Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and debt instrument of Aditya Birla Fashion and Retail Ltd (ABFRL) at ‘CRISIL AA/Positive/CRISIL A1+’.

 

The outlook on the rating was revised to “Positive” from “Stable" on June 02, 2022 on expectation of further strengthening of financial risk profile with fresh equity infusion of Rs 2,195 crore to be completed over fiscals 2023 and 2024. This, coupled with potential improvement in the business risk profile driven by revenue growth and operating margins expanding to 8-9% (pre-IndAS basis) / 18-19% (post-IndAS basis) may result in a rating upgrade.

 

The board of ABFRL, on 24 May 2022, had approved fresh equity infusion of Rs 2,195 crore by way of 7.5% stake dilution on post-issue basis to an affiliate (Caladium Investments Pte Ltd) of GIC, Singapore. The first tranche of Rs 770 crore is expected in the first half of this fiscal and balance Rs 1,425 crore within 18 months of the 1st tranche.

 

Fiscal 2022 revenue rose by 55% to Rs 8,136 crore driven by strong recovery post relaxation of covid curbs leading to higher footfalls and strong traction seen during festive season. Ebitda margin (on post Ind AS basis) went up by 280bps to 14.8% on year driven by improved operating leverage. As of March-2022, net debt (excluding lease liabilities) stood at Rs 504 crore.

 

Backed by the strong market position of its apparel brands, addition of new stores and expanding presence in the ethnic wear segment, CRISIL Ratings expects double-digit revenue growth over the medium term. Operating margins are also expected to rise driven by increasing scale of operation and superior product mix.

 

The company has focused on expanding presence in the ethnic apparel retail segment through acquisition of 51% stake in Sabyasachi Couture, owner of brand “Sabyasachi” for Rs 398 crore and 33.5% stake in luxury couture business under “Tarun Tahiliani Brand” for Rs 67 crore. Going forward, the company may continue to carry out acquisition of select brands to widen its portfolio and invest in the Ethnic portfolio. Investments are also expected to be stepped up in the D2C (Direct to Consumer) business.

 

Capex is expected at ~Rs 300-350 crore p.a. mainly towards expansion of own stores in the Pantaloons format while growth in the Madura division would continue through the asset-light franchisee model. CRISIL Ratings expects the capex and any acquisitions to be funded through accruals and cash with low reliance on external debt.

 

The ratings continues to factor in company's strong business risk profile, backed by the solid market position of apparel brands of Madura division and strong value proposition of Pantaloons division as well as superior financial risk profile. The ratings also factors in strong management of Aditya Birla Group (ABG). These strengths are partially offset by intense competitive landscape for the apparel retail sector in India and susceptibility of performance to economic down cycles.

Analytical Approach

CRISIL Ratings has amortized goodwill of Rs 1,168 crore generated at the time of acquisition of the erstwhile Pantaloons Fashion and Retail Ltd (PFRL) from the Future group. CRISIL Ratings has also amortized goodwill of Rs 628 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 Pvt Ltd has also been amortized over a period of five years from the date of acquisition.

 

CRISIL Ratings has fully consolidated the business and financial risk profiles of company’s subsidiaries, Jaypore E-commerce Pvt Ltd (100% stake), Jaypore Inc (100% stake), TG Apparel & Decor Pvt Ltd (100%), Finesse International Design Pvt Ltd (58.69%) as well as the partnership firm, M/s Sabyasachi Calcutta LLP in which it holds 51% stake and Indivinity Clothing Retail Pvt Ltd wherein it holds 80%. These acquisitions are strategic, enjoys strong brand reputation thus will play significant role in future growth.

 

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 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 strong return on capital employed. Pantaloons currently has a pan-India presence, with a network of 377 stores with a high proportion of private labels (~62%), which the management aims to increase further in future. Moreover, the company’s foray into Ethnic segment like tie-ups with Sabyasachi Brand, Tarun Tahiliani, and House of Masaba can further bolster its position in the market as this segment face less competition and huge untapped potential.

 

• Strong financial risk profile and financial flexibility

As of March 2022, ABFRL’s net debt excluding lease liabilities stood at Rs 504 crore significantly down from Rs 2509 crore as of March-2020, led by equity infusion of Rs 2500 crore through right issue and stake sale to a new strategic investor, Flipkart. The proposed equity infusion of Rs 2,195 crore over the medium term would further strengthen the financial risk profile.

 

• Strong management setup and experience of ABG

ABG owns 56.09% 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.

 

Weaknesses

• 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. 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+') and Shoppers Stop Ltd (rated '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 Ratings believes the strong brand equity of Madura, and the unique positioning of the Pantaloons division should continue to benefit ABFRL.

 

• Susceptibility to economic down cycles

ABFRL remains susceptible to economic down cycles due to the discretionary nature of its products. This renders the revenue and profitability vulnerable to economic cycles.

Liquidity: Strong

CRISIL Ratings expects net cash accruals (NCA) of Rs 650-700 crore and Rs 800-900 crore for fiscal 2023 and 2024, respectively which will cover the scheduled debt maturity of around Rs 434 crore and Rs 330 crore due in FY23 and FY24, respectively. The capital expenditure including inorganic acquisitions of Rs 600-700 crore p.a. is expected to be funded majorly through accruals and cash balance. Further, the utilization of fund based bank lines of Rs 1667 crore remain nil as of March-2022 while the cash & equivalents stood at Rs 600 crore.

 

ESG Profile

CRISIL Ratings believes that ABFRL’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.

 

The retail sector has a low impact on the environment due to its mainly trading activity. The sector has a social impact because of its large workforce. ABFRL has continuously focused on mitigating its environmental and social impact.

 

ABFRL’s key ESG highlights:

•                  ABFRL’s sustainability goals 2025 are aligned to the Paris Agreement on climate change and is determined to work in the direction in an accelerated manner.

•                  45% renewable across ABFRL facilities due to rainwater harvesting and recharging.
•                  34% of energy coming from renewable energy sources across ABFRL operations.
•                  5% reduction in scope 3 emissions and product intensity.
•                  Enhance the use of cleaner sources of energy across operations in a planned manner through the usage of solar power and renewable fuel like biomass-based briquettes.
•                  Water positive across own operations.
•                  Zero waste to landfill.
•                  50% garments to have at least two sustainable attributes (40% of products by volume to have at least 1 sustainability attribute).
•                  10% products by volume to be recycled/upcycled.
•                  Ranked Asia's 'Most Sustainable Company' in the Textile, Apparel & Luxury Goods Industry' by S&P Global CSA 2020.
•                  Won the Golden Peacock Award for Sustainability 2020 in the Textile and Apparel Sector.

•                  ABFRL’s governance profile is marked by 50% of its board comprising independent directors with none of them having tenure exceeding ten years, split chairman and CEO positions, dedicated investor grievance redressal and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. ABFRL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to domestic market.

Outlook Positive

CRISIL Ratings believes ABFRL’s credit profile could strengthen driven by improvement in both operating profitability as well as the financial risk profile.

Rating Sensitivity factors

Upward factors:

• Strong revenue growth and improvement in operating performance leading to sustained operating margin of 8-9% on a pre Ind AS basis and 18-19% on post Ind AS basis.
• Sustenance of strong financial risk profile with Net debt to Ebitda below 0.8x on pre Ind AS basis.

 

Downward factors:

Outlook may be revised to stable on

• Deterioration in operating performance leading to operating margins below 7.5%
• Significant weakening of debt protection metrics with net debt to Ebitda sustaining over 1.2 times

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. As on Mar-2022, the company operated on a retail area of 9.2 million square feet, with 3091 exclusive brand outlets for Lifestyle brands and 377 Pantaloons stores.

Any other information: Not applicable

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
INE647O08107	NCD	09-Sept-21	5.80	09-Sept-24	400	Simple	CRISIL AA/Positive
INE647O08081	NCD	11-Nov-19	8.60	11-Nov-22	500	Simple	CRISIL AA/Positive
INE647O08099	NCD	22-May-20	8.75	22-May-23	325	Simple	CRISIL AA/Positive
NA	NCD@	NA	NA	NA	75	Simple	CRISIL AA/Positive
NA	Commercial Paper	NA	NA	7-365 days	2000	Simple	CRISIL A1+
NA	Long-Term Loan	NA	NA	Mar-23	12	NA	CRISIL AA/Positive
NA	Fund based limit	NA	NA	NA	1140	NA	CRISIL AA/Positive
NA	Fund based limit*	NA	NA	NA	508	NA	CRISIL AA/Positive
NA	Non-fund based limit	NA	NA	NA	445	NA	CRISIL A1+
NA	Non-fund based limit*	NA	NA	NA	230*	NA	CRISIL A1+
NA	Proposed Long-Term Bank Loan Facility	NA	NA	NA	165	NA	CRISIL AA/Positive

@Yet to be issued.

*Two-way interchangeability from fund to non-fund and non-fund to fund based