By Prasad Patil

India Ratings and Research (Ind-Ra) has affirmed the ratings of Shoppers Stop Limited’s (SSL) commercial paper (CP) and short-term debt/CP as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

-

0-365 days

INR250

IND A1+

Affirmed

Short-term debt/CP

-

-

0-365 days

INR250

IND A1+

Affirmed

There are no issuances under both the instruments. The CP has been carved out of SSL’s fund-based working capital limits. The short-term debt/CP programme issue is to be internally earmarked by SSL against fund-based working capital limits, as per the undertaking given by the company.

Analytical Approach: Ind-Ra continues to take a consolidated view of SSL and its wholly owned subsidiaries - Crossword Bookstores Limited; Shoppers’ Stop Services (India) Limited; Upasna Trading Limited; Shoppers’ Stop.com (India) Limited; Gateway Multichannel Retail (India) Limited - on account of the strong legal and operational inter-linkages and a common promoter group.

KEY RATING DRIVERS

Established Brand Name; Omni-Channel Presence: SSL runs one of the largest departmental stores chains in India, with a country-wide presence. At FYE20, it had a network of 89 departmental, 11 HomeStop, 132 beauty and 41 Crossword stores, occupying an area of 4.5 million square feet across 44 cities in India. Through this wide network of stores, SSL offers products across categories such as apparels, fragrances, accessories, cosmetics, footwear, home décor and furnishings. SSL has positioned itself as a bridge to luxury retailers, with a focus on young middle-to-high income families. SSL has also worked to enhance its online presence through an e-commerce website and a mobile application. SSL's omni-channel presence has been bolstered by the company's association with Amazon.com Inc, which holds 5% stake in the company.

Continued Focus on Beauty Business; Private Labels and Customer Connect Initiatives:  SSL has been focusing on a) growing its beauty business; b) increasing the share of private labels in its offerings; c) boosting its Personal Shoppers programme; and d) strengthening its loyalty programme. The management expects the beauty segment, which contributed 16% to the company’s revenue in FY20, to grow faster than the rest of the business, backed by the combination of store additions and an enhanced brand portfolio. To ramp up the share  of private labels, SSL has formed a dedicated leadership team, taken various measures such as establishing a design studio and a testing lab, and has worked on revamping the product portfolio.  The company plans to boost its loyalty programmes - Personal Shoppers and First Citizen - through personalisation and customisation for members and by increasing awareness about the programme. SSL has strong brand loyalty, with more than seven million members in its loyalty programme, First Citizen, contributing about 82% to its revenue during FY20 (FY19: 76%). The contribution of members in the Personal Shoppers programme to the total revenue increased to 15.6% in FY20 (FY19: 13.6%). 

Deterioration in Financial Profile due to COVID-19 Outbreak; Recovery likely in FY22: SSL’s revenue declined 3% yoy to INR34,639 million in FY20 on account of a sharp decline of 2.5% in like-for-like (LFL) store growth. The overall LFL growth for the year was adversely affected by a decline of 16% in the same during 4QFY20, as COVID-19-related disruptions impacted the company's operations from the second half of March 2020, particularly by way of store closures due to the complete lockdown that was imposed to tackle the pandemic. The EBITDA (comparable- excluding the impact of the shift to Ind-AS 116 accounting standards) declined 28% yoy to INR1,761 million during FY20 owing to lower absorption of fixed costs and inventory write-offs during 4QFY20. The net adjusted leverage (adjusted net debt/EBITDAR) deteriorated to 4.9x in FY20 (FY19: 4.4x) on account of the fall in profitability. However, the interest coverage (EBITDA/gross interest expense) improved to 23.1x in FY20 (FY19: 17.8x) due to lower interest expenses. In the absence of any major debt-led capex and strong cash flow generation, SSL's gross debt has been declining since FY17. The company turned net cash positive at INR8 million at FYE20. In FY18, SSL had taken several steps to deleverage its business, including the divestment of its stakes in Hypercity, Timezone Entertainment and the Nuance Group (duty-free airport retailing joint venture) and an equity infusion through a 5% stake sale to Amazon's investment arm, Amazon.com NV Investment Holdings LLC.

Ind-Ra believes the business disruptions from the lockdown and the resultant economic slowdown would have a greater impact on companies such as SSL that mainly operate through mall-based stores. Consequently, the company’s revenue is likely to decline by 30%-35% in FY21. During 1HFY21, the sales are likely to remain muted due to weak consumer confidence; reduced footfalls on the lingering fears of contracting COVID-19 amid the continuation of social distancing norms, and customers’ preference to prioritise essential commodities over discretionary spending amid a slowing economy. However, with the gradual releasing of the lockdown in the country, Ind-Ra expects the footfalls and sales to increase in the coming quarters. As per the management, about two-thirds of the company’s stores have resumed operations and the situation has been seeing a gradual improvement. SSL's focus on the e-commerce channel would continue to support its recovery, as consumers are likely to prefer digital sales until normalcy returns. 

The high operating leverage of the retail business would pressurise margins in FY21. The management believes its focus on significant cost cutting and reducing discretionary spends such as advertising, travelling and overheads, and renegotiation of rental expenses (from fixed to variable) could mitigate the impact on earnings, resulting in better margins once the business normalises. Ind-Ra expects SSL’s credit metrics to weaken in FY21 due to lower profitability. The extensions of lockdown or delays in business normalisation continue to pose major risks to the company’s performance. However, the measures undertaken by the management to defer discretionary capital expenditure, including muted new store openings, the absence of large external debt and the tight cost control would mitigate the adverse impact of the pandemic-related disruptions. The agency expects the business to stabilise from FY22, with the margins and credit metrics recovering to the FY20 levels.

Liquidity Indicator- Adequate: SSL’s average utilisation of the fund-based limits was only 35% over the 12 months ended June 2020. The cash flow from operations (CFO) was positive over FY17-FY20, but it fell to INR1,819 million in FY20 (FY19: INR1,920 million) due to lower profitability. The free cash flow deteriorated to a negative INR80 million in FY20 (FY19: INR704 million) due to the capex incurred towards store expansion and lower profitability. At end-March 2020 the company’s cash and cash equivalents stood at INR1,581 million, with negligible long-term debt repayments. SSL expects to cut its capex significantly to INR500 million in FY21 (FY20: INR1,819 million) to conserve cash.  The company has an availed additional term loan of INR1,500 million in 1HFY21 to further shore up the liquidity. SSL’s working capital cycle shortened to a comfortable 66 days in FY20 (FY19: 102 days) owing to an improvement in the inventory and payable days. During FY20, the company’s  receivables period  fell to around two days (FY19: four days), the inventory period declined to 121 days (142 days) and the payables period increased to close to 57 (44). Ind-Ra expects the company to have adequate internal accruals to meet the operating requirements. Post the normalisation of operations, Ind-Ra expects the free cash flows to be neutral-to-positive over the medium term on the back of sustained margins, a stable working capital cycle, moderate capex for store additions from internal accruals and modest dividend pay-outs.

In FY18, SSL divested its shareholding in Hypercity Retail (India) Limited to Future Retail Limited, and in return, the company received some shares of Future Retail. However, during FY20, the company had to mark-to-market these investments to INR365 million from INR2,113 million (net of shares sold). Ind-Ra also derives comfort from the company’s association with the K Raheja group.  SSL has not availed the Reserve Bank of India-prescribed moratorium on its loan payments

Inherent Risks: High competition in the retail sector and susceptibility to economic cycles continue to constrain the ratings. Furthermore, the company is prone to the general consumption risk associated with the retail industry. A cyclical downturn, fall in purchasing power and low ease of consumer credit could hurt the overall industry’s prospects.


RATING SENSITIVITIES

Negative: Lower EBITDAR margin or higher-than-expected debt-led capex, leading to the net adjusted leverage exceeding 5.0x, or an elongated working capital cycle, leading to negative cash flow from operations, on a sustained basis, may result in a negative rating action.


COMPANY PROFILE

Incorporated in 1991, SSL is a retail chain that operates in the space for departmental and speciality format stores. Its key format is Shoppers Stop (90 stores). Its other formats are specialty stores: Home Stop, Crossword and MAC, Clinique, Bobbi Brown and Estee Lauder. The total chargeable area of all stores is 4.5 million square feet across 44 cities.

FINANCIAL SUMMARY

Particular

FY20

FY19

Revenue (INR million)

34,639

35,779

EBITDA (INR million)

1,761

2,457

Interest cost (INR million)

76

138

EBITDA margin (%)

5.1

6.9

Interest coverage (x)

23.1

17.8

Net adjusted leverage(x)

4.9

4.4

Source: SSL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating

Historical Rating/Rating Watch

Rating Type

Rated Limits (million)

Rating

8 August 2019

26 June 2018

13 October 2017

CP

Short-term

INR250

IND A1+

IND A1+

IND A1+

IND A1/RWE

Short-term debt/CP

Short-term

INR250

IND A1+

IND A1+

IND A1+

IND A1/RWE


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Prasad Patil

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121