­Acuite has considered the consolidated approach of the business and financial risk profiles of Hari Krishna Exports Pvt Ltd (HKEPL), H K Jewels Pvt Ltd (HKJ) and H K Designs India LLP(HKD) to arrive at the rating. The consolidation is in the view of a similar line of business, common management, and significant business and financial interlinkages between these entities. The group is herein referred to as H K Group (HKG).

­Experienced management and established market position in the gems and jewelry industry
The promoters of HKG started their business since 1992. The group is engaged in manufacturing and trading of cut & polished diamonds (CPD) with carat range majorly from 1 to 3 carats in any of the cut, clarity and color ranges. Further, the group is also engaged in manufacturing of diamond studded and plain gold jewelry. The group is promoted by Mr. Savji Dholakia, Mr. Ghanshyam Dholakia, Mr. Tulsi Dholakia and Mr. Himmatbhai Dholakiya. The group’s promoters have been in the diamond industry for more than three decades and have established position in the industry. HKG has a global presence and is among one of the leading diamond players in India. They have a diversified customer base in around 53 countries, based in USA, Europe, and Hong Kong among other countries. Hari Krishna Exports Pvt Ltd (HKEPL) is a sight holder with leading miners such as De Beers, Rio Tinto which ensures steady supply of rough diamonds. Apart from the sights, the company also procures roughs from the secondary market. The extensive experience of the promoters has helped the company to establish long and healthy relationships with reputed customers and suppliers over the years. Further, key customers of H K Jewels include names such as Malabar Gold and Diamond, Titan, Kalyan Jewelers and Joyalukkas.
Acuité believes that the promoter's experience and reputed clientele is expected to support in improvement of its business risk profile over the medium term.

Healthy operating performance, albeit moderation in H1FY23
HK Group has recorded a strong operating performance in FY2022. Revenue of the group saw a 50 % Y-o-Y growth with its revenue at Rs.11,523.11 in FY2022 as against Rs. 7,795.24 Cr in FY2021. Such growth is driven by recovery in consumer demand post covid-19. ~76% of the groups revenue comes from export sales and ~24% of revenue comes from domestic sales. While export sales is the major contributor to the turnover, domestic diamond jewelry segment has seen a healthy growth with the revenues doubling from 428.01 Cr in FY2021 to Rs.929.65 Cr in FY2022. Further, the group also plans to expand the presence of the domestic jewelry brand ‘KISNA’ through its own retail franchise stores in FY2023. Realisation per carat for the CPD business saw a steady improvement from Rs. 1.25 lakh per carat in FY2020 to Rs. 1.33 lakh per carat in FY2021 and Rs. 1.35 per carat in FY2022. Sale of the group during the peak season from August to December grew by 41% in FY2022. The group recorded sales of approx. Rs.5,378 Cr during August to December, 2021 as against Rs. 3,805 Cr during August to December, 2020. Further, operating profit of the group improved from 7.50 percent in FY2022 as against 6.60 percent in FY2021. The improvement in EBITDA margins come at the back of foreign exchange gain. The group recorded a foreign exchange gain of Rs.96.36 Cr in FY2022 and Rs.107.37 Cr in FY2021. EBITDA margins excluding the foreign exchange gain stood at 6.70 percent in FY2022. as against 5.20 percent in FY2021. PAT margins improved from 4.71 percent in FY2022 as against 3.93 percent in FY2021.

H K Group has recorded a stable operating performance with consolidated revenue of Rs. 5,977.86 crore in H1FY23. The stable performance of the company is driven by the robust demand form the domestic jewellery segment of the group at H K Jewels Pvt Ltd. HKJ has recorded revenue of Rs. 728.58 crore in H1FY23 as against Rs. 151.29 crore in H1FY22 driven by the positive market sentiments in the domestic market. Revenue of HKEPL stood at Rs. 4,907.45 crore in H1FY23 as against Rs. 5,756.44 crore in H1FY22. Such degrowth in performance is on account of subdued demand in USA and Hongkong. H K Designs India LLP has also seen a stable operating performance with sales of Rs.341.83 crore in H1FY23 as against Rs.324.71 crore in H1FY22.
Acuité believes that the business risk profile of the group is likely to remain stable over the medium on the back of reputed clientele and established track record of operations of the group, albeit demand slowdown in the near term.

Healthy financial risk profile
HK group’s financial risk profile is healthy marked by healthy networth, low gearing levels and healthy debt protection indicators. The networth of the group  stood at  at Rs.2,306.81 Cr as on March 31, 2022. The networth has improved sequentially from Rs.1,786.68 Cr as March 31, 2021 on the back of healthy accretion to reserves.. The company has followed conservative financial policy in the past as reflected by peak gearing levels of 0.99 times as on March 31, 2020. The current gearing however has remained low at 0.83 times as on March 31, 2022. Majority of the working capital requirements are funded through bill discounting limits. The bill discounting limits were utilized at an average of 93 per cent over the last twelve month period through September 2022. The operations of the company are working capital intensive due to high inventory holding period and lenient credit term offered to its customers. Acuite believes that the gearing levels are expected to remain in the range of 0.70-0.56 times over the near to medium term. HK Group’s debt protection indicators remained healthy with interest coverage at around 11.22 times as on March 31, 2022 and net cash accruals (NCA) to Total Debt stood at 0.31 times as on 31st March 2022.
Acuite believes that the debt coverage indicators are likely to remain moderate in the absence of any large deviations in incremental working capital requirements.

­Working Capital intensive nature of operations
Working capital operations of the group are intensive marked by GCA days of 167 days in FY2022 as against 198 days in FY2021. Higher GCA days are driven by higher inventory holding period. HKEPL on an average maintains inventory for 130 days. Most of the inventory held by the diamond studded jewelry business is backed by orders. The inventory holding period improved at 124 days in FY2022 as against 130 days in FY2021. Debtor collection period stood at 37 days in FY2022 as against 47 days in FY2021. The  Group’s reliance on working capital borrowings is high, marked by average utilization of working capital limits of ~93 percent during the ten months period ended November’ 2022.  
Acuite believes that the working capital operations of the group will remain intensive in the medium term and will continue to remain a key rating sensitivity.

Susceptibility of operating performance to cyclicality in gems and jewellery sector and geographical concentration risk
HKG faces concentration risk as two major intermediate/marketing affiliates which contributes to 20 - 25 percent of total sales and purchases of group for key markets like Hong Kong and USA. Also, two key markets USA and Hong Kong contribute to ~60 percent of revenues in last two year ending FY2022. HKG’s export sales contribute to ~74 percent to overseas clients directly or through its marketing affiliates. Demand for CPD and jewelry is directly linked to discretionary spending by the clients and spending pattern changes as a result of economic slowdown. Any impact on the relationships with these players and any change in demand or disruption in this key markets will have direct impact on operating performance of HKG.
Acuité believes that established players like HKG will be able to maintain a resilient credit profile on the back of their healthy financial risk profile and demonstrated ability to manage their business risk profile during uncertain market conditions.