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 the company 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 store chains in India, with a country-wide presence. As on 30 June 2021, it had a network of 83 departmental in India, 11 HomeStop, 127 beauty and 29 Crossword stores, occupying an area of 4.4 million square feet across 47 cities. 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 its core target customers being the 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 its association with Amazon.com, Inc., which holds a 4% stake in the company.

Continued Focus on Beauty Business; Private Labels and Customer Connect Initiatives: SSL continues 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 FY21, to grow at a healthy rate over the medium term, backed by the combination of store additions (once the normalcy in the business is visible), an enhanced brand portfolio, the launch of a private label under the beauty segment and growing online sales. SSL's share of the private label and exclusive brands to its revenue increased to 14% in FY21 (FY20: 12%) on account of the company's increased product offerings across different categories and the price points offered.

To cater to the changing consumer preference away from formal wear after the pandemic, SSL launched private labels under the sleepwear and athleisure category and expanded into the babywear segment in FY21. Ind-Ra expects steady growth in the private label business by the strong response to the brands launched. The company plans to boost its loyalty programme - First Citizen - and assisted shopping programme - Personal Shoppers - through personalisation and customisation for members and by increasing awareness about the programmes. SSL has strong brand loyalty, with over 8 million members in its loyalty programme, First Citizen, contributing about 78% to its revenue during FY21. During FY21, the company launched its First Citizen Black loyalty programme to target premium high-income customers. The contribution of members in the Personal Shoppers programme to the total revenue stood at 16% in FY21 (FY20: 15.6%). 

Continued Healthy Financial Profile on Equity Raise:  SSL’s net leverage and gross interest coverage were healthy at negative 0.01x and positive 19.6x, respectively, in FY20 before being impacted in FY21 due to COVID-19-led disruptions. However, SSL's net debt remained negligible at INR165 million at FYE21 (FYE20: negative INR8 million), despite a sharp fall in its profitability, driven by an equity issuance of INR2,992 million during the year. In November 2020, SSL launched its rights issue of INR2,992 million, which was fully subscribed. SSL, thus, was able to repay debts aggregating to INR1,250 million in FY21. Delays in business normalisation due to recurrent lockdowns and deterioration in consumer confidence remain risks to the recovery, and thus can deteriorate the financial profile of the company, which would be partially offset by cost conservation measures as evidenced in FY21. 

Significant Hit to Profitability in FY21; Improvement Likely in FY22 and Normalisation in FY23: SSL’s revenues fell 50% yoy to INR17,490 million in FY21 (FY20: down 3% yoy) due to COVID-19-led disruptions. The national lockdown over April-May 2020, customers' preference to prioritise essential commodities over discretionary spending such as clothing, reduced footfalls on the lingering fears of contracting COVID-19 and the severe spread of the virus in urban India, all led to the apparel retail witnessing a sharp drop in revenues, especially in 1HFY21. SSL’s revenue recovery has been steady through the quarters after a sharp 93% yoy decline in 1QFY21 when the operations were shut for the bulk of the quarter to a 66% yoy decline in 2QFY21, a 30% yoy decline in 3QFY21 and almost flat in 4QFY21 (negative 6% yoy) on pent-up demand. Although footfalls remained below the normalised levels even in 4QFY21, higher customer conversions and basket sizes are likely to have aided sales, along with a sharp uptick in e-commerce sales.

The high operating leverage of the retail business pressurised margins in FY21 with the reported EBITDA margin (Ind-Ra adjusted) turning negative at 10.8% (FY20: positive 4.3%). The cost rationalisation measures undertaken by the company during the pandemic-led crisis such as negotiating for variable rental expenses and reducing employee and other discretionary spends such as advertising and travelling, mitigated the impact of adverse operating leverage prevalent in the retail business to a certain extent. Ind-Ra expects a part of these cost savings to be sticky and sustain even after FY22, thereby structurally improving the margin profile of apparel retailers. After witnessing EBITDA losses (Ind-Ra adjusted) in 1HFY21, as per Ind-Ra, the company turned EBITDA positive in 2HFY21. SSL’s network expansion was deferred in FY21 with it opening only one departmental store and two beauty stores in India, owing to COVID-19-led disruptions. The company focused on store rationalisation and closed six loss-making stores in FY21 to improve profitability. The store expansion is likely to accelerate post business normalcy.

The second wave of COVID-19 adversely impacted SSL’s operations in April and May 2021 and halted an otherwise healthy recovery trajectory. Regional lockdowns caused the shutdown of stores in 1QFY22, resulting in a 70% sequential fall in SSL’s revenue. Ind-Ra believes the business disruptions from the lockdown and the resultant economic slowdown will have a greater impact on companies such as SSL that mainly operate through mall-based stores. An extension of lockdowns or delays in business normalisation continue to pose major risks to the company’s performance. Nonetheless, Ind-Ra expects FY22 revenues to show healthy growth over FY21, largely due to base effect with a strong recovery in the profitability and continuing cost saving. Sales through e-commerce channels have witnessed significant growth in FY21, which is likely to continue. Revenues and profitability are likely to normalise from FY23.

Liquidity Indicator - Adequate: SSL’s cash and cash equivalents were INR1,696 million at FYE21 (FYE20: INR1,581 million). The average utilisation of its fund-based limits was only 41% during the 12 months ended May 2021. The cash flow from operations (Ind-Ra adjusted) was positive over FY17-FY20, but turned negative at INR2,686 million in FY21 (FY20: INR1,664 million) due to lower profitability. The free cash flow (Ind-Ra adjusted) remained negative and deteriorated to negative INR3,523 million in FY21 (FY20: negative INR235 million) due to working capital outflow and lower profitability. 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. The company has scheduled debt repayments (standalone) of INR563 million/INR750 million/INR188 million in FY22/FY23/FY24. SSL continues to operate on negative net working capital (FY21: negative INR2,656 million, FY20: negative INR2,486 million), thus reducing its needs on external funding to finance working capital.  Ind-Ra continues to derive comfort from the company’s association with the K Raheja group. 

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: Prolonged disruption caused by COVID-19 containment measures leading to the delayed normalisation of operations with subdued EBITDA and/or an elongation in the net working capital cycle and/or higher-than-expected debt-led capex, leading to the net leverage exceeding 2x on a sustained basis will lead to 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 (83 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 4.4 million square feet.

FINANCIAL SUMMARY

Particulars

FY21*

FY20*

Revenue (INR million)

17,490

34,639

EBITDA (INR million)

-1,891

1,494

EBITDA margin (%)

-10.8%

4.3%

Total debt (INR million)

1,860

1,573

Gross interest coverage (x)

NA

19.6

Net leverage (x)

NA

-0.01

Source: SSL, Ind-Ra; *Ind-Ra adjusted numbers



RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

6 August 2020

8 August 2019

26 June 2018

CP

Short-term

INR250

IND A1+

IND A1+

IND A1+

IND A1+

Short-term debt/CP

Short-term

INR250

IND A1+

IND A1+

IND A1+

IND A1+



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

CP

Low

Short-term debt/CP

Low


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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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