By Krishan Binani

India Ratings and Research (Ind-Ra) has taken the following rating actions on Aditya Birla Fashion and Retail Limited (ABFRL):

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Long-Term Issuer Rating

-

-

-

-

IND AA/Stable

Affirmed

Term loans

-

-

March 2022

INR232.8

IND AA/Stable

Affirmed

Fund-based working capital limits

-

-

-

INR6,530

IND AA/Stable/IND A1+

Affirmed

Non-fund-based working capital limits

-

-

-

INR8,250

IND A1+

Affirmed

Non-convertible debentures (NCDs)*

-

-

-

INR8,000

IND AA/Stable

Affirmed

NCDs#*

-

-

-

INR3,250

IND AA/Stable

Assigned

Proposed NCDs^

-

-

-

INR750

WD

Withdrawn

Commercial paper (CP)***

-

-

November 2020

INR20,000

IND A1+

Affirmed

Working capital limits (fund/non-fund-based)

-

-

-

INR6,130

IND AA/Stable/IND A1+

Affirmed

Proposed working capital limits (fund/non-fund-based)##

-

-

-

INR2,000

IND AA/Stable/IND A1+

Assigned


#The assignment of the final rating follows the receipt of transaction documents, including the final term sheet conforming to the information already received by Ind-Ra

^Forthcoming debt issue/transaction carrying an expected rating is no longer likely to proceed as previously envisaged.

## The provisional rating of the proposed bank facilities has been converted to final rating as per Ind-Ra’s updated policy. This is because the agency notes that debt seniority and general terms and conditions of working capital facilities tend to be uniform across banks, and are not a rating driver.

*Details in Annexure

***Current outstanding is INR13,250 million

KEY RATING DRIVERS

Company among Top Three Fashion Players; Leader in Branded Apparel: ABFRL is one of India’s largest pure-play fashion and lifestyle companies. ABFRL’s Madura fashion division dominates the branded menswear segment, while Pantaloons is one of the leading players in the value fashion segment, with a dominant share in women's wear and a large contribution from private labels/own brands. The combined platform offers a diversified mix of products across categories, price points and market channels. Both Madura and Pantaloons divisions had an aggregate retail space of 8 million square feet at end-June 2020, spread across 2,662 exclusive brand outlets (Madura) and 342 large format stores (Pantaloons) in over 750 cities and towns. Madura’s brands are also distributed through the wholesale channel, comprising around 23,700 multi-brand outlets and over 6,700 shop-in-shops in department stores. 

Strong Parentage: ABFRL benefits from the strong financial flexibility of the Aditya Birla Group and the group’s experience of successfully handling consumer-facing businesses such as financial services, apparel and telecom. The group has been able to substantially scale up these businesses despite intense competition in each of these segments. The group considers apparel retail sector to be a focus area, and in Ind-Ra’s assessment, it will continue to extend need-based managerial and financial support to ABFRL. 

Significant Hit to Profitability likely in FY21; Expect Normalisation in FY22: ABFRL had reported strong operating performance prior to the temporary closure of its store network due to the COVID-19-led nation-wide lockdown.  Despite the lockdown in March 2020, the company’s revenue grew 8% yoy to INR87.9 billion in FY20, led by revenue growth in both Madura and Pantaloons divisions. The store rollout momentum was strong with the net additions of 327 stores, highest in at least five years. For 9MFY20, the company’s EBITDA growth was also strong at 19% yoy with the margins improving 50bp.  However, for FY20, EBITDA (comparable - excluding the impact of the IND-AS 116 accounting standard) declined 19% yoy to INR4.5 billion owing to a loss in 4QFY20, resulting from the lost sales of around INR3.4 billion and the gross margin of INR2 billion, and given the fixed cost structure. 

Ind-Ra believes the business disruptions from the lockdown and the slowdown in the economy would lead to a 30%-35% yoy decline in the revenue in FY21. The 1HFY21 revenue is likely to remain muted with a slow demand recovery due to weak consumer confidence leading to a preference to prioritise spending on essentials over clothing (discretionary in nature) and reduced footfalls in retail stores. Organised retail has a high concentration of stores in urban India, which is likely to witness a slower recovery than that in rural India. Being non-essential, ABFRL’s sales network was allowed to resume operations from May 2020 with restricted hours and adhoc lockdowns. Over April and May 2020, the company reported only 8% of normal sales. Consequently, the revenues dropped 84% yoy to INR3.2 billion in 1QFY21. Sales have since improved month-on-month through August 2020 (June 2020: 26% of normal sales), albeit at muted pace. The company has reopened 90% of its stores now (80% as of June 2020). The agency believes players with strong brands such as ABFRL, with a pan-India network and diversified offerings are likely to witness a quicker recovery than competitors; further, sales through ecommerce channels are likely to rebound faster, which could aid recovery as consumers are likely to prefer digital sales till normalcy returns. The digital sales of the company’s Madura division grew 166% yoy in June 2020, contributing 21% to the total sales compared to 6% yoy. In 1QFY21, Pantaloons division’s average daily sales volumes grew 4.2x and 2.5x yoy on its own website and partnered ecommerce business, respectively.

Ind-Ra expects the high operating leverage of the retail business to pressurise ABFRL's margins in FY21. However, the management believes its focus on significant cost cutting, targeting discretionary spend such as advertising, travelling and overheads, employee expenses, and the renegotiation of rental expenses (from fixed to variable) could mitigate the threat to earnings, resulting in better margins once the business normalises.

COVID-19 to Weaken Financial Profile; Recovery likely in FY22: ABFRL’s net leverage (net debt/EBITDA excluding other income) deteriorated to 5.6x in FY20 (FY19: 3x) due to its lower profitability, working capital outflows, and acquisition-related spends. Its interest coverage (EBITDA/gross interest expense) too deteriorated to 2.1x in FY20 (FY19: 2.96x) on account of higher interest expense. The company’s net debt at FYE20 increased to INR25.1 billion (FY19: INR16.5 billion) due to the elongation of its working capital cycle on account of an inventory build-up and further to INR32.5 billion in June 2020 due to low sales and fixed cost outflows. Ind-Ra expects the company to continue to witness stretched credit metrics in FY21 due to significant erosion of profitability. The adhoc imposition of local lockdowns and delays in business normalisation due to weak consumer confidence remain major risks. However, the management’s deferment of discretionary capital expenditure, the likely release of the working capital, in addition to tight cost control could mitigate the adverse impact. ABFRL has completed the rights issue through which the company is likely to raise nearly INR10 billion, with 50% of the amount already raised at end-July 2020. The remaining amount will be received in two instalments of 25% each in January 2021 and July 2021. Apart from fully subscribing to the extent of their rights entitlement, the promoter group has committed to subscribe to any additional equity shares for ensuring subscription to the extent of at least 90%.  The agency expects the business to stabilise from FY22, with a sharp recovery in margins and credit metrics.

Both Madura and Pantaloon Performed Well until 9MFY20:  Madura’s robust business model is underpinned by strong brands, a large scale, strong margins and returns, an asset-light model of expansion (over 80% through franchisees) and the ability to generate free cash flows. During FY20, Madura contributed around 60% to ABFRL’s revenues and EBITDA. The division’s overall revenue grew 9% yoy to INR54.8 billion in FY20 (FY19: up 13% yoy), led by healthy growth in its lifestyle brands (Louis Philippe, Van Heusen, Peter England and Allen Solly, etc.) and a strong contribution from its innerwear segment (around 40% growth yoy). The division’s lifestyle brands reported revenue growth of 8% yoy in FY20 (FY19: 11% yoy; FY18: 6% yoy). Madura added over 400 stores across the country with a net addition 293 stores in FY20 (FY19: 216, FY18: 138), the fastest rollout seen by the division in recent years. The retail like-to-like (LTL) sales for the lifestyle brands was 9% during 9MFY20 (FY19: 5.3%) but the same stalled in 4QFY20, resulting in full year LTL of around 5%. The EBITDA margin of Madura fell to 5.4% for FY20 (FY19: 8%) after expanding to 7.5% until 9MFY20 (9MFY19: 7%). The rising sales in women and kid's apparel category (doubled in FY20) and Peter England's small town format (over 200 stores) are likely to show a faster recovery in FY21. 

Pantaloons’ revenue grew 10% yoy to INR35.1 billion in FY20, driven by steady-store additions and healthy LTL growth (FY20: 2.7%, 11MFY20: 6.8%, FY19: 1.4%). The segment added net 34 stores in FY20 (FY19: 33).  20%-25% of the store additions were through the franchisee model. Pantaloons’ margins continued their increasing trend by rising to 9% in 9MFY20 (9MFY19: 8.5%, FY19: 7.2%) - the highest level since its acquisition in FY13 - on account of a markdown management through better inventory planning, product innovation, new brand imagery, and increased focus on cost control and operating leverage. However, due to the EBITDA loss in 4QFY20, FY20 margins fell to 6.3% (FY19: 7.2%).

Liquidity Indicator - Adequate: ABFRL had cash and cash equivalents of INR3.5 billion (FY19: INR0.57 billion) and around INR6 billion in unutilised fund-based working capital line at end-July 2020. The company repaid INR5.28 billion towards the redemption of NCDs that matured on 20 April 2020, thereby meeting the bulk of the term debt repayment obligations for FY21. ABFRL raised INR7.5 billion in long-term financing in 1QFY21 to shore up its liquidity, apart from INR5 billion from the 50% proceeds from the rights issue. ABFRL expects to keep a liquidity buffer of INR5 billion until business normalises. The company has debt worth nearly INR4.4 billion, INR6.7 billion, INR4.0 billion maturing in FY22, FY23 and FY24, respectively, which it should be able to meet through a mix of internal accruals, refinancing, and proceeds from rights issue. The company reported a negative free cash flow (FCF) of INR6.6 billion due to a significant working capital outflow and large capex (FY20: INR3.2 billion). The company's focus on cash preservation by the rationalisation of capex and the optimisation of working capital is likely to aid FY21 liquidity. Although ABFRL is subject to rollover risks for the outstanding CPs (outstanding as on 12 August 2020: INR13,250 billion), Ind-Ra derives comfort from the group’s strong financial flexibility. ABFRL has not availed of the Reserve Bank of India-prescribed moratorium. 

Intense Competition; Vulnerable to Economic Cycles: ABFRL continues to face high competition in the apparel retail sector. Moreover, the company’s performance remains susceptible to economic cycles.

 


RATING SENSITIVITIES

Positive: A significant improvement in the operating profitability, growth in the market share and strengthening of the company’s market presence, and the net leverage reducing below 2x, all on a sustained basis, will lead to a positive rating action.

 

Negative: Higher-than-expected deterioration of the operating profitability on account of prolonged distruption caused by COVID-19 containment measures reducing the visibility of net leverage reducing below 3.5x from FY22, on a sustained basis, and/or a weakening of the linkages between the Aditya Birla Group and ABFRL will lead to a negative rating action.


COMPANY PROFILE

ABFRL is the apparel retail venture of the Aditya Birla Group. 

FINANCIAL SUMMARY  

Particulars

FY20

FY19

Revenue (INR billion)

87.88

81.18

EBITDA (INR billion)

4.47

5.54

EBITDA margin (%)

5.1

6.8

Total debt (INR billion)

27.83

17.02

Gross interest coverage (x)

2.10

2.96

Net leverage (x)

5.61

2.97

Source: Company, Ind-Ra

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

18 May 2020

12 November 2019

31 August 2018

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Term loans

Long-term

INR232.8

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Fund-based working capital limits

Long-term/Short-term

INR6,530

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

Non-fund-based working capital limits

Short-term

INR8,250

IND A1+

IND A1+

IND A1+

IND A1+

NCDs

Long-term

INR11,250

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

CP

Short-term

INR20,000

IND A1+

IND A1+

IND A1+

IND A1+

Working capital limits (fund/non-fund-based)

Long-term/Short-term

INR8,130

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+


ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

NCDs

INE647O08073

7 September 2018

8.96

14 August 2021

INR3,000

IND AA/Stable

NCDs

INE647O08081

11 November 2019

8.60

11 November 2022

INR5,000

IND AA/Stable

NCDs

INE647O08099

22 May 2020

8.75

22 May 2023

INR3,250

IND AA/Stable

Total NCDs

INR11,250



COMPLEXITY LEVEL OF INSTRUMENTS

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

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Krishan Binani

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356162

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121