Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities of Safari Industries India Limited (SIIL; part of the Safari group) to ‘CRISIL AA-/Stable/CRISIL A1+’ from ‘CRISIL A+/Stable/CRISIL A1’.

 

The ratings upgrade reflects the continuous improvement in business and financial risk profiles of the group along with an expectation of further improvement over the medium term. The business risk profile improvement considers better operating efficiency as reflected in higher profitability, better than expected revenue growth during fiscal 2024 and presence in oligopolistic industry.

 

In fiscal 2024, on consolidated level topline increased 27.7% year-on-year to Rs 1550 crore, driven by increase in air traffic and higher spending on travel and tourism. Increasing share from own manufactured hard luggage segment has supported the operating margin. Consequently, earnings before interest, tax, depreciation, and amortization (EBITDA) increased 40% year-on-year to Rs 278 crore in fiscal 2024 and EBITDA margin improved to 17.9% by 160 basis point. For fiscal 2025, the group is expected to earn revenues of Rs. 1900 crore, 24% higher than 2024 with EBITDA margins improving to 18.5%.

 

The financial risk profile is supported by healthy net cash accrual of Rs 228 crore in fiscal 2024 (Rs 158 crore in fiscal 2023). This along with reduction in debt resulted in net cash accrual to adjusted debt ratio improving to 5.48 times as on March 31, 2024 (from 2.55 time in fiscal 2023 and 3.82 time in fiscal 2022). Healthy cash accrual along with fund raise done in fiscal 2024 resulted in adjusted networth increasing from Rs 425 crore as on March 31, 2023 to Rs 822 crore as on March 31, 2024. As a result, gearing decreased from 0.14 times to 0.05 times for the same period. The company’s debt/Ebitda ratio declined to 0.15 time in fiscal 2024 compared to 0.30 time in fiscal 2023 (0.20 time in fiscal 2022) on account of improved profitability. The total borrowings were reduced to Rs 42 crore as on March 31, 2024 compared to Rs 60 crore a year earlier. The company has cash and cash equivalents of Rs 218 crore as on 31st March 2024 and as on June 2024 unutilized fund-based working capital limit of Rs 149.5 crore adding to the financial flexibility. Gearing and debt/ EBITDA are expected to remain comfortable over the medium term at around 0.05 and 0.14 times in fiscal 2025.

 

In March 2024, SIIL received as investment of Rs.229 Crores from Lighthouse Funds (Alternate Investment Fund -AIF). Group has announced capex of Rs.215 Crores for setting up a greenfield manufacturing unit in Jaipur, Rajasthan. Capex would lead to doubling its hard luggage capacity from ~6.5lac pieces per month to ~13lac pieces per month. The new capacities expected  to become operational in H2FY25 and will help group to further penetrate in to North Indian market. With the capex expected to come online around December 2024, the revenues and margins are expected to see a further improvement from fiscal 2026, while capital structure remains strong. Offtake from enhanced capacities will be instrumental for future growth.

 

The ratings continue to reflect an established market position in the Indian luggage industry and a strong financial risk profile. These strengths are partially offset by working capital-intensive operations and exposure to volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Safari and its fully owned subsidiaries, Safari Lifestyles Ltd (SLL) and Safari Manufacturing Limited (SML). This is because these companies, together referred to as Safari, are in the same line of business with operational synergies and have a common management

 

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:

• Significant Market Share and operating efficiency : The organized Indian luggage industry is oligopolistic in nature where SIIL has grown its market share over the past three years and is among the largest players in terms of revenue share.  A pan India distribution network, comprising over 100 plus company owned company operated outlets and an established product portfolio, further strengthen its market position.

 

Also, the group has recently launched a new brand, Urban Jungle which caters to casual premium segment in order to focus on younger consumers and the branding is being done primarily via advertisements and digital platforms.

 

The group continues to launch 3-4 stores per month, aiming to cater to premium as well as mass scale segments. Significant market share in organized luggage industry has helped company to maintain healthy operating margin, despite the competition. Furthermore, group has its own manufacturing units for hard luggage which are operating at full capacity utilization. The brand strength and wide presence is also substantiated  from Euromonitor International Limited’s report which has  adjudged Safari brand as the ‘No 1 luggage Brand in India ‘ in revenue terms.

 

The group is expected to maintain its established brand in the luggage industry over the medium term.

 

• Strong financial risk profile: Capital structure continues to remain comfortable, marked by low total outside liabilities to tangible net worth (TOL/TNW) ratio of 0.38 times, as on March 31, 2024. Company having net worth of Rs.822 Crores. Going forward, TOL/TNW to remain below 0.3 times supported by healthy net cash accruals and in the absence of large debt funded capex. Debt protection metrics should also remain healthy with expected interest coverage and NCA/TD of over 30 times and 10 times in medium term. CRISIL Ratings believes SIIL will continue to have strong Credit metrics in the medium term.

 

Weaknesses:

• Moderately working capital-intensive operations:  Gross current assets (GCAs) excluding cash and cash equivalents were moderate at 108 days, driven by debtors and inventory of 39 days and 77 days, respectively, as on March 31, 2024. While debtors are moderated to 30-40 days, inventory is likely to remain around 80 days over the medium term. The improvement in inventory is backed by lower import of luggage from China and higher revenue contribution from hard luggage, which is manufactured in India and has lower inventory levels. Overall working capital levels are expected to remain  around 110 to 120  days over the medium term

 

• Exposure to volatility in raw material prices and forex rates: Profitability is susceptible to prices of imported soft luggage and raw materials, which account for 55-60% of operating cost. Any sharp fluctuation is likely to impact the operating margin. Around 45-50% of the soft luggage is imported against nil exports. While forex exposure is mitigated through forward contracts, profitability continues to be susceptible to volatility in forex rates.

Liquidity: Superior

Bank limit utilization is low at around 2 percent for the past twelve months ended June 2024.  Company is expected to generate healthy cash accruals of around Rs. 270 crore for fiscal 2025. Current ratio is healthy at 2.28 times on March 31, 2024. High cash and cash equivalents of around Rs 218 crore  and liquid investments of Rs.149 Crores as on March 31, 2024 aid the liquidity. Low gearing and moderate net worth support its financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business.

 

ESG Profile

CRISIL Ratings believes Safari Industries Limited Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

Safari Industries Limited has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• The greenhouse gas (GHG) emissions intensity has reduced from 0.67 tCO2/ revenue in 2022 to 0.57 tCO2/revenue in 2023.
• The total waste generation has reduced from 1.06 tonnes/ revenue in 2022 to 0.62tonnes/revenue in 2023. The Company has started manufacturing hard luggage by using polypropylene and polycarbonate material which is 100% recyclable.
• Companies  governance profile is marked by 90% of its board comprising independent directors, and presence of robust internal control systems and processes. It also has extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of Safari to ESG principles will play a key role in enhancing stakeholder confidence and access to capital markets

Outlook: Stable

CRISIL Ratings believes that the business risk profile of Safari group is expected to be benefited by a strong distribution network and robust positioning in the mid- to lower-segment of the market

Rating Sensitivity factors

Upward Factors:

• Sustained growth in revenue while maintaining  market share supported by ramp up in enhanced capacities and improvement in operating margin above 15% (post lease adjustment) resulting in higher accruals above Rs.250 Crores.
• Sustained strong financial risk profile and steady increase in liquid surplus, supported by healthy cash accrual and continued moderate capex

 

Downward factors:

• Subdued revenue growth and operating margins falling below 10% (post lease adjustment), constraining overall business risk profile.
• Stretch in working capital cycle or large debt funded capex/acquisition weakens the financial risk profile

About the Group

SIIL was incorporated in 1980 by Mr. Mehta and family. The company was taken over by Mr. Sudhir Jatia in 2012. It manufactures and sells luggage under the brand, Safari. The manufacturing unit is in Halol, Gujarat. Safari is listed on both Bombay Stock Exchange and National Stock Exchange.

 

SML was incorporated in November 2021 as wholly owned subsidiary of SIIL. SML has a manufacturing unit at Halol, Gujarat

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Fund-Based Facilities	NA	NA	NA	23.8	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit*	NA	NA	NA	27.5	NA	CRISIL A1+
NA	Fund-Based Facilities*	NA	NA	NA	98.7	NA	CRISIL AA-/Stable

*Fully fungible between fund based and non-fund based facilities