­Extensive experience of promoters and long track record of operations
SG, engaged mainly into manufacturing & exports of cut & polished diamonds, has a global presence and is among one of the leading diamond players in India. They have a diversified customer base based in USA, Europe, Hong Kong, Middle East, etc. among other countries. It is also designated as four-star export house by the Government of India. This has been facilitated by the extensive experience of promoter of the group, Mr. Govind Kakadia, who has an experience of more than 5 decades into this business segment. The promoter is well supported by the second generation in the family – Mr. Ajay Kakadia, Mr. Bharat Kakadia and Mr. Chirag Kakadia.

Acuité believes that the extensive experience of the management and established global presence will strengthen the business risk profile over the medium term.

Long-standing relationship with reputed diamond mining companies in the world
SG has a long-term association with major diamond companies viz. De Beers, Rio Tinto and Alrosa for sourcing of rough diamonds. Such contracts with key suppliers like them allow a steady supply at competitive rates. Diamond Trading Company (DTC), the marketing arm of De Beers, sells rough diamonds only to an exclusive group of manufacturers throughout the world called sight-holders. The status of being a sight-holder with these mining companies lend significant comfort to the sourcing arrangements of SG whereby they procure rough diamonds as per fixed-term contracts with DTC that also assures uninterrupted supply at competitive pricing rather than sourcing from secondary markets. In view of the ongoing war and sanctions against Russia, SG has gradually reduced its procurements from Alrosa.

Acuité believes that SG will benefit from its position as a sight-holder giving the Group a higher competitive advantage in terms of quality over the other players present in the diamond industry.

Established distribution network and presence in major global markets
In the international market, SG  has a strong distribution and procurement network through its step-down subsidiaries in key consuming markets viz. Hong Kong, USA, Belgium, Middle East, and Shanghai. Further, the Group has launched an online application in February 2015, which marked its entry into the e-commerce trading space. This mobile-based application helps in assisting customers and clients to place their orders as per their requirement from the ready inventory of stock available online, after inspecting the product based on different grading scales, certificates in the industry and price bands, without having to travel to the Group’s office. The digital sales contribute to 40 to 50 percent of the total sales. Further, during the year, SG has set up a manufacturing unit in Botswana, under stepdown subsidiary company of Sheetal Golden Works (India) LLP.

Healthy Financial Risk Profile
Sheetal Group has healthy financial risk profile marked by tangible net worth of Rs.1166.87 crore as on 31 March, 2022 (provisional) as against Rs.971.51 crore as on 31 March, 2021. The gearing level of the Group remained low at 0.55 times as on 31 March, 2022 (provisional) as against  0.73 times as on 31 March, 2021. The adjusted gearing level stood at 0.62 times as on 31 March, 2022 (provisional) against 0.57 times same period last year. The total debt outstanding of Rs.854.18 crore consists of working capital borrowings of Rs.727.50 crore, unsecured loan from promoters of Rs.126.68 crore and no term loan obligations as on 31 March, 2022(provisional).
The coverage ratios of the group  remained healthy with Interest Coverage Ratio (ICR) of 14.88 times for FY2022 (provisional) against 4.44 times for FY2021. Net Cash Accruals to Total Debt (NCA/TD) stood at 0.27 times for FY2022 (provisional) as against 0.10 times for FY21. The total outside liabilities to tangible net worth (TOL/TNW) of the group  stood at 1.07 times as on March 31, 2022 (provisional) against 0.99 times as on March 31, 2021.

Acuité expects the financial risk profile to remain healthy over the medium term on account of large scale of operations, comfortable debt protection measures and moderate reliance on the external borrowings resulting in stable debt protection measures

Working Capital Intensive Nature of Operations
The operations of the Group are working capital-intensive in nature marked by  Gross Current Asset days of 177 days for  FY2022(provisional) as against 296 days for  FY2021. The improvement in GCA days is on account moderated inventory and debtor levels. The inventory days of the Group stood at 122 days for FY2022 (provisional) as against 185 days for FY2021 and the debtor days reduced to 46 days for FY2022 (provisional) as against 89 days for  FY2021. The creditor days stood at 32 days for  FY2022 (provisional) as against 47 days for  FY2021. The  Group’s reliance on working capital borrowings is moderate, marked by average utilization of working capital limits of ~77.70 percent during the ten months period ended June’ 2022.

Susceptibility of profitability margins to volatility in prices of diamonds and fluctuations in forex risk
Due to high inventory holding period, the Group  runs an inherent risk of volatility in raw material prices. The Group  imports 79 percent of its raw material requirement i.e. rough diamonds and exports around 57 percent of its total sales. While the forex risk on exports is largely covered against imports, the price volatility risk in rough diamond threatens the thin profitability margins of the Group due to long working capital cycles.