Rating Rationale
July 27, 2020 | Mumbai
Aditya Birla Fashion and Retail Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.2500 Crore
Long Term Rating CRISIL AA/Stable
 
Rs.400 Crore Non Convertible Debentures CRISIL AA/Stable
Rs.500 Crore Non Convertible Debentures CRISIL AA/Stable
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable
Rs.2000 Crore Commercial Paper CRISIL A1+
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities and debt instruments of Aditya Birla Fashion and Retail Limited (ABFRL) continue to reflect the company's healthy business risk profile, backed by the strong market position of apparel brands of the Madura division, favourable growth prospects for the Pantaloons division, driven by strong brand image and pan-India presence, healthy financial flexibility, and benefits from the strong parentage of ABG. These strengths are partially offset by the company's modest financial risk profile, intensifying competitive landscape for the apparel sector in India, and susceptibility of performance to economic down cycles.

Operating performance of ABFRL was impacted from March 2020 onwards due to measures taken by various state governments and government of India towards containment of COVID-19 which included temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures impacted the operations of the company as it led to closure of stores in the Madura as well as Pantaloons division. The company has opened substantial number of the stores since then post the relaxation of the lockdown in early May 2020. However sales in the initial few months of this fiscal will be muted due to relatively discretionary demand for apparel products and impact of lockdown on consumer's income levels. The ability of the business to revert to operational stability will be the key monitorable.

However, ABFRL's management has taken measures to ramp up liquidity which stands at around Rs 1000 crore as on 5th July 2020 (in the form of cash & equivalents and unutilized bank lines). Additionally Rs 900 crore of commercial paper limits remain unutilized. The company redeemed NCD of Rs. 528 crore (including accrued interest) on 20th April 2020 and no major term debt repayments are expected for rest of the fiscal 2021. Additionally the company also raised Rs 325 crore through NCD issuance in May 2020. The company expects to maintain Rs 500 crore of liquidity this fiscal at least till the full-fledged recovery is seen. This will support faster recovery when situation normalises.

Additionally the board of directors of the company approved rights issue amounting to ~Rs 995 crore in June 2020 and the same was fully subscribed in July 2020. The rights issue is structured such that 50% of the funds raised will be received in July 2020, while 25% will be received at the end of fiscal 2021 and 25% in fiscal 2022.

These measures would help mitigate any mis-match in cash flows and debt obligations in the near term. The company enjoys healthy financial flexibility due to being a part of Aditya Birla Group (ABG) which owns around 59% in the company and has a common name & common logo.

In fiscal 2021, ABFRL's revenues and profits are expected to decline significantly in the first half and will recover gradually in second half of the fiscal. ABFRL's online business, which represents about 7% of sales, could offset part of the major sales deterioration at brick-and-mortar stores.
 
The company has strong lifestyle brands such as Peter England, Allen Solley, Louis Phillippe and Van Heusen in Madura division while Pantaloons division derives ~65% revenues through private labels. This enables company to enjoy healthy gross margins of 50%. The company has also taken steps towards drastic cost cutting of the overheads through various initiatives and converting substantial rental expenses to variable cost (as % of sales). The overheads and rentals contributed around 30% to overall revenues in fiscal 2019, provide significant scope for cost reduction and with which, the operating margin is projected to remain at around 6-8% (un-adjusted for Ind-AS 116). In an effort to mitigate cash usage, ABFRL has curtailed its capital expenditure plan and promotional spend during the current fiscal.

Net debt, which stood at Rs 2509 crore in fiscal 2020, increased from Rs 1645 crore in fiscal 2019 as the company paid off significant amount of creditors in March, will remain elevated at Rs 2500-2600 crore during fiscal 2021. Fiscal 2021 will see sharp focus on generation of cash flow and reduction in the debt.

Analytical Approach

CRISIL has taken into account need-based managerial and financial support expected from ABG in the event of an exigency. Furthermore, CRISIL has amortised goodwill of Rs 1,169 crore generated at the time of acquisition of the erstwhile Pantaloons Fashion and Retail Ltd (PFRL) from the Future group. CRISIL has also amortised goodwill of Rs 627 crore and Rs 64 crore generated from the merger of PFRL with the Madura division and the acquisition of exclusive franchise rights for Forever 21, respectively. The goodwill on acquisition of Jaypore E-Commerce Pvt Ltd and Finesse International Design has also been amortised over a period of five years from the date of acquisition.

Key Rating Drivers & Detailed Description
Strengths
* Healthy business risk profile backed by the strength of apparel brands in the Madura division and strong value proposition of Pantaloons division:
The Madura division of ABFRL has the leading apparel brands, namely Louis Philippe, Van Heusen, Allen Solly, and Peter England, which enjoy a strong brand positioning. The franchise model of store expansion helps reduce capital requirement, thereby leading to sustenance of healthy return on capital employed. Pantaloons currently has a pan-India presence, with a network of 343 stores across 80 cities with a high proportion of private labels, which the management aims to increase further in future. Focus on value retail segment, higher store productivity, cost rationalisation and better product mix has improved the profitability of this segment in last few years.

* Strong management setup and experience of ABG:
ABG owns 59.09% of equity shares in ABFRL. Key personnel in ABFRL are from ABG. Furthermore, ABFRL is the group's flagship company in the retail sector. It is expected to benefit from the group's experience of handling businesses in multiple industries.

* Healthy financial flexibility:
CRISIL believes while the cash accrual may be impacted in fiscal 2021 owing to COVID ' 19 impact, the same should bounce back significantly in fiscal 2022 owing to expected strong rebound in the revenue growth while some of the cost cutting measures may have permanent impact. Furthermore, the company has been able to refinance its debt obligations at favourable terms in the past; this has helped reduce interest rates and repayments. Also, ABG will continue to extend need-based managerial and financial support to ABFRL.

Weaknesses
* Modest financial risk profile with moderate, albeit improving, debt protection metrics:
ABFRL has an average financial risk profile, due to high debt levels, leading to moderate debt protection metrics. Its borrowings (net of cash) stood at Rs.1645 crore as on March 31, 2019 and estimated at around Rs 2509 crore as on March 31, 2020. The debt protection metrics which remains modest owing to high debt levels, will improve sharply from fiscal 2022 onwards by healthy increase in cash accrual and no large debt funded capital expenditure (capex).

* Intensifying competitive landscape for the apparel retail sector in India:
ABFRL continues to be one of the largest listed fashion and retail company in India, with revenue of Rs 8,788 crore in fiscal 2020. The competitive landscape for the apparel retail sector remains high. Apart from ABG, many of India's large corporate groups, including the Tata group and Reliance Retail Ltd (a step-down subsidiary of Reliance Industries Ltd [rated 'CRISIL AAA/Stable/CRISIL A1+']) have ventured into apparel retail. Additionally, the sector has established players such as Lifestyle International Pvt Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'), Shoppers Stop Ltd (rated 'CRISIL A1+'), and Future Lifestyle Fashions Ltd (rated 'CRISIL A+/Stable/CRISIL A1'). Large global apparel chains such as Marks and Spencer Plc and Inditex S.A. have also entered into joint ventures with local partners to capture a slice of the market. However, CRISIL believes the strong brand franchise of Madura, and the unique positioning of the Pantaloons division should continue to benefit ABFRL.

 * Susceptibility to economic downcycles
ABFRL remains susceptible to economic downcycles due to the discretionary nature of its products. This renders the revenue and profitability vulnerable to economic cycles.
Liquidity Strong

The company has liquidity of around Rs 1000 crore (in the form of cash & equivalents and unutilized bank lines). Additionally Rs 900 crore of commercial paper limits remain unutilized. The company redeemed NCD of Rs. 528 crore (including accrued interest) on 20th April 2020 and no major term debt repayments are expected for rest of the fiscal 2021. Additionally the company also raised Rs 325 crore through NCD issuance in May 2020. Fiscal 2021 will see sharp focus on generation of cash flow and reduction in the debt, capital expenditure is expected to be cut significantly accordingly. The company expects to maintain Rs 500 crore of liquidity this fiscal at least till the full-fledged recovery is seen.  

Outlook: Stable

CRISIL believes ABFRL will continue to benefit from the parentage of Aditya Birla Group as well as its healthy business risk profile marked by established market position of its brands under Madura and the strong value proposition of the Pantaloons division.

Rating Sensitivity Factors
Upward Factors:
* Healthy operating performance of the Madura division combined with sustained improvement in the operating performance of the Pantaloons division, leading to overall improvement in operating margin of company to above 10% on a sustainable level while maintaining 10-12% the revenue growth per annum
* Reduction in debt and increase in operating profit strengthening debt protection metrics, with Net debt-to-EBIDTA falling below 1 time
* Significant improvement in the business and financial risk profiles of ABG.

Downward Factors:
* Prolonged impact of COVID - 19 on revenue growth & cash accruals
* Significant weakening of debt protection metrics for instance Net Debt to EBIDTA increases beyond 4 times in fiscal 2021 and 3 times in fiscal 2022
* Reduction in shareholding of, and/ or change in stance of support from ABG as well as deterioration in the business and financial risk profiles of ABG.

About the Company

ABFRL is the apparel retail venture of ABG, which merged the Madura division (formerly, a division of Aditya Birla Nuvo Ltd) with the erstwhile PFRL on January 9, 2016, with appointed date of April 1, 2015. PFRL was renamed ABFRL subsequent to the merger of the Madura division and PFRL. The Madura division is the holder of leading brands in the country, while departmental stores are under the Pantaloons format. ABFRL also acquired Forever 21 in India in 2016 to scale its fast fashion segment. The company has started its innerwear brand with retail reach of 24000 outlets across 85 cities as on December 31, 2019.

As on March 31, 2020, the company operated on a retail area of 8.1 million square feet, with 2,699 exclusive brand outlets for Lifestyle brands and 342 Pantaloons stores.

For the twelve months ended March 31, 2020, ABFRL reported net loss of Rs 99 crore (un-adjusted for Ind-AS 116) as against net profit of Rs 321 crore for the corresponding period the previous year on operating income of Rs 8788 crore (Rs 8118 crore for the corresponding period the previous year).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 8118 7181
Profit After Tax (PAT) Rs.Crore 321 118
PAT Margin % 4.0% 1.6%
Adjusted debt/EBITDA Times 2.8 3.7
Interest coverage Times 2.92 2.56

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.Crore)		 Complexity level Rating assigned
with outlook
INE647O08073 NCD 07-Sep-18 0% 14-Aug-21 300 Simple CRISIL AA/Stable
INE647O08081 NCD 11-Nov-19 8.60% 11-Nov-22 500 Simple CRISIL AA/Stable
INE647O08099 NCD 22-May-20 8.75% 22-May-23 325 Simple CRISIL AA/Stable
NA NCD@ NA NA NA 75 Simple CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 2000 Simple CRISIL A1+
NA Long-Term Loan NA NA Mar-23 22 NA CRISIL AA/Stable
NA Long-Term Loan NA NA Jun-24 150 NA CRISIL AA/Stable
NA Long-Term Loan NA NA May-23 250 NA CRISIL AA/Stable
NA Working Capital Demand Loan NA NA NA 150 NA CRISIL AA/Stable
NA Working Capital Demand Loan^ NA NA NA 175 NA CRISIL AA/Stable
NA Cash Credit* NA NA NA 513 NA CRISIL AA/Stable
NA Cash Credit# NA NA NA 490 NA CRISIL AA/Stable
NA Cash Credit** NA NA NA 745 NA CRISIL AA/Stable
NA Proposed Long-Term Bank Loan Facility NA NA NA 5 NA CRISIL AA/Stable
@Yet to be issued.
^Interchangeable with CC/STL/BC/EPC
*Interchangeable with WCDL/STL
#Interchangeable with WCDL
**Interchangeable with WCDL/STL/BC/EPC
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2000.00  CRISIL A1+  18-05-20  CRISIL A1+  31-10-19  CRISIL A1+  31-08-18  CRISIL A1+  02-11-17  CRISIL A1+  -- 
        21-04-20  CRISIL A1+  31-08-19  CRISIL A1+           
Non Convertible Debentures  LT  1125.00
27-07-20  		CRISIL AA/Stable  18-05-20  CRISIL AA/Stable  31-10-19  CRISIL AA/Stable  31-08-18  CRISIL AA/Stable  02-11-17  CRISIL AA/Stable  CRISIL AA/Stable 
        21-04-20  CRISIL AA/Stable  31-08-19  CRISIL AA/Stable      14-03-17  CRISIL AA/Stable   
Short Term Debt (Including Commercial Paper)  ST                  14-03-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  2500.00  CRISIL AA/Stable  18-05-20  CRISIL AA/Stable  31-10-19  CRISIL AA/Stable  31-08-18  CRISIL AA/Stable  02-11-17  CRISIL AA/Stable  CRISIL AA/Stable 
        21-04-20  CRISIL AA/Stable  31-08-19  CRISIL AA/Stable      14-03-17  CRISIL AA/Stable   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 513 CRISIL AA/Stable Cash Credit 841 CRISIL AA/Stable
Cash Credit# 490 CRISIL AA/Stable Long Term Loan 27.9 CRISIL AA/Stable
Cash Credit** 745 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 1431.1 CRISIL AA/Stable
Long Term Loan 422 CRISIL AA/Stable Working Capital Demand Loan 200 CRISIL AA/Stable
Proposed Long Term Bank Loan Facility 5 CRISIL AA/Stable -- 0 --
Working Capital Demand Loan 150 CRISIL AA/Stable -- 0 --
Working Capital Demand Loan^ 175 CRISIL AA/Stable -- 0 --
Total 2500 -- Total 2500 --
^Interchangeable with CC/STL/BC/EPC
*Interchangeable with WCDL/STL
#Interchangeable with WCDL
**Interchangeable with WCDL/STL/BC/EPC
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for rating short term debt

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