- Long track record of operations; experienced partners and association with reputed Clientele
The firm established in 1989, is involved in the manufacture and export of leather-jackets for nearly three decades. The partner is a veteran in the industry with long-standing experience over 3 decades, which leads to steady revenues. GE exports leather garments to reputed global clients including ITX Trading (SPAIN), Hugo Boss (Germany). They contribute over 60 percent of the total revenue. GE has wellestablished relationships with these customers, which helped the firm in winning repeat orders from these brands. GE’s has reported revenues of Rs.154.41 Cr in FY2022(Prov.) against Rs. 118.44 Cr in FY2021, thus registering a Y-o-Y growth of approx. 30.37 percent. Acuité believes that the promoter's experience, vintage of operations, reputed clientele are expected to support in the improvement of its business risk profile over the medium term.
- Above-average financial risk profile
GE has above-average financial risk profile characterised by healthy gearing (debt-to-equity), moderate total outside liabilities to total net worth (TOL/TNW) and above-average coverage indicators and moderate net worth. The net worth of the firm stood at Rs.28.11 Cr and Rs.23.08 Cr as on March 31, 2022(Prov.) and 2021 respectively. The gearing of the firm stood at 0.37 times as on March 31, 2022(Prov.) against 0.27 times as on March 31, 2021.The deterioration in the gearing is because of increase in short debt portion.Debt protection metrics – Interest coverage ratio and debt service coverage ratio stood at 11.29 times and 9.18 times as on March 31, 2022(Prov.) respectively as against 3.35 times and 2.84 times as on March 31, 2021 respectively. The main reason for improvement in Interest coverage ratio( ICR) ratio is because of decrease in interest cost FY2022 , where bank has charged less interest rate in FY 2022 for the instruments ( Export Packing Credit, Foreign Bill Discounting) and debt service coverage ratio(DSCR) ratio is improved because of improvement in net cash accruals in FY 2022. TOL/TNW (Total outside liabilities/Total net worth) stood at 0.90 times and 1.19 times as on March 31, 2022(Prov.) and 2021 respectively. The debt to EBITDA of the firm stood at 1.16 times as on 31 March, 2022(Prov.) as against 1.43 times as on 31st March, 2021. Acuité believes that the financial risk profile of the company will continue to remain healthy on account of healthy net worth and debt protection metrics.
- Efficient working capital management
GE's working capital operations are efficiently managed as evident from Gross Current Asset (GCA) at 59 days as on March 31, 2022(Prov.) as against 93 days as on March 31, 2021, due to prudent inventory management, and efficient collection of trade receivables supported by reputed clientele.Inventory days stood at 28 days as on March 31, 2022(Prov.) as against 51 days as on March 31, 2021. Subsequently, the payable period stood at 57 days as on March 31, 2022(Prov.) as against 102 days as on March 31, 2021 respectively. The debtor day stood at 21 days as on March 31, 2022(Prov.) as against 11 days as on March 31, 2021. Further, the average bank limit utilization in the last six months ended August, 2022 remained at 63 percent for fund based limits. Acuité believes that GE's operation continue to be at efficient levels supported by reputed clientele with timely payments, minimal inventory levels and support from creditors.
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- Exposure to foreign exchange rate fluctuation
The firm's profitability is exposed to foreign exchange rate fluctuation; however, the risk is mitigated to an extent by the benefit of natural hedge and through forward contracts. Since the firm engages in both import and export activities, the forex risk is naturally hedged to some degree. The balance foreign currency exposure is hedged by forward cover with sanctioned limits of Rs. 1.00 Cr. Acuité believes that revenues and profitability remain susceptible to regulatory risks such as changes in duty structure and rate of export incentives, which could potentially impact the competitiveness of its products.
- High competition in the industry and geographic and customer concentration risk
Leather industry is characterised by high competition due to presence of large number of small to medium sized players along with intense competition from international suppliers. The firm has to compete not only with other domestic players, but also with manufactures in overseas market of China, Pakistan and Bangladesh. The intense competition limits the ability of the firm to pass on the volatility of the raw material prices and forex loss to its customers entirely, while pricing the products. Further, GE’s top five customers account for more than ~65 percent of its sales.
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