JAY JAY MILLS (INDIA) PRIVATE LIMITED

Ratings JAY JAY MILLS (INDIA) PRIVATE LIMITED Facilities Amount (Rs. Crore) Ratings 1 Remarks Long-term Bank Facilities 114.30 (reduced from 118.05) CARE BBB (Triple B) Short-term Bank Facilities 50.00 CARE A3 (A Three) Total Facilities 164.30 Revised from CARE BBB- [Triple B Minus] Reaffirmed Rating Rationale The revision in the long-term rating of Jay Jay Mills (India) Private Limited (JJ) factors in consistent improvement in operational performance of the company for the past three years ended March 2013 backed by continuous improvement in performance of its wholly-owned subsidiaries, successful completion of the expansion project and reduced client concentration risk. The ratings also favourably consider JJ s presence in the niche segment of children-wear, its established relationships with leading brands and retailers in the garment export market and good order book position. The ratings also take note of the improved performance of JJ during the eight months ended November 2013. The ratings are, however, constrained by the increased debt levels of JJ, owing to completion of capital expenditure during FY13 (refers to the period April 1 to March 31) and high geographical concentration risk with major share of revenue derived from USA. The ratings also take into account the continued exposure of JJ to its wholly-owned subsidiaries, which is considerable in relation to the networth of the company. Going forward, the ability of JJ to leverage on its expanded capacities, improve its capital structure and reduce exposure to its subsidiaries will be the key rating sensitivities. Background Incorporated in 1999, JJ is a textile company promoted by Mr M. Balasubramaniyam. As on March 31, 2013, each of his three sons, Mr B. Jaichand, Mr B. Srikumar and Mr B. Karthik hold 33.33% stake in JJ. The day-to-day operations of JJ (India) are managed by Mr B. Jaichand, while the wholly-owned subsidiaries in Sri Lanka and Bangladesh are actively managed by Mr B. Srikumar and Mr B. Karthik respectively. JJ manufactures readymade garments (RMG) for new-born, infants and toddlers from its facilities situated at Tiruppur and Perundurai in Tamilnadu, with in-house capabilities for undertaking knitting, dyeing, fabric printing, embroidery, cutting & sewing and finishing. The company s RMG is marketed in the American and European Union (EU) regions and JJ also sells fabric exclusively to its wholly-owned subsidiaries situated in Sri Lanka and Bangladesh. These subsidiaries are also engaged in the manufacture and export of RMG for clients in USA and EU markets. Credit Risk Assessment Presence in niche children-wear segment and established relationship with reputed clients JJ specialises in the manufacture and export of Ready-Made Garments (RMG) like bodysuits, sleepsuits, blankets, thermal wear etc., (can be categorised as children-wear) for new-born/infants and toddlers. The presence in niche children-wear segment has to an extent insulated the company from weak global economic scenario in the past years. JJ exports almost 100% of its manufactured products to reputed international companies having strong presence in USA and Europe markets. Besides, the company also caters to the requirements of large retail chains in these markets. JJ has been able to report y-o-y increase in RMG sales in the past years, on account of its long-term cordial relationship with its overseas customers, most of who have been with JJ since 2003. Such long relationships signify high level quality standards adhered and timely delivery met by JJ. 1 Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications 1

Track record of profitable operations with consistent improvement in operational performance for the past three years JJ has had a stable operational track record with continuous growth in sales and consistent profits over the past decade. The company has been able to maintain PBILDT margins at around 11% and PAT margins at around 2% - 3% over the past years from FY10 to FY13. PBILDT margin has been relatively stable except during FY12 when the company saw a higher PBILDT margin at 17% due to favourable yarn price movements and currency fluctuations. JJ has been able to report such stable margins on account of its presence in a niche segment (children-wear), which to an extent has been impervious to the economic slowdown. In FY13, JJ reported a growth of 20% in total income to Rs.309 crore (Rs.258 crore for FY12). Sale of ready-made garments continued to be the major revenue driver contributing to 56% of JJ s gross sales in FY13. JJ also manufactures and exports fabric to its wholly owned subsidiaries (WOS) in Sri Lanka and Bangladesh, which contributed to nearly 44% of gross sales of JJ in FY13. It is to be noted that the subsidiaries entire fabric requirement is sourced from the parent company. JJ s fabric sales to its WOS registered a growth of 12% and 25%, in volume and value terms respectively in FY13 on account of increased scale of operations of Bangladesh subsidiary and depreciation of Rupee. For FY13, the group on a consolidated basis (consisting of JJ and its two wholly-owned subsidiaries) reported a PAT of Rs.29 crore (Rs.21 crore for FY12) on a total income of Rs.564 crore (Rs.439 crore for FY12). For 8MFY14 (refers to the period April 1 to November 30), JJ achieved a total income of Rs.247 crore with PBILDT margin of 13.53% and PAT margin of 4.25%. Reduced customer concentration risk on account of diversification JJ has consciously diversified its customer profile in the past years and consequently, the share of top client in total income declined to 12% in FY13 from 41% in FY11. The share of top five customers has also declined to 41% of JJ s gross sales in FY13 as against 58% in FY12. Further, in order to reduce its dependence on the US market, JJ has started catering to other geographies like UK, Brazil, Sweden, France etc., thereby reducing business concentration risk from US market to 43% in FY13 from 48% in FY12. However, this risk still continues to be high considering the fact that JJ s wholly-owned subsidiaries also sell RMG primarily to the US and UK markets. On a consolidated basis, the US and UK markets together contributed to 86% of JJ s exports in FY13. Going forward, the ability of the company to further diversify and strengthen its presence in other markets will enable the company to reduce its geographic concentration risk. Increase in debt levels on account of debt funded project completed in FY13 The company completed the expansion project at SIPCOT, Perundurai in FY13 at a total cost of Rs.62 crore, which was funded by term debt of Rs.39 crore and internal accruals of Rs.23 crore. Major portion of the term debt for the expansion was drawn during FY13. The original estimated cost of the project was Rs.49 crore, to be funded by term debt of Rs.39 crore and internal accruals of Rs.10 crore. However, due to the delay in obtaining the No-Objection Certificate (NOC) from the Pollution Control Board, the project implementation was delayed by 12 months. On account of the delay in implementation, the project faced a cost overrun of Rs.13 crore which was funded by the company from its internal accruals. As on March 31, 2013, the long-term debt to equity of JJ stood at 1.35 times, while the overall gearing stood at 2.35 times. The overall long-term debt to equity and gearing of the JJ group (consisting of JJ and its two wholly-owned subsidiaries) stood at 1.19 times and 2.29 times respectively as on March 31, 2013. Continuing exposure to group companies During FY13, there were no additional investments made by JJ in its two wholly-owned subsidiaries (WOS). As on March 31, 2013, the total investment in these subsidiaries remained at Rs.11.54 crore (Rs.2.4 crore in the Sri Lankan subsidiary and Rs.9.14 crore in the Bangladesh subsidiary). These WOS are strategic investments in nature, as these entities provide synergies of operations (by way of exclusively sourcing fabric from the parent) and yield additional revenue in form of fabric sale. Moreover, the operational costs in both these entities are lesser than the operational costs in India. Besides the normal course of business operations, JJ has also extended corporate guarantees on behalf of the WOS for the bank facilities sanctioned to these WOS. During the year, the Sri Lankan subsidiary repaid the balance term loan and thereby JJ s 2

corporate guarantee was released. However, as on September 30, 2013, the amount of corporate guarantee extended on behalf of Bangladesh WOS, stood at USD 5.96 Million for term loans sanctioned and at USD 5 Million for working capital facilities. Successful completion of expansion projects in FY13 JJ had started capacity expansion programme in its SIPCOT, Perundurai facility in FY11, to increase the knitting capacity from 10 tonnes per day to 18 tonnes per day and processing capacity from 8 tonnes per day to 24 tonnes per day. This project was successfully completed in FY13 and commercial operation has commenced in Q2FY14. Prospects Presence in the niche children-wear category and the continued demand for JJ s products from its principal markets such as the USA and the European Union would help the company in sustaining its growth in operating income. Further improving sales in new found geographies would help JJ to reduce the concentration risk. Ability to leverage expanded capacities, improve capital structure and prudent management of exposure to its subsidiaries will be key sensitivities to the financial prospects of the company. Financial Performance - Standalone (Rs. Crore) Y.E. March 31, 2011 2012 2013 (12m, A) (12m, A) (12m, A) Working Results Total Income 229 258 309 PBILDT 32 45 35 Interest 10 12 15 Depreciation 12 12 11 PBT 10 21 9 PAT (After def. Tax) 6 14 6 Gross Cash Accruals 20 26 18 Financial Position Equity Share capital 1 1 1 Net Worth 29 44 62 Total Debt 113 79 146 Key Ratios Growth Growth in Total income (%) 14.66 12.96 19.57 Growth in PBILDT (%) 38.38 41.54-22.67 Profitability (%) PBILDT / Total Income (%) 13.91 17.42 11.27 PAT / Total Income (%) 2.83 5.41 2.05 ROCE (%) 14.98 23.15 14.08 RONW (%) 17.63 29.11 10.78 Solvency Long-term Debt Equity (times) 1.49 1.05 1.35 Overall Gearing (times) 2.77 1.42 2.35 Interest Coverage (times) 3.03 3.70 2.34 Term Debt/Gross Cash Accruals(years) 2.92 2.07 4.44 Total Debt/Gross Cash Accruals (years) 5.57 2.85 7.89 Liquidity Current ratio (times) 1.13 1.67 1.17 3

Y.E. March 31, 2011 2012 2013 (12m, A) (12m, A) (12m, A) Quick ratio (times) 0.68 1.21 0.83 Turnover Average collection period (days) 45 38 40 Average inventory period (days) 43 40 31 Average creditors period (days) 21 18 17 Operating cycle (days) 68 60 54 A-Audited; Analyst Contact Name: P Sudhakar Tel: 044-2849 7812 Mobile: +91-94422 28580 Email: p.sudhakar@careratings.com (This follows our brief rational for entity published on 04 February, 2014) DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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