| Repeat orders from overseas client buoyed by long operating track record and extensive experience of promoters
The promoter, Mr. Rajiv Bhatia has experience of more than two decades in leather product manufacturing and export business, which has helped the company establish a strong customer base over the years. Currently, the second generation, Mr. Viraj Bhatia and Mr. Vashisht Bhatia have also entered into the business. The long standing experience of the promoters and long track record of operations has consequently helped them to establish high customer vintage, loyalty and a strong connect with its overseas customers and also comfortable relationships with key suppliers. Strong customer base of reputed international entities such as Marks and Spencer's, Radley and co., Adolfo Dominguez, Piquadro, etc have been providing repeat business. Acuité believes that the promoter’s extensive experience has helped the company to establish long term relationship with customers ensuring repeat orders and therefore will benefit the company going forward, resulting in steady growth in the scale of operations.
Acuité draws comfort from the company’s diversified geographical presence with exports to countries such as the UK, Spain, France, Italy, Canada, the US, and so on. It has a global presence in more than ten to twelve nations. Having been in business for almost two decades ensures a positive relationship with consumers and suppliers. Radley & Co Limited (UK) and Adolfo Dominguez SA (Spain) are two of the company's most important clients accounting for ~48 per cent of its revenues. However, the company enjoys an established relationship with these marquee customers, which have been awarding it with repeat businesses. However, Acuité believes association with reputed brands restricts its bargaining power.
Modest but improving scale of operations
The company’s turnover reached the pre-Covid level in FY2022, supported by a recovery in demand of leather products since Q2 FY2022. The operating revenue of the company improved to Rs 115.12 Cr in FY 2022 as compared to Rs 67.55 Cr in FY 2021. With the order pipeline remaining adequate, the revenues are expected to witness healthy growth in the near term, early trends of which can be seen from the revenue of ~Rs. 72.52 Cr recorded till H1FY23 against ~Rs. 52.83 Cr. recorded during the same period last year. However, high overhead expenses emanating from the increasing director’s remuneration and fees and substantial increase in labour costs amid increment in minimum wage kept the operating margin under pressure in FY 2022. The company’s margins are also impacted by the volatility in leather prices, although its ability to partly pass on the price increase to its customers mitigates the risk to a large extent. The operating margin declined to 9.62 per cent in FY2022 as compared to 11.65 per cent in the previous year. However, the PAT margin of the company increased to 4.65 per cent in FY2022 from 4.44 per cent in FY2021, owing to better absorption of depreciation. The RoCE levels for the company stood comfortable at 13.03 per cent in 2022 as against 9.85 per cent in FY2021. The company is exposed to geographical concentration risks as the major portion of its exports are made to the US and European markets. With ~60-65 per cent of the revenues coming from the European markets, the company remains susceptible to demand cyclicality in the end-user markets. Acuité expects the demand of the luxury products to moderate over the medium term with looming recession and the high inflation across the globe.
Above average financial risk profile
The company’s above average financial risk profile is marked by moderate net worth, modest gearing and healthy debt protection metrics. The tangible net worth of the company improved to Rs.37.40 Cr as on March 31, 2022 from Rs. 32.05 Cr as on March 31, 2021, on account of ploughing back of profits. Gearing of the company increased to 1.10 times as on March 31, 2022 as compared to 0.85 as on March 31, 2021, mainly led by increasing reliance on external debt to support the working capital requirements and guaranteed emergency credit line (GECL). Total outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 1.51 times as on March 31, 2022 as against 1.13 times as on March 31, 2021. The healthy debt protection metrics of the company is marked by Interest Coverage Ratio (ICR) at 6.49 times in FY 2022 as against 6.99 times in FY 2021; and Debt Service Coverage Ratio (DSCR) at 3.25 times in FY 2022 as against 4.17 times in FY 2021. Net Cash Accruals/Total Debt (NCA/TD) stood moderate at 0.19 times as on March 31, 2022. With the company’s increased reliance on term borrowings since the previous two years in the form of ECLGS loans, its repayment obligations are scheduled over the next few years, which are likely to keep the debt coverage metrics modest. Acuité believes that going forward, scaling up of operations, while improving profitability, will remain crucial to maintain comfortable debt coverage metrics in the medium term.
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| Working capital intensive nature of operation
The working capital management of the company has improved in FY22, although marked by Gross Current Assets (GCA) of 236 days in 31st March 2022 as compared to 255 days on 31st March 2021 with increased efficiencies in inventory and debtor management. The stretch in the GCA days is mainly on account of stretch in the debtor period which stood at 122 days as on March 31, 2022, even though it has improved as compared to 156 days as on 31st March 2021. The supply chain crisis, along with increased container turnaround time had a domino effect on the receivable cycle, increasing the average debtor days, as the company mainly receives payment against Documents against Acceptance (DA bills) and against payment (DP bills). However, the inventory period improved to 54 days as on 31st March, 2022 against 60 days in the previous year. The company needs to maintain raw material (leather) inventory to ensure smooth production throughout the year. Going forward, Acuité believes that the working capital management of the company will remain at similar levels as evident from the existing collection mechanism and moderate inventory levels over the medium term.
Exposure to foreign exchange rate fluctuation
Being an export-oriented entity, the company remains exposed to adverse changes in foreign currency. However, the forex risk is mitigated to some extent by the use of foreign currency in its working capital limits as well as the company’s hedging policy of using forward contracts. The company hedges 60-70 per cent of its forex exposure through forward contracts.
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