CRISIL has reaffirmed its ratings on the bank facilities and debt instruments of Aditya Birla Fashion and Retail Limited (ABFRL) at 'CRISIL AA/Stable/CRISIL A1+' and has also withdrawn its rating on Rs 400 crore non-convertible debenture of ABFRL (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as it is fully redeemed. The rating is withdrawn in line with CRISIL's policy.

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 have impacted the operations of the company as it has led to closure of stores in the Madura as well as Pantaloons division. While, most of the government's measures are applicable till May 03, 2020, prolonged closures can significantly weaken credit profiles of firms. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely. That said, the ability of the business to revert to operational stability, and any relief measures provided by the government are key monitorables.

However, ABFRL's management has taken measures to ramp up liquidity through enhancement of bank lines. The company has liquidity of around Rs 650 crore presently (in the form of cash & equivalents and unutilized bank lines and CP limits) and it is in the process to enhance the bank lines further by around Rs 800 crore in the near term. The company redeemed NCD of Rs. 528 crore (including accrued interest) on 20^th April 2020 and no major term debt repayments are expected for rest of the fiscal 2021. 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.

These measures would help mitigate any mis-match in cash flows and debt obligations in the near term. Moreover, 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. Overall for fiscal 2021, the revenues are projected to be lower by ~15-20% owing to the impact of COVID ' 19. The diversified geographical profile of Madura division (around 10% of stores are in the malls out of total of over 2600 stores, remaining on high streets across the country) as well as the value retailing segment, Pantaloons (around 15% of the stores are in malls out of the total 343 across 80 cities) will limit the impact on revenues.
 
Also the healthy gross margin of over 50% enjoyed by the company owing to strong brands in Madura division (which houses lifestyle brands such as Peter England, Allen Solley, Louis Phillippe and Van Heusen) as well as Pantaloons division wherein private labels contribute ~65% of the revenues, provides significant leverage to offer discounts and reduce the inventories in shorter span of time. ABFRL has also taken steps towards drastic cost cutting of the overheads through various initiatives and converting all 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), near to levels of earlier fiscals. In an effort to mitigate cash usage, ABFRL has curtailed its capital expenditure plan and promotional spend during the current fiscal.

Net debt, which is estimated at Rs 2450 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.

The ratings 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 downcycles.

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.

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 2450 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 8,700 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 AA-/Negative/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.

The company has liquidity of around Rs 650 crore presently (in the form of cash & equivalents and unutilized bank lines and CP limits) and it is in the process to securing additional bank lines of Rs 800 crore in the short while. The company redeemed NCD of Rs. 528 crore (including accrued interest) on 20^th April 2020 and no major term debt repayments are expected for rest of the fiscal 2021. 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.  

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 Factor
* Prolonged impact of COVID - 19 on revenue growth & cash accruals
* Significant weakening of debt protection metrics for instance Net Debt to EBIDTA increases beyond 4.0 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.

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 also entered the innerwear segment, with a retail reach of 20000 outlets as on June 30, 2019.

As on December 31, 2019, the company operated on a retail area of 8.1 million square feet, with 2,656 exclusive brand outlets for Lifestyle brands and 343 Pantaloons stores.

For the nine months ended December 31, 2019, ABFRL reported net profit of Rs 179 crore (normalised for deferred tax and un-adjusted for Ind-AS 116) as against Rs 119 crore for the corresponding period the previous year on operating income of Rs 6925 crore (Rs 6202 crore for the corresponding period the previous year).

Any other information: Not applicable