­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 jewellery 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 company is likely to sustain its existing business profile over the medium term on the back of an established track record of operations and experienced management.

Healthy financial risk profile
The financial risk profile of the Group is healthy marked by healthy net worth, low gearing and healthy debt protection metrics. The tangible net worth of the Group stood at Rs. 2721.24 crore in as on March 31, 2023, as against Rs. 2287.34 crore as on March 31, 2022. The gearing of the Group stood at 0.63 times as on March 31, 2023, as against 0.90 times as on March 31, 2022. The decrease in the debt levels is attributed to the comparatively lower utilisation of the working capital limits by the Group. The total debt of the Group stood at Rs.1706.13 crore as on March 31, 2023. It consists of the long-term debt of Rs.28.93 crore, unsecured loans of Rs.3.90 crore and short-term debt of Rs. 1669.47 crore. The Group has added CC limits of ~Rs.60 crore in FY2023. Additional limits of ~Rs.90 crore is expected to be added in FY2024. Further, the Group has taken a vehicle loan of Rs.21 crore in FY24 for the purchase of 48 buses which will be used for the transportation of their employees. The interest coverage metrics stood healthy with interest coverage ratio of 6.22 times in FY2023 as against 11.22 times in FY2022. The DSCR stood at 3.17 times in FY2023 as against 2.86 times in FY2022. Acuité believes that the ability of the Group to maintain a healthy financial risk profile in the medium term will remain a key rating sensitivity in medium term.

Moderate operating performance, albeit decline in the cut and polished diamond segment
 H K Group has recorded a decline in the revenue by 8 percent to Rs.10494.61 in FY2023 as against the revenue of Rs.11531.93 crore in FY2022. The decline is due to the slump in the demand for the cut and polished diamonds in the international markets such as USA and China due to factors such as recession , ~77 percent of the revenues of HKEPL come from the exports market out of which ~30 percent of the same comes from the US markets. The tepid market conditions in the overseas market may further impact the revenues of the H K Group. Even though Hari Krishna Exports recorded a decline in the revenues due to the cut and polish diamonds segment, H K Designs and H K Jewels witnessed an improvement in the revenues due to boost in the demand for the gold studded jewellery segment and expansion of the presence in the domestic jewellery market through their own brand ‘Kisna’. The operating margins of the Group stood at 7.33 percent in FY2023 as against 7.37 percent in FY2022. The Group is focusing on maintaining the profitability margins at 7-8 percent. The PAT margin of the Group stood at 4.15 percent in FY2023 as against 4.67 percent in FY2022. The PAT margins have declined, majorly due to the high finance costs resulted by the increase in the interest rates for the working capital loans. Acuité believes that the ability of the Group to maintain and improve its business risk profile in medium term will remain a key rating sensitivity.

­Working Capital intensive nature of operations
The Group has working capital intensive operations marked by the high GCA days of 184 days as on March 31, 2023, as against 166 days as on March 31, 2022. The high GCA days are majorly driven by high inventory days. The inventory days stood at 151 days as on March 31, 2023, as against 129 days as on March 31, 2022. The average inventory holding period is around 5 months. The debtors’ days stood at 30 days as on March 31, 2023, as against 37 days as on March 31,2022. Average credit period allowed to the customers is around 30 days. The creditors days stood at 66 days as on March 31, 2023, as against 58 days as on March 31, 2022. The average credit period received from the suppliers is around 60-70 days. The Group needs to make advance payments to the suppliers of the rough diamonds in the CPD segment. The average bank limit utilisation for the H K Group is high at around 82 percent for last six months ended May’2023. 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
Demand for CPD and jewellery 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 established market position.