The credit rating of Uvelit JSC (hereinafter, Uvelit, or the Company) has been upgraded in view of better scores for geographic diversification on the back of the expanding retail chain, for FCF margin, and for the leverage and liquidity metrics due to improved debt structure in terms of maturities.
In ACRA’s opinion, the Company’s operational risk profile is still medium, which reflects, on the one side, its leading positions on the Russian jewelry market, flexible production model, and a sufficiently high product diversification, and, on the other side, a high pro-cyclicality of demand for Uvelit's products, and the medium level of corporate governance. Among the Company’s financial risk profile factors, the Agency notes the medium business size, high profitability, medium leverage, and medium coverage of fixed charges and interest payments.
Uvelit is one of the Russian largest jewelry companies operating under the SOKOLOV brand. The Company sells its products through both wholesale channels and its own retail chain that included over 447 stores as of September 30, 2023.
Uvelit is the key company of a Group, with over 80% of the consolidated revenue for H1 2023; therefore, in its rating analysis of financial and operational metrics, ACRA used the consolidated reports of the Welvart Holding AG Group.
Key assessment factors
The medium assessment of the operational risk profile. Since the previous rating action, the Company's revenue structure has not changed: in 2023, over 65% of revenue came from the sale of gold jewelry, and the rest came from the sale of watches and silver jewelry. Production processes have not undergone significant changes and remain quite flexible, which allows the Company to quickly refocus on more marginal and in-demand groups of goods. Uvelit continues to actively develop its own retail chain: in the first nine months of 2023, the Company opened more than 100 new outlets, and the total size of the chain reached 447 stores in 57 regions. Taking into account the expansion of the chain while maintaining concentration on regions with a high level of solvent demand, the Agency improved the score for the geographical diversification of the Company, which was one of the reasons for the upgrade on its credit rating. Uvelit continues to use other sales channels like e-commerce and wholesale. ACRA still considers the jewelry market to be pro-cyclical, which can lead to fluctuations in demand and prices depending on the current economic cycle. The corporate governance factor has not changed significantly and is assessed by the Agency at a medium level. Since 2022, Uvelit discloses the Group’s IFRS reports, which is positive for the financial transparency score. The Group’s auditor is Technologies of Trust — Audit JSC.
High profitability and medium business size. In 2022, the Company showed the revenue dynamics that corresponded to the Agency’s forecasts, and its revenue amounted to RUB 27 bln. In 2023, according to ACRA’s estimates, this indicator may increase by 45% and reach RUB 38–40 bln. However, in the period from 2024 to 2026, the Agency expects more restrained annual revenue growth rates at 15–20%. According to ACRA’s calculations, the Company’s FFO before net interest and taxes may amount to RUB 6.6 bln this year, which corresponds to the medium score for the business size as per ACRA’s methodology. By the end of 2023, the FFO before net interest and taxes margin may equal 17%, which is assessed by the Agency as high.
Medium leverage and medium coverage of fixed charges and interest payments. ACRA is of the opinion that after a sharp decline in 2022, the Company’s leverage metrics will stabilize by the end of 2023. Given a significant share of rent in the Company’s costs, in its analysis of leverage, the Agency calculated relevant indicators both with and without capitalized lease debt. The ratio of rent-adjusted total debt to FFO before fixed charges may amount to 3.9x, and the ratio of total debt to FFO before net interest may equal 2.3x, which is generally consistent with the 2022 indicators and is assessed by the Agency as medium. Against the background of further growth of the Company’s business, ACRA assumes that the leverage may tend to decline in the absence of large investments and aggressive dividend payments. The Agency notes the improvement of the qualitative assessment of the leverage in view of longer-term bond market borrowings and bank loans. In addition, the increase in the share of debt with a fixed interest rate allowed the Company to reduce the negative effect of the key rate hikes in 2023, but it was not possible to completely neutralize its impact on the coverage of interest payments. ACRA expects a decrease in the ratio of FFO before fixed charges to fixed charges from 2.2x in 2022 to 2.1x in 2023, while the ratio of FFO before net interest to interest will decrease from 5.7x in 2022 to 4.5x by the end of this year. This corresponds to the medium level of coverage of fixed charges and interest payments.
Scores for liquidity and FCF improved. In 2022, the Company’s FCF became positive in line with ACRA’s expectations, and the FCF margin significantly exceeded the level forecasted by the Agency and reached 16%. ACRA is still of the opinion that against the background of increased capital expenses and the maintenance of the current dividend policy, the Company’s FCF may return to negative values in 2023, and reach a stable positive level not earlier than by 2025–2026. At the same time, the weighted average FCF margin for the period from 2021 to 2026, according to ACRA’s calculations, amounted to 0.5%, which resulted in a better score for this factor and was one of the reasons for the upgrade of the Company’s rating.
A negative FCF can put some pressure on the Company's liquidity assessment in 2023. However, the changes described above in the structure of the debt portfolio have led to a fairly smooth debt repayment schedule, while growing cash balances and committed credit lines may allow the Company to pass the repayments in 2023–2026 more confidently. All these facts have been reflected in a higher score for liquidity.
Key assumptions
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The annual average revenue growth at 15–20% in 2024–2026.
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The FFO before net interest and tax margin within 17–20%.
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Capex program being implemented as planned.
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Dividend payouts of 90% of FFO.
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Access to external sources of liquidity.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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The weighted average ratio of adjusted total debt to FFO before fixed charges declining below 1.0x and the weighted average ratio of total debt to FFO before net interest declining below 1.0x;
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The weighted average ratio of FFO before fixed charges to fixed charges exceeding 5.0x and the weighted average ratio of FFO before net interest to interest exceeding 10.0x;
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The weighted average FCF margin exceeding 5%.
A negative rating action may be prompted by:
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The weighted average ratio of adjusted total debt to FFO before fixed charges exceeding 4.0x or the weighted average ratio of total debt to FFO before net interest exceeding 3.5x;
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The weighted average ratio of FFO before fixed charges to fixed charges declining below 1.5x or the weighted average ratio of FFO before net interest to interest declining below 2.5x;
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The FFO before net interest and tax margin declining below 15%;
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Deterioration in the access to external sources of liquidity.
Rating components
Standalone creditworthiness assessment (SCA): a-.
Support: no.
Issue ratings
Bond of Uvelit JSC, series 001P-01 (RU000A105PK0), maturity date: December 23, 2025, issue volume: RUB 3 bln — А-(RU).
Credit rating rationale. The issue represents senior unsecured debt of Uvelit JSC. The Issuer is the main operational company of the Group. In assigning the recovery rates, ACRA has taken into account the presence of secured debt. According to ACRA's calculations, the issue belongs to recovery category II. Therefore, as per ACRA’s methodology, the credit rating of the issue is on par with that of the Group, i.e. A-(RU).
Regulatory disclosure
The credit ratings of Uvelit JSC and the bond of Uvelit JSC (RU000A105PK0) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit rating to the above bond issue.
The credit ratings of Uvelit JSC and the bond of Uvelit JSC (RU000A105PK0) were published by ACRA for the first time on November 23, 2022 and December 27, 2022, respectively. The credit rating of Uvelit JSC and its outlook and the credit rating of the bond of Uvelit JSC (RU000A105PK0) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on the data provided by Uvelit JSC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and Uvelit JSC participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Uvelit JSC. No conflicts of interest were identified in the course of credit rating assignment.
