Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of REDTAPE LTD (REDTAPE) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’. 

 

The revision in outlook factors in the wide market reach of the company in metros and tier-1 cities and improving presence in tier 2 and 3 cities. The company has also shown its ability to adapt to changing market trends. The rating also factors in the extensive experience of the promoters in the footwear industry along with comfortable financial risk profile, as reflected in comfortable capital structure and strong debt protection metrics. These strengths are partially offset by large working capital requirement and exposure to intense competition in the footwear and garments industry.

 

Revenue grew 26% on-year in fiscal 2024 to Rs 1,843 crore (Rs 1,468 crore in fiscal 2023) driven by strong growth in both footwear and garment sales. Revenue is expected to grow further with strong domestic demand from metro cities and increasing penetration in tier-2 cities over the medium term. Strong offline presence through exclusive brand outlets (EBOs) and multi-brand outlets (MBOs) offer better margins. The operating margin increased to 17.1% in fiscal 2024 compared to 16.6% in fiscal 2023 due to improvement in gross margin and is estimated to remain at a similar level over the medium term.

 

The financial risk profile was comfortable, supported by moderate capital structure and adequate debt protection metrics over the medium term. Networth was Rs 640 crore as on March 31, 2024. Gearing stood at 0.7 time in fiscal 2024 (0.5 time in fiscal 2023) whereas total outside liabilities to tangible networth (TOLTNW) ratio remained at 1.5 times as on March 31, 2024 (1.6 times a year ago). The financial risk profile is expected to remain healthy with strong accrual and limited debt-funded capital expenditure (capex) over the medium term.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of REDTAPE and its subsidiaries (as mentioned in the annexure) as all the entities are engaged in the same business and have common promoters.

 

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:

• Strong established brand and agility to adapt to changing market trends and consumer preferences: REDTAPE has positioned itself as a provider of affordable footwear and garments without compromising on quality. This value proposition appeals to a broad customer base, ensuring steady demand and repeat business. The company has invested in effective marketing strategies and strong brand positioning. This has enhanced brand recognition and loyalty, contributing to sustained revenue growth. REDTAPE has shown agility in adapting by staying ahead of trends and continuously innovating its product line in the Indian market, with burgeoning youth that exhibit continuous change in trends in both the footwear and apparel segments.

 

• Extensive experience of the promoters and integrated operations: The promoters have experience of more than two decades, which has enabled REDTAPE to maintain moderately strong market position in the domestic footwear and garment segments. The company has an integrated manufacturing facility in Unnao, Uttar Pradesh, which accounts for roughly ~25% of products manufactured and includes contract manufacturing from the domestic supplier. The remaining ~75% is imported from Bangladesh. REDTAPE is holding reasonable inventories and is not expected to have any impact over the near term owing to the current political unrest in Bangladesh. CRISIL Ratings shall continue to monitor events regarding the same and its impact on the business profile of REDTAPE. Furthermore, most of the manufacturers from which the company procures are certified by the Bureau of Indian Standards (BIS), which has become mandatory with effect from August 01, 2024.

 

• Comfortable financial risk profile: Tangible networth stood at Rs 640 crore as on March 31, 2024. Total debt, as on March 31, 2024, was Rs 480 crore out of which Rs 52 crore was long-term debt, Rs 109 crore was working capital debt and Rs 320 crore was lease liabilities[1]. Gearing stood at 0.7 time in fiscal 2024 (0.5 time in fiscal 2023) whereas TOLTNW ratio remained at 1.5 times as on March 31, 2024 (1.6 times a year ago). The financial risk profile is supported by low quantum of long-term debt, healthy networth, comfortable gearing and adequate liquidity.

 

Going forward, gearing and debt protection metrics are expected to remain strong due to healthy cash accrual, low debt-funded capex and gradual repayment of long-term debt.

 

Weaknesses:

• Working capital-intensive operations in the footwear and garments business: Owing to the retail nature of the business and planned expansion through addition of offline retail stores, the company is required to keep large amount of inventory leading to high working capital requirement. Accordingly, the working capital cycle remains a key monitorable as gross current assets (GCAs) have remained high at 180-200 days.

 

• Exposure to risks related to intense competition in the footwear and garments industry: The footwear and garment industries are highly fragmented, with the unorganised sector accounting for a large share of the market. Furthermore, the emergence of e-commerce and increasing presence of international brands have intensified competition. However, after the BIS certification regulation, the company is expected to have an edge, as most of its suppliers are already BIS certified. Also, the company has a strong presence in e-commerce with more than 30% of its total sales coming from the online channel.

[1] Lease liabilities are contractual in nature and are included in debt under IndAS.

Liquidity: Adequate

Cash and cash equivalent were Rs 21 crore as on March 31, 2024. Utilisation of the Rs 415 crore working capital limit has been modest at ~38% on average for the 12 months through March 31, 2024. Expected cash accrual of above Rs 250 crore (prior to lease payments) per annum over the next three years should comfortably meet the moderate capex, incremental working capital requirement and debt obligation.

Outlook: Positive

REDTAPE will continue to benefit from strong brand recall across product categories, wide variety of product offerings, strong presence in metros and tier 1 cities and improving penetration in tier 2 and 3 cities. The financial risk profile should remain strong, driven by low long-term debt, high financial flexibility and moderate capex.

Rating Sensitivity factors

Upward factors:

• Increased revenue while sustaining operating margin at 16-18% leading to improved cash generation
• Sustenance of healthy financial risk profile and improvement in the working capital cycle

 

Downward factors:

• Decline in revenue or operating margin below 12% leading to lower cash accrual
• Large working capital requirement or significant debt-funded capex, weakening the financial risk profile

About the Company

REDTAPE is a prominent player in the retail segment of footwear and garments for men, women and children. It sells products under three brands – REDTAPE, MODE (REDTAPE London) and BOND STREET (REDTAPE London). Most sales are made in the domestic market with minimal exports. The company has two business segments – footwear and readymade garments - with presence of 26 years in the footwear segment and around 15 years in the garments segment.

 

The company has pan India presence with around 600 retail stores of which ~70% are EBOs and ~30% are shop-in-shop (SIS)/MBOs. It has one manufacturing unit in Unnao, Uttar Pradesh, where it manufactures ~25% of its products (mainly footwear) including contract manufacturing from domestic suppliers and the remaining ~75% are imported from Bangladesh through contract manufacturing.

 

During fiscal 2024, REDTAPE reported revenue from operations and profit after tax (PAT) of Rs 1,843 crore and Rs 176 crore, respectively, against Rs 1,468 crore and Rs 142 crore, respectively, in the previous fiscal.

Key Financial Indicators(consolidated)*

As on / for the period ended March 31	Unit	2024	2023
Operating revenue	Rs crore	1,843	1468
Reported profit after tax (PAT)	Rs crore	176	142
Reported PAT margin	%	9.6	9.7
Adjusted debt/adjusted networth	Times	0.5	0.7
Adjusted interest coverage	Times	10.1	14.4

*CRISIL Ratings’ adjusted numbers

Any other information: Not Applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
REDTAPE Bangla Ltd (erstwhile Mirza Bangla Limited)	Full	Wholly owned subsidiary
REDTAPE H.K. Ltd	Full	Wholly owned subsidiary
Sen En Mirza Industrial Supply Chain LLP*	Full	Associate/Strong operational and financial linkages

* Closed in fiscal 2024