.

 

Weaknesses:

• Exposure to high geographical concentration: 

As of July 2024, of its 39 stores, PNG has 36 stores in Maharashtra, which contributed to over 95% of its revenue in fiscal 2024. Moreover, five stores contributed to ~35% of revenue in fiscal 2024. The closure of these stores may affect its business and financials. Thus, the company is exposed to high geographical concentration risk. However, this concentration risk is mitigated by the fact that PNG is one of the oldest and second largest retailers of gold, silver and diamond jewellery in Maharashtra. Its strong brand recognition especially in tier II and tier III cities throughout western India further supports growth.

CRISIL Ratings believes the addition of new stores in other geographical areas may result in revenue expansion as well as diversification of its geographical profile, which will be a key monitorable.

 

• 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. Total custom duty on gold was lowered from 15% to 6% in the latest Union Budget in July 2024. Some of these regulatory changes have moderated operating performance in the past. CRISIL Ratings believes that PNG will remain susceptible to changing regulatory norms.

 

• Intense competition in the jewellery segment: 

PNG is exposed to intense competition in the jewellery retailing segment. Jewellery retailing in India is largely dominated by unorganised players, which have a stronghold in their regions. Besides, organised players have also been expanding rapidly in select regions, posing stiff competition. As the company expands into newer geographies and cities, it will face severe competition from these local players. However, increasing consumer awareness about branded jewellery and purity of gold, implementation of hallmarking since June 2021 and the trust associated with the PNG brand (especially in Maharashtra) will enable the company to penetrate new markets and geographies over the medium term.

Liquidity: Adequate

Liquidity will be supported by expected annual cash accrual of Rs 260-360 crore, with nil debt obligation going forward. Bank limit utilisation averaged above 90% over the 12 months through August 2024. However, it is expected to come down because of utilisation of IPO funds for working capital requirement.

Outlook: Stable

PNG’s credit profile will continue to benefit from its established market position and consistent performance over the medium term with steady cash generation.

Rating sensitivity factors

Upward factors:

• Sustained and significant volumetric growth along with sustenance of operating margin of 6-7%.
• Diversification in business with the addition of new territories leading to lower reliance on a single geography
• Efficient working capital management leading to further improvement in the financial risk profile and liquidity

 

Downward factors:

• Decline in revenue or operating profitability below 4%, leading to lower-than-expected net cash accrual
• Large, debt-funded capex or stretched working capital cycle weakening the capital structure

About the Company

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 38 stores and one outlet in the US as of July 2024. In fiscal 2023, PNG closed its business in the UAE. The operations are managed by Mr Saurabh Gadgil and Mr Parag Gadgil.

 

The company got listed on the Indian stock exchange (NSE/BSE) on September 17, 2024. Post IPO, the promoters hold ~ 83% stake, while the rest (17%) is owned by the public.

Key financial indicators (Consolidated)

As on/for the period ended March 31*	Unit	2024	2023
Revenue	Rs crore	6114	4509
Profit after tax (PAT)	Rs crore	153	94
PAT margin	%	2.5	2.1
Adjusted debt/adjusted networth	Times	0.91	0.95
Interest coverage	Times	5.9	3.7

*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