Detailed Rationale

CRISIL Ratings continues its rating on the non-convertible debentures (NCDs) of Aditya Birla Digital Fashion Ventures Ltd (ABDFVL) on ‘Rating Watch with Negative Implications’. ABDFVL is a subsidiary of Aditya Birla Fashion and Retail Ltd (ABFRL; rated ‘CRISIL AA+/Watch Negative/CRISIL A1+’), and the rating watch follows a similar rating action on the parent.

 

ABFRL’s ratings were placed on rating watch with negative implications on April 29, 2024, following the announcement of the scheme of arrangement between ABFRL and Aditya Birla Lifestyle Brands Ltd (ABLBL). The scheme, inter alia, provides for demerger, transfer and vesting of the Madura Fashion & Lifestyle Business (MF&L) from ABFRL into ABLBL. CRISIL Ratings believes that upon the resolution of the watch, the rating of ABDFVL is unlikely to change by more than one or two notches.

 

CRISIL Ratings also takes note that ABFRL have received no observation / no objection letter from the stock exchanges pertaining to the scheme of arrangement among ABFRL, ABLBL, and their respective shareholders and creditors, and the said letters have a validity of six months, within which the scheme shall be submitted to the National Company Law Tribunal (NCLT). ABFRL has initiated the filing process with the NCLT, and the demerger is subject to requisite approvals and will be executed through a scheme of arrangement under the NCLT.

 

The rating on the NCDs of ABDFVL factors in the strong operational, managerial and financial support from ABFRL. ABDFVL was set-up by ABFRL for foraying into digital platform for Direct to Consumer (D2C) business by building a portfolio of distinct new age brands across fashion and lifestyle segments. TMRW is the brand created in ABDFVL, which will be the ‘House of Brands’ to build digital native brands. ABDFVL has bought a majority stake in brands such as Bewakoof, Urbano, The Indian Garage Co (TIGC) and Vierdo. During the first quarter of fiscal 2025, the company acquired 17.1% stake in “WROGN” for around Rs. 125 crore, and during October 2024, the company further increased its stake by 15.74% for Rs. 75 crore (32.84% total equity stake in “WROGN” as of October 30, 2024). Further, ABFRL is building a central advanced technology platform at ABDFVL, which will offer comprehensive support to brands, covering research and development (R&D), operations and advertisement. These strengths are partially offset by the company’s modest scale of operations and weak financial risk profile.

 

In fiscal 2024, its second year of operations, ABDFVL reported operating income of Rs 423 crore; revenue is expected to grow at a healthy 50-60%, albeit on a modest base, over the medium term. Owing to extensive investment in developing technology, and hence the related investments being incurred on manpower, the company is reporting operating losses, which are expected to continue, but reduce over medium term, as revenue ramps up.

 

ABFRL is incurring total investment of Rs 750 crore in ABDFVL. Of this, Rs 650 crore has already been invested and the balance Rs 100 crore infused in the first quarter of fiscal 2025. Support from ABFRL will be forthcoming if needed, as ABDFVL is a strategically important entity.  It is essentially an extension of ABFRL, established to strengthen the group's presence in digital-first next-gen brands. ABDFVL will leverage ABFRL's experience in the retail sector, its strong management, and support functions.

Analytical Approach

• CRISIL Ratings has applied its parent notch-up framework and factored in the operational, managerial and financial support available to ABDFVL from its parent, ABFRL.
• CRISIL Ratings has combined the business and financial risk profiles of ABDFVL and its subsidiaries. This is because all these companies are in the same business and have strong financial and operational linkages.
• Goodwill arising from mergers / on consolidation from the subsidiary has been amortised over 5 years and other intangible assets, which includes brands and trademarks are amortised over 10 years, given the strong brand value of the acquired entities and expectation of returns being spread over a longer tenure.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational, managerial and financial support from the parent, ABFRL: The company is a wholly owned subsidiary of ABFRL. Key personnel of ABFRL present on the board of the company include Mr. Ashish Dixit, CEO and Mr. Jagdish Bajaj, CFO and are also actively involved in the day-to-day affairs of the entity taking financial decisions and deciding on long-term strategy related matters. ABDFVL is led by Mr. Prashanth Aluru who is the CEO and co-founder. Mr. Aluru comes with extensive experience in digital and technology across strategy, growth and investing.

 

Of the total planned investments of Rs 750 crore, the parent has already infused Rs.650 crore since incorporation, which includes Rs 500 crore through equity and Rs 150 crore through optionally convertible redeemable preference shares (OCRPS). While OCRPS is optionally convertible and redeemable, they are intended to remain with ABDFVL for the long term, despite the current three-year tenure. Also, ABFRL infused the remaining OCRPS of Rs 100 crore in the first quarter of fiscal 2025. The company also intends to raise funds for future growth by onboarding financial investors over the medium term. ABFRL, will, nevertheless, continue to be the largest and majority shareholder in the company.

 

Also, support from ABFRL will be forthcoming if needed, as ABDFVL is a strategically important entity and essentially an extension of ABFRL, established to strengthen the group's presence in digital-first next-gen brands. Besides, ABDFVL will leverage on ABFRL's experience in the retail sector, its strong management, and support functions. 

 

• Benefits of the technology platform and centre of excellence for its brands: ABDFVL has been set up to foray into digital platform for D2C business by building a portfolio of distinct new age brands across fashion and lifestyle segments. ABDFVL is the primary holding company that has acquired majority stake in brands such as Bewakoof, Urbano, The Indian Garage Co (TIGC) and Vierdo.

 

In addition to investing in these brands, ABDFVL shall operate as a centre of excellence to support these smaller acquired entities /brands across verticals such as supply chain, logistics and market research. Further a central advanced technology platform is being developed to offer comprehensive support to all these brands, covering R&D, operations and advertisement.

 

Weaknesses:

• Nascent stage of operations: Company, having been set-up in February 2022, started operations in fiscal 2023 and has acquired six D2C brands since then. However, the company is in nascent stage of operations and yet expanding its business. Further, owing to extensive investment in developing technology, and hence the related investments being incurred on manpower, the company is reporting earnings before interest, tax, depreciation and amortisation (EBITDA) losses, which is expected to continue. Nonetheless, the same is likely to reduce gradually over the medium-to-long term with operating leverage benefit as scale of operation expands.

 

• Exposure to intense competition: The D2C segment, especially in the digital space has intense competition. With low entry barrier, the industry is flooded with numerous players selling their products through multiple platforms. Hence establishing the brand and leveraging the same amidst stiff competition will remain crucial.

 

• Weak financial risk profile- The financial risk profile of ABDFVL remains weak owing to erosion of networth due to losses incurred in the inception stage. The company proposes to raise funds from external investors in addition to ABFRL, which will support operations and financial risk profile over the medium term. Hence, timely fund raising will be critical for the company’s growth plan and shall remain key rating sensitivity factor.

Liquidity: Strong

While the company is reporting cash losses owing to its nascent stage of operations, liquidity is backed by the flexibility enjoyed by virtue of regular fund infusion by the parent. The company is likely to incur cash losses over the medium term. Currently, the company does not have any external long-term borrowing and no major debt-funded capex plan. As of May 2024, fund-based bank line of Rs 128 crore was utilised (~62%) which provides additional cushion.

Rating sensitivity factors

Upward factors:

• Any upgrade in the credit rating of parent- ABFRL by one notch or any change in its stance of support or strategic importance.
• Substantial and sustained increase in scale leading to cash breakeven and operating profitability
   

Downward factors:

• Downgrade in the credit rating of the parent, ABFRL, by one or more notches or any change in its stance of support or strategic importance.
• Higher-than-expected losses at operating level.
• Delay in fund raising.

About the Company

ABDFVL was incorporated in April 2022 as a wholly owned subsidiary of ABFRL. The board of ABFRL approved to set-up a new subsidiary, for foraying into D2C business towards building a portfolio of distinct, new-age, digital brands across categories in fashion, beauty and other allied lifestyle segments. ABDFVL is referred as ‘House of Brands’ and has a separate brand identity as TMRW. ABDFVL is the primary holding company and has acquired majority stake in popular brands (though subsidiaries) that are essentially targeting the millennials and Gen Z segment.

About the Parent

ABFRL is the apparel retail venture of the Aditya Birla group, 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. The Madura division holds leading brands while the departmental stores are under Pantaloons. ABFRL acquired Forever 21 in India in 2016 to ramp up its fast fashion segment. As of September 2024, the company operated on a retail area of 12.0 million square feet with 4,121 brand outlets, 37,952 multi brand outlets, and 417 Pantaloons stores.

Any other information: Not Applicable