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.
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