Rationale

The ratings upgrade for Novel Jewels Limited (NJL) primarily considers commencement of the company’s operations from July 2024 with a clearly laid out branding and differentiation strategy, its plans for an accelerated ramp-up in store count and operations along with commensurate changes in the Aditya Birla Group’s (ABG/Group) capital infusion plan to frontload the equity infusion. Demonstrated equity infusion by the Group so far, in line with the funding plan, has also been considered as one of the key factors for the ratings upgrade. NJL commenced jewellery retail operations by opening its first few stores in July 2024 and launched its jewellery brand ‘Indriya’ in the same month. Since then, the company has opened stores in multiple cities across various states and its store count is expected to reach more than 20 by the end of FY2025. The company has revised its business plan to step up store expansion from FY2026, primarily through a faster adoption of the franchisee model. The capex for all types of franchisee stores and the inventory for franchisee owned, company operated (FOCO) stores will be funded by the business partners. This will result in lower funding requirement per store for future expansion. Nevertheless, the overall gross margin and the operating margin will be lower due to margin sharing with the franchisees. The Group has infused an additional capital of Rs. 1,000 crore in the current fiscal, taking the total equity capital to Rs. 1,274 crore, which is in line with the targeted equity infusion till March 2025. Significant marketing and brand building expenses coupled with other store-level fixed expenses would keep NJL’s operating profitability in the negative territory in the initial years. However, the Group’s plan to prepone the proposed capital infusion in alignment with the acceleration in the store count, as per the revised business plan, is likely to support NJL’s liquidity and capital structure. The ratings continue to factor in the company’s strong parentage for being a part of the ABG along with its strong managerial, operational and financial linkages with the Group. NJL was incorporated in FY2023 by ABG to enter the domestic jewellery retailing industry and set up a pan-India jewellery brand, while benefitting from the industry tailwinds of accelerated formalisation, leveraging the strong brand recall of the Group among Indian consumers and the Group’s experience in domestic retail. Accordingly, ABG plans to invest ~Rs. 5,000 crore in NJL, in a phased manner, over five years from FY2024. The ratings also factor in the Group’s willingness to support NJL through regular equity infusion over the near-to-medium term to fund the latter’s initial operational losses and debt servicing obligations owing to NJL’s strategic importance to the Group’s business diversification plans and reputation. The ratings also derive comfort from the strong leadership team of NJL, comprising senior leadership of ABG and other senior executives with experience in the jewellery and other consumer-oriented industries, which is expected to aid in execution of the business plan. NJL’s geographical concentration risks will remain limited, given its planned expansion across the country. Moreover, its policy to hedge the entire gold inventory and an expected high share of studded jewellery (more than 25%) are likely to result in a stable and healthy gross margin. The ratings are, however, constrained by the execution risks, including profitable scale-up of stores in a timely manner. Being a new entrant in the industry, the company faces intense competition from larger national and regional players. NJL needs to invest significantly in establishing its brand among jewellery consumers while also differentiating itself from the competitors. Moreover, entities in the jewellery industry are exposed to regulatory risks, which could impact demand/supply conditions. The Stable outlook on the long-term rating reflects ICRA’s expectations that NJL will be able to ramp up its revenues significantly over the medium term, driven by its extensive marketing initiatives and plans to accelerate store count. Besides, ABG will support NJL through regular capital infusion to fund its initial operational losses along with a part of the working capital requirement and meet its debt service obligation. NJL’s exceptional financial flexibility for being a part of the ABG would also support its credit profile.