Press Release Lava International Limited - …

1 1 CARE Ratings Limited Press Release Lava International Limited February 26, 2018 Ratings Facilities Amount (Rs. crore) Rating1 Rating Action Long term Bank Facilities (enhanced from crore) CARE A; Stable (Single A; Outlook: Stable) Reaffirmed Short term Bank Facilities CARE A1 (A one) Reaffirmed Total Facilities (Rs. One thousand two hundred ninety nine crore and fifty five lakhs only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Lava International Limited (Lava) continue to derive strength from experienced promoters and management team, wide distribution network, comfortable financial risk profile as reflected by its capital structure and liquidity position.

2 The ratings also take into account the support from GOI for local manufacturing of mobiles as reflected by increase in Basic Custom Duty on import of mobiles from 10% to 20% during H2FY18. These rating strengths are, however, partially offset by intense competition in the mobile handset industry, which has, impacted the sales of the company during FY17 and H1FY18 besides announcement of demonetization and implementation of GST, inherent risks related to the nature of business operations which include reliance on third-party suppliers for products/services and its susceptibility to foreign exchange fluctuation risk.

3 Going forward, profitable scale-up of operations with efficient working capital management and adapting to changing consumer preferences and technological evolutions shall be the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Experienced promoters and management team Lava was promoted by Mr. Hari Om Rai, Mr. Shailendra Nath Rai, Sehgal and Mr. Sunil Bhalla. Mr. Hari Om Rai, Chairman and MD of the company is co-chairing the task force for Make in India program of the Government of India. All the promoters are part of the Board of Directors of the company and have background in engineering and management studies with wide experience in varied fields.

4 Mr. Shailendra Nath Rai is a leading professional in Supply Chain Management, Mr. Sunil Bhalla, is a Mechanical engineer & an MBA from IMT, he has worked with Maruti Udyog Limited in the past and is the founder of Luminous Power and Mr. Vishal Sehgal who has experience of more than 18 years in telecom & FMCG industry. The board is ably supported by a team of highly qualified and experienced people from telecom and consumer durable industry. Wide distribution network Lava has a well-established single-layer distribution model and support-service network of 1,110+ distributors, who further distribute products to 100,000+ retailers and micro-distributors across India along with 42 Carrying & Forwarding agents providing sales and distribution support.

5 Lava s complete automated inventory and distributor monitoring, including online tracking of each product from shipping till activation stage, has resulted in a more demand-driven production, controlled inventory levels and healthy relationship with distributors. The company has its entire network 1 Complete definition of the ratings assigned are available at and other CARE publications 2 CARE Ratings Limited Press Release operations on SAP platform since the beginning.

6 Due to strong distribution channel, feedback about the models reaches to R&D team fast, helping them with adapting to designing and technology trend. Lava has R&D team of 700+ engineers based at China. The company also launched its operations in Africa in FY17 by entering the Egyptian market and intends to further expand its reach in 12 countries across the African continent. The company has however rationalised its distribution network during the last year and also launched project Vistaar , placing its employees at the retail outlets in order to push the sales as against relying primarily on the distributors in view of the increased competition.

7 Mahendra Singh Dhoni continues to be the brand ambassador of the LAVA brand. The company has also tied up with various mobile service providers and is offering bundled products. Lava also launched 30 day money back scheme on its high end Z series phone. Also the company in order to compete with the Chinese players and create a distinct image is offering 2-year warranty for all its major models in its product portfolio (mobile phones) in India, across smartphones and feature phones. Comfortable financial risk profile The financial risk profile of the company is marked by comfortable capital structure and liquidity position albeit increasing operating cycle.

8 Given the change in the company s business model from that of outsourced manufacturing model to own assembling and manufacturing model, the company s term debt has increased over the last 2 financial years. However, the overall gearing (including net creditors) of the company reduced to times as on March 31, 2017 (as against times as on March 31, 2016) owing to lower utilisation of Non-Fund based limits due to curtailed operations in H2FY17. Further, Lava has raised additional capital in December 2017 upon conclusion of a USD 30 million ( Crore) preferential investment from a Chinese investor, Tsinghua Unigroup.

9 The company had also signed a deal for preferential allotment of cr to Benett Coleman Company Ltd in Sept-17. This has resulted in improved capital structure and liquidity position. The liquidity position has been further supported with the company receiving Cr. (from February - April 2017) from Custom Department towards refund of excess CVD paid in FY15 and FY16. As on December 31, 2017, the company had free cash and bank balance (including Mutual Fund investments) of crore. The operating cycle however increased to 41 days during FY17 from 23 days in FY16 on account of increase in inventory period to 61 days during FY17 from 47 days in FY16.

10 Also, the average collection period has increased during the period as the company has been extending higher credit period to some of its channel partners so as to push the sales. Change in Govt. Policies to incentivize manufacturing including recent hike in Basic Custom Duty The Govt. of India (GOI) has increased the Basic Custom Duty (BCD) on import of electronic goods including mobile phones during FY18 in order to encourage local manufacturing. The Custom Duty on mobile phones has been increased from 10% to 20% (5% each in December 2017 and February 2018 Budget announcement).