CRISIL Limited has downgraded its long term and short terms ratings to the bank loan facilities of PC Jeweller Ltd to CRISIL D. As per the Rating Rationale "the downgrade in the rating factors in the instances of devolvement of Letter of Credits (LC) and overutilization in working capital limits for more than 30 days. The same is reflective of the fact that the liquidity profile of the group has deteriorated in past few months on account of cash flow mismatches. The ratings reflect instances of LC devolvement and overutilization in working capital limits, large working capital requirement and the risk of unfavourable regulatory changes. These weaknesses are partially offset by PCJ group's strong market position in manufacturing and retailing gold and diamond jewellery and the above-average capital structure."

The Company however clarifies that Indian jewellery demand during Q2 at 101.6 tonnes was almost a third lower Y-0-Y due to weaker consumer sentiments and there was a decline of nearly 51% in Indian bullion imports on Q-o-Q basis. The overall jewellery demand suffered primarily due to the following reasons:

Sudden Price Surge - The gold prices rallied during the quarter ended September, 2019 and breached Rs. 35,0001l0g level in mid of July, 2019 and continued climbing to Rs. 38,795110g by the end of August, 2019 before reaching an all-time high of Rs. 39,01111Og during the first week of September, 2019. The two month leap of - Rs, 5,000 / 10g from Rs. 34,006 / 10g at the end of June, 2019 caught consumers completely off guard, prompting many to delay buying. Despite a correction in the final few weeks of the quarter, due to the decrease in the international gold price and a strengthening rupee, the impact on demand was muted as it coincided with Pitru-Paksha, an inauspicious 16 lunar day period during which Hindus pay homage to their ancestors.

Customs Duty - Demand was further dented by a 2.5% rise in the customs duty on gold to 12.5%. This higher rate hit sentiments amongst both the gold trade and consumers, and fresh jewellery purchases suffered as a result. Consumers preferred gold-to-gold exchanges, which increased to an average of 50-60% of purchases. Weak Sentiment - Consumers confidence fell further over concerns around the slowing economy. Weak sentiments. due to a liquidity crunch, excessive monsoon rains in some states and the absence of any festivals, also influenced demand during the quarter. The situation has however, changed with the onset of festive season from October, 2019 onwards.

The cash flows have started and the Company by the end of November, 2019 has adjusted 90% of the devolved SBLCs. There is no further invocation of any SBLC. The Company also clarifies that there was no increase in the absolute amount of working capital limits even after SBLC invocations and there was only an intra facility exposure mismatch. There is no increase in the bank borrowing of the Company and there is actually a decline of Rs. 248 crores between March 1, 2019 and September 30, 2019.

The Promoter of the Company has infused Rs. 215 crores of his personal funds in the Company to improve its NWC. These funds are non-interest bearing and though the same are currently classified as unsecured loan and taken as liabilities, they will be converted in due course into equity or equity like instrument subject to receipt of necessary approvals and compliance with applicable laws and will further improve the net worth of the Company.

The financials of the Company as on September 30, 2019 shows that the Company has a healthy CR and TOL / TNW. The Company's debt service coverage ratio (EBIT/Intt) for the half year ending September 30, 2019 is also positive.