Serving the rich in the West was thought to be the best protection against the vagaries of export business. And the rise and growth of Jatin Mehta-controlled Winsome Diamonds and Jewellery, previously Su-Raj Diamonds, only confirmed it. The company rode out of the global financial crisis of 2008 with elan, banking on the demand for gold and diamond jewellery from overseas.
But the fortunes of the jewellery maker came crashing down in March this year amid the crash in gold prices, the only hedge against inflation. Gold prices fell from $ 1,597 per troy ounce to $1,476, an almost 7.6 per cent drop in a matter of four weeks in April.
With almost all its business transacted overseas, Winsome's exposure to currency volatility and gold prices had always been high. As the prices crashed, its liquidity came under severe pressure and, for the first time, the company failed to pay its installment to bullion banks-foreign banks that sold gold to Winsome. These banks were selling gold to winsome against guarantees by a clutch of Indian public sector banks. A consortium of lenders, including Punjab National Bank and Canara Bank, had issued letters of credit to Winsome for buying gold. However, after the company failed to pay the bullion lenders, they invoked all the guarantees, ballooning the company's debt 10 times to Rs 4,000 crore.
The inkling of challenges ahead for the company first became visible in the annual report for 2011-12. Its overall profitability dropped that year (FY'12), though turnover grew on rising gold prices and the falling rupee. In its guidance for the next year too, the company was muted and did not project any significant growth.
It did try to mitigate risks through long-term arrangement for regular supplies of diamonds. It imported gold mainly on an unfixed-price basis. The price is fixed subsequently on a back-to-back basis with overseas customers to mitigate risks. However, delay in payments by some of these customers triggered the crisis for the company.
Winsome had executed gold loan agreements with bullion banks from whom it regularly procured gold. The agreements contained an enabling provision to recall all outstanding loans in the event of a default. So, while foreign banks saved themselves with the money that flowed from the guarantees that they invoked, Indian banks resorted to giving a lifeline to Winsome by restructuring its loans. A proposal in this regard has been referred to the corporate debt restructuring cell. The company has pitched for a moratorium period of three years (from April 2013 till March 2016).
|Winsome's financial performance in nutshell|
|Total income||4,386 cr||5,598 cr||7,164 cr|
|Profit after Tax||111 cr||95.75 cr||(33.50 cr)#|
|Net Profit Margin||2.55%||1.71%||-0.46%|
· Unaudited and the company has got nod to extend FY13 till September 2013 (making it 18-month financial year)
# - loss
Source = CDR document
It has also asked for relief in the form of lower interest rate. Currently, banks are charging 11 to 13 per cent on working capital facility. It wants the rate reduced to 10.5 per cent. As part of the restructuring, Winsome's liabilities, essentially working capital loan amounting to approximately Rs 3,244 crore, will be converted into working capital term loan. The repayment is to be done over 28 quarterly installments after a moratorium of three years commencing from June 2016. The promoters of the company have also agreed to bring Rs 560 crore over five years from their personal wealth.
Referring to the proposed debt recast package, a top executive of a public sector bank says, "We are not going soft and we will have control through nominee directors. Winsome's debtors (in Dubai) have admitted liabilities and have given in writing to pay the dues."
Meanwhile, operations at Winsome's group company Forever Precious Jewellery and Diamond is also at a standstill and the company is in the process of being referred for corporate debt restructuring. Forever has a liability of Rs 1,750 crore.
However, Winsome's biggest challenge will be to regain the trust and goodwill lost as a result of the default. The company has already worked out a blueprint for the medium term to regain its lost credibility. A three-pronged strategy has been devised to lower its working capital limits.
First, while sticking to its mainstay - gold jewellery - the company has now decided to concentrate more on manufacturing. This means customers will provide gold and Winsome will turn it into jewellery. At present, it has the manufacturing contract for Tanishq, the jewellery brand from of Tata-controlled Titan Industries.
Second, it will continue to manufacture jewellery for customers based in West Asia. On the face of it, the move seems counter-intuitive as the company burnt its fingers by working with these very clients. "We cannot suspend supplies all of sudden", says Ramesh Parikh, director (finance). Also, it is in Winsome's interest not to snap ties with them as they owe money to the company. Winsome has decided to continue working for these customers and use the money from them to repay its loans. The lenders, in turn, have agreed to restore the company's credit limit by an equal amount.
The third and the most crucial part of the revival plan is to revive its flagging diamond business. "We will be focusing on diamond cutting and polishing in a big way and that will help us see through this difficult phase. Diamond cutting will go up to 60 to 70 per cent in four years", says Parikh. The company will look at sourcing lab-grown diamonds (a synthetic diamond) for this business. Since the diamond business offers higher margins, it will be the key in ensuring Winsome meets its debt repayment plans.