Rationale

The reaffirmation of the ratings factors in the company's established market position as one of the leading leather footwear exporters in India, its backward-integrated manufacturing operations that increase its cost competitiveness, along with its experienced promoter and management team. Moreover, the ratings derive comfort from the reduction in leverage to ~Rs. 258.0 crore as on January 31, 2021 from Rs. 388.8 crore as on March 31, 2020 due to the improved cash flow arising from the release of working capital particularly in Q3 FY2021, which coupled with unutilised working capital lines, led to healthy liquidity buffer available with the company. The ratings favourably factor in the established position of the company's Red Tape brand in the domestic market, along with diversified brand portfolio including brands such as Red Tape Athleisure, Bond Street, Mode, and Oaktrak. With rapid expansion in the domestic market, the share of domestic sales has risen to 65% in 9M FY2021 compared with 58% in FY020 and as low as 0% in FY2017. The launch of more brands, along with diversification in the product offerings, which includes sports shoes, casual shoes and apparel, has facilitated in the expansion and diversification of the clientele and product offerings. ICRA notes that MIL is gradually reducing the share of the wholesale/ multi-brand outlet (MBO) segment owing to the high working capital-intensive nature of the segment. The same, coupled with rise in focus on online and exclusive business outlets (EBOs) led to rise in the cumulative sales contribution of these two segments over the last three years. The company has also strengthened its domestic retail network via own stores as well the franchisee stores, with 273 EBOs, increased from 222 as of March 2020. The ratings are further strengthened by the large and diversified customer base in the export market, with repeat orders from reputed clients such as Steve Madden and Marks & Spencer, etc, reflecting positively on its track record. Further, MIL has a policy of 100% hedging of export receivables since FY2011, which insulates it from adverse movements in foreign exchange. Since FY2021, the company has started 100% hedging of imports as well, vis-àvis 50% earlier, which reduces the forex exposure for the client. However, the ratings remain constrained by the adverse impact of the Covid-19 pandemic, which has led to significant decline in revenues and accruals for the current year. The revenues for 9M FY2021 declined by 27% to Rs. 736.2 crore vis-à-vis Rs. 1,011.8 crore in 9M FY2020, while the operating profitability dipped to 10.6% in 9M FY2021 from 13.6% in 9M FY2020. ICRA notes that, despite the reduction in leverage, the lower accruals impacted the debt coverage indicators in YTD FY2021 as evidenced by the reduction in interest cover to 2.3 times in 9M FY2021 from 3.9 times in 9M FY2020. The ratings remain constrained by the continued tepid demand in the export market exacerbated by the lockdowns imposed in MIL's main market, United Kingdom (UK), to contain the spread of the pandemic including the new UK variant of Covid-19 virus. The ratings also factor in the low capacity utilisation of the tanneries due to muted demand for finished leather, leading to continued losses in leather segment since FY2019. The ratings continue to be constrained by high working capital intensity (46% in FY2020) owing to significant investments in inventory and receivables. The ratings also continue to be impacted by the intense competition in the leather footwear industry, geographical concentration in exports (particularly to UK), and vulnerability of profits to adverse movements in raw material prices and changes in rates of export incentives / duty remission rates, especially given that the company currently imports most of the non-leather footwear and garments, which are sold in the domestic market. ICRA has noted that MIL plans to construct a corporate office, and has a fresh sanctioned loan for the same. ICRA has also noted the discontinuation of the Merchandise Exports from India Scheme (MEIS), under which MIL claimed Rs. 21.39 crore in FY2020. MEIS is to be replaced with Remission of Duties or Taxes on Export Products (RoDTEP). The rates and certain key points for RoDTEP are yet to be finalised, and the same would remain a monitorable. The profitability may be impacted in case of adverse changes in rates under the scheme. The outlook on the long-term rating continues to be Negative, given the continuing pressure on debt protection indicators due to YoY decline in sales as well as accruals owing to the Covid-19 pandemic. Further, the prolonged tepid demand and lockdowns in the main export market had a sustained adverse impact on the segment and MIL's accruals. The pace and timing of pickup in demand would remain a key monitorable.