Reuters: Market News: TEXT-Fitch rates MK at 'Fitch A4(ind)'

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TEXT-Fitch rates MK at 'Fitch A4(ind)' Mar 28th 2012, 07:25 Wed Mar 28, 2012 3:25am EDT March 28 - Fitch Ratings has assigned India-based jewellery company MK's INR50m fund-based facilities a 'Fitch A4(ind)' rating. The rating reflects volatility in MK's revenue and profitability over the last four years, due to fluctuations in gold prices and foreign exchange. MK's revenue grew to INR472.5m in FY11 (financial year ending March) from INR379.62m in FY10, after declining to INR240.85m in FY09 due to the economic downturn in the US and UK from INR430m in FY08, while its EBITDA margins fluctuated between 4% and 6% over the same period. However, its credit profile had been comfortable, with low financial leverage (adjusted net debt/operating EBITDA) of 0.53x (FY08: negative 0.80x) and FFO interest coverage of 8.06x in FY11 (FY08: 1x), on the back of low working capital requirements. The rating also reflects MK's moderate liquidity position, as illustrated by its 96% utilization of the fund- based limits in H2FY12 till date, high net working capital cycle (FY11: 69 days, FY10: 54 days) and low cash balances (FY11: INR1m , FY10: INR0.9m). The company is seeking for an enhancement in its working capital requirements. Fitch notes that the company has changed its sales strategy from FY12 onwards to directly cater to clients of its US-based associate company - Hira Moti, from exporting jewellery to the latter. MK's revenue growth is likely to remain between 6% and 8% over the medium term. However, the new business model will increase its debtor days, thus increasing its working capital requirements, leading to increased short-term bank borrowings and thereby interest costs. As a result, MK's financial leverage (net adjusted debt/operating EBITDA) and FFO interest coverage are likely to deteriorate to over 5.0x and below 5.0x, respectively, in the short to medium term. However, these risks may be partly mitigated after sanction of additional working capital limits and by potential margin expansion as the company will sell directly to its end-customers. The rating also factors in the two-decade-long experience of MK's founders in the gems and jewellery industry, the company's fully integrated manufacturing plant at SEEPZ, Mumbai, and lack of any significant capex plans in the near term. Positive rating action may result from EBITDA interest coverage of above 3x on a sustained basis. Conversely, delays in timely debt servicing would result in negative rating action. Established in 2002, MK is a partnership firm that manufactures and exports diamond-studded gold jewellery, such as rings, earrings, pendants and bracelets, on a made-to-order basis. Link this Share this Digg this Email Reprints

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