Farida Shoes Private Limited

RATING HISTORY Amount Outstanding in Rs. million Maturity date Rating Outstanding March 2009 LBB+ A4+ A4+ A4+ Previous Ratings

Rs. 302.1 million term loans Rs. 455 million fund based limits Rs. 205 million nonfund based limits Rs. 90 million standby limits ICRA has assigned an LBB+ (pronounced L double B plus) rating to the Rs. 302.1 million rupee term loan facilities of Farida Shoes Private Limited (FSPL). The rating indicates inadequate credit quality.The sign of plus (+) appended to the rating symbol indicates its relatively stronger position within the rating category concerned. ICRA has also assigned an A4+ (pronounced A four) rating to the Rs. 455 million fund based short-term limits, the Rs. 205 million non-fund based limits and the Rs. 90 million standby limits of FSPL, indicating risk prone credit quality rating to the short term debt instrument. The sign of plus (+) appended to the rating symbol indicates its relatively stronger position within the rating category concerned. The ratings assigned are constrained by the current financial risk profile of the company characterised by high gearing levels, weak coverage indicators, low profit margins, weak free cash flows and high working capital intensity due to a long cash conversion cycle; and, exposure to forex risk by virtue of being a major exporter. However, the ratings also For complete rating scale and definitions, please refer to ICRAs website www.icra.in or other ICRA Rating Publications

factor in the long track record of FSPL in leather footwear export business; association with strong brands such as Deichmann, Debenheim, Heinrich and Marks & Spencer through outsourcing; and adequate systems in place to control and optimise its operations. The Indian leather export industry is estimated at US$3.5 billion, with leather footwear exports accounting for 42% of the total revenues. India is the second largest footwear manufacturer in the world after China and accounts for 14% of global footwear production of 14.5 billion pairs. India produces 2 billion pairs of different categories of footwear and exports 115 million pairs. Its major export destinations include European Union and the United States of America, which together account for 90% of its total footwear exports. The domestic leather and footwear market is, however, highly fragmented with a large number of small unorganised players. The unorganised sector accounts for over 75% of the production and 65% of the turnover of the industry; and continues to be a major source of competition for organised manufacturers. India faces significant competition from China, which is the largest footwear exporter to all key geographies. The competitiveness of Chinese footwear exporters stems from economies of

scale, favourable currency regime and high productivity of labour. The European Commission imposed an anti-dumping duty on imported footwear from China in October 2006. Nonetheless, China continues to pose a threat to Indian footwear exporters. FSPL procures various components such as shoe uppers, soles, insoles and lining material; assembles footwear and exports to key markets. These export markets contribute to 95% of its total revenues. The overseas business is split into two seasons: Spring & Summer and Autumn & Winter. Autumn/Winter shipments are effected during December-April and Spring/Summer shipments are during June-October. In addition, FSPL handles orders during the festival (Christmas/ New Year) season in November and December. The overseas customers send samples to FSPL based on existing market trends, fashions and seasons. The process starts normally four to six months before the commencement of each season. The orders are finalised along with the payment terms. The company starts the procurement of raw materials upon confirmation of orders from its customers. The association with major brands such as Deichmann, Marks & Spencer, Debenheim and

Heinrich results in low revenues risk for FSPL. The leather industry is labourintensive and operating margins (of 4.6% for FY2008) tend to be weak due to high raw material costs, packaging costs, and manufacturing costs. The net margins at 0.7% are low for FSPL due to its high interest expense. Its RoCE and RoNW (of 11.6% and 6.9%, respectively, in FY 2008) remain at moderate levels, thus reflecting the high capital intensity and low profitability of the industry. FSPL has a high working capital intensity emanating from its long working capital cycle. FSPL extends 30 days of open credit to 70% of its customers; 45-90 days of open credit to 20% of its customers; and insists on L/C sales for the balance 10% of its customers. FSPL is extended open credit for 60 days by 5% of its customers; however, 95% of its procurement has to backed by L/Cs. High working capital requirements to support growth and stretched cash conversion cycle have resulted in high gearing levels (of 3.2 times in KEY FINANCIALS

FY2008) and subdued cashflows for FSPL. The utilisation of working capital facilities has remained high for FSPL, indicating its tight liquidity position. Going forward, the sales of FSPL may drop in FY 2010 owing to the slowdown in leather footwear export industry together on the account of macroeconomic conditions. Neverthless, ICRA expects the revenues to grow at a CAGR of 4%-5% in the period from FY2009 to FY2013. The operating margins and coverage indicators are expected to remain weak in the near term. Despite the availability of various fiscal incentives, leather footwear exporters continue to be affected by the ongoing macroeconomic slowdown as volume off-take by customers has reduced. The buyers are delaying placing of the orders with footwear manufacturers to ensure the retail off-take before committing the volumes, thereby affecting the capacity utilisation of footwear manufacturers. In addition to the drop in demand, competition from Chinese manufacturers remains a key challenge.

Company Profile Farida Shoes Private Limited (FSPL), the flagship company of the Farida Group, was incorporated on September 24, 1976 to manufacture full shoes. FSPL has manufacturing facilities with a current production capacity of 12,000 pairs/day at Ambur, Vellore District, Tamil Nadu. Promoted by Mr. Rafeeque Ahmed and his family, M/s Farida Holdings Private Limited is the single largest stakeholder of FSPL. The Farida group has over 35 years of experience in the leather footwear export business. The closely held Group concerns achieved sales revenues of around Rs. 6700 million in FY 2008. The group companies are closely managed by the Chairman, Mr. Rafeeque Ahmed and his sons.

August 2009

Amount in Rs. Million Dec-08^ Operating Income 1505.80 OPBDIT 61.10 Profit After Tax (PAT) 28.2 Equity Capital Net Worth PAT/Operating Income % 1.87% Profit before Interest and Tax/ % avg(Total Debt + Net Worth + DTL) OPBDIT/Interest & Financial (times) 1.07 Charges Net Cash Accruals/Total Debt % Total Debt/Net Worth (times) Total Debt/OPBDITA (times) NWC/OI (times) Note: ^ are Financial results for the FY2009 till December 2008. Source: Companys Annual Reports

Mar-08 2044.22 94.74 14.04 4.99 206.61 0.69% 11.62% 1.37 6% 3.25 7.10 0.25

Mar-07 2013.35 81.87 13.20 4.99 199.17 0.66% 10.64% 2.04 8% 2.78 6.75 0.23

Mar-06 1964.57 43.74 13.64 4.99 187.15 0.69% 10.95% 1.98 7% 1.23 5.26 0.14

For further details please contact: Analyst Contacts: Mr.K. Ravichandran, (Tel. No. +91-44-24333293-94) ravichandran@icraindia.com Relationship Contacts Mr. Jayanta Chatterjee, (Tel. No. +91-9845022459) jayantac@icraindia.com Copyright, 2009, ICRA Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA
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