Rationale

 For arriving at the ratings, ICRA has taken a consolidated view of KDDL Limited (KDDL) as well as its subsidiaries and associate companies, given the strong operational, financial and managerial linkages between these entities. The outlook revision factors in the expected improvement in the Group's performance, led by stability of demand witnessed by the manufacturing segment. The healthy order book from the manufacturing segment provides better revenue visibility, which augurs well for the company going forward. Further, the stores operating under Ethos Limited have reopened entirely and KDDL is witnessing good traction, driven by both online as well as offline channels. The luxury watches retail business has depicted resilience, despite the impact of the second wave of the pandemic, with substantial revenue growth in the current financial year as compared to the previous year. While lease rental concessions during the pandemic supported its margins, improved demand in H2 FY2022 is likely to result in higher cash accruals. The ratings favourably consider the rights issue of Rs. 25 crore supporting its liquidity position, majority of which would be used towards working capital in the retail business over a period of time. The ratings continue to note KDDL's prominent market position in watch component manufacturing as a leading supplier of watch hands and dials, established relationships with leading global luxury watch manufacturers and Ethos' position as the largest organised luxury watch retailer in the country. The ratings, however, continue to be constrained by the working capital nature of business particularly in the retail segment, which is characterised by high inventory requirements. Further, it faces demand risk in the retail division on account of high demand elasticity, coupled with the discretionary nature of spending for luxury watches. The company reported a subdued performance in FY2021 due to the Covid-19 pandemic. The evolving nature of the pandemic remains critical and might adversely impact demand in the retail as well as manufacturing business. Additionally, it remains exposed to the moderate forex fluctuation risk in the retail division, as a large part of the inventory is imported and is unhedged, although there is a natural hedge at a consolidated level.