Rationale

 The ratings reaffirmation reflects the expected improvement in the performance of Thangamayil Jewellers Limited (TMJL) in the current fiscal, driven by its established market position and improving business diversification. Post the healthy earnings growth in FY2021, TMJL's operating profitability was under pressure in FY2022 due to an increase in the other operating costs, especially in the second half, incurred towards opening of large showrooms (the operating margin declined to around 4% in FY2022 from ~8% in FY2021 and ~6% in FY2020). The overall performance in H2 FY2022 was constrained by heavy rainfall in the key markets in the third quarter and the impact of the third wave of the pandemic and high gold prices in the fourth quarter. However, TMJL's performance is expected to improve in FY2023, supported by a strong first quarter performance, improving revenue contribution from new showrooms and its strong brand equity in the Tamil Nadu market. ICRA estimates that TMJL is likely to record a healthy revenue growth of more than 25% in the current fiscal, and an operating margin of ~5% in the coming quarters. TMJL's debt protection metrics had weakened to an extent in FY2022, given the low operating profits and an increase in debt levels towards meeting funding requirements for the proposed showrooms. Key ratios including interest coverage and Total Outside Liabilities to Tangible Net worth (TOL/TNW) stood at around 3.3 times and 1.8 times, respectively in FY2022. Nevertheless, with the expected improvement in revenues and operating profits, its interest cover is estimated to improve to more than 4 times in FY2023 despite the likely increase in debt levels. TMJL's credit profile also remains supported by its adequate liquidity position and Total Outside Liabilities to inventory of less than 80%, which lends financial flexibility. The ratings also factor in the geographical concentration and product concentration risks as TMJL derives its entire revenue from the Tamil Nadu market and over 90% of its revenues from gold jewellery. Further, TMJL is exposed to inherent regulatory risks in the jewellery industry, which could impact the retailers' performance. Besides, intense competition limits pricing flexibility and exposes its earnings to fluctuations in gold prices. The Stable outlook on the long-term rating reflects ICRA's opinion that TMJL's performance will continue to benefit from its established market position in southern Tamil Nadu, increasing focus on expanding to new markets and comfortable capitalisation levels.