Rating Rationale
August 31, 2019 | Mumbai
Aditya Birla Fashion and Retail Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1250 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
 
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable (Reaffirmed)
Rs.400 Crore Non Convertible Debentures CRISIL AA/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable (Withdrawn)
Rs.260 Crore Non Convertible Debentures CRISIL AA/Stable (Withdrawn)
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable (Withdrawn)
Rs.1250 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the long-term bank facilities and debt instruments of Aditya Birla Fashion and Retail Limited (ABFRL). CRISIL has also withdrawn its rating on non-convertible debentures of Rs 860 crore (See Annexure 'Details of Rating Withdrawn' for details) consequent to their redemption. CRISIL has received independent confirmation that these instruments are fully redeemed, and the withdrawal is in line with CRISIL's policy.

CRISIL expects ABFRL to sustain its operating performance, with healthy double-digit revenue growth of 10-12% per annum over the medium term, driven by steady like-to-like growth in the Madura division, expected improvement in same store growth, rise of private label share in the Pantaloons division, and continued addition of stores in both the segments. Value retailing segment- Pantaloons, accounting for ~40% of revenues; is expected to grow 10-12% per annum over the medium term, driven by addition of 50-60 stores per annum.

In fiscal 2019, the company posted revenue growth of 13% year on year (y-o-y), while operating margin improved to 7.6% from 7.0%, backed by improving profitability in the Pantaloons segment, stable margin in the Madura brands business and improving margins in Madura's other businesses (inner wear and fast fashion). Cost rationalisation initiatives in Pantaloons, higher contribution from private labels, and recovery in same store growth should increase profitability over the medium term. Rapid scale of growth in the innerwear segment will, likely, improve profitability in other businesses which are expected to breakeven by the fourth quarter of fiscal 2021.

Overall debt stood at Rs 1,703 crore as on March 31, 2019 while earnings before interest, taxes, depreciation, and amortisation (EBITDA) was Rs 619 crore in fiscal 2019. Debt-to-EBIDTA improved to 2.8 times in fiscal 2019 from 3.7 times the previous fiscal, owing to improving profitability, disciplined working capital management, and limited capital expenditure (capex). Over the medium term, debt-to-EBIDTA is likely to improve to 2 times (unadjusted for Ind-AS 116), supported by healthy increase in cash accrual and no large debt-funded capex.

With the implementation of Ind-AS 116 on lease accounting, effective April 01, 2019, lease liabilities of around Rs 2000 crore will be added to debt in fiscal 2020. However, debt-to-EBIDTA is not expected to be impacted significantly as EBIDTA is also expected to double in line with the accounting treatment. In the first three months of fiscal 2020, EBIDTA margin was 16% (post Ind-AS 116). The comparable EBIDTA margin for this period was 7.6% as against 6.4% in similar period in fiscal 2019.

ABFRL continues to benefit from the strong financial flexibility of the Aditya Birla Group (ABG). 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.

Analytical Approach

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. Furthermore, CRISIL has taken into account need-based managerial and financial support expected from ABG in the event of an exigency.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy business risk profile backed by the strength of apparel brands in the Madura 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. Profitability in the Madura division has moderated due to losses from new businesses (Forever 21 and other ventures); however, CRISIL expects the profitability to revive driven by the strength of the apparel brands, store rationalisation in fast fashion, and healthy growth in the innerwear segment.
 
* Favourable growth prospects for the Pantaloons division:
Growth prospects for the Pantaloons division remain healthy, driven by the strong brand image, healthy geographic diversity, and improving profitability. The margin in this segment improved to 7.2% in fiscal 2019 from 6.0% the previous fiscal, despite more than 60% higher marketing spend y-o-y. The improvement could be attributed to focus on the value retail segment, better product mix, cost rationalisation, and higher store productivity. Profitability is expected to improve further over the medium term. Pantaloons currently has a pan-India presence, with a network of 314 stores across 80 cities with a high proportion of private labels, which the management is aiming to increase in future. The management also has plans to open 50-60 stores per year over the medium term. Higher productivity of current stores and faster turnaround of the new stores should benefit Pantaloons' business risk profile.
 
* Strong management setup and experience of ABG:
ABG owns 59% 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 ABFRL's net cash accruals should remain strong going forward, thereby ensuring robust financial flexibility. 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. NCDs of Rs 500 crore due in fiscal 2020 have already been redeemed. 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 stood at Rs.1703 crore as on March 31, 2019. ABFRL is expected to generate sufficient cash accrual to part-fund its capex, term debt repayments, and regular working capital. The debt protection metrics is expected to improve over medium term 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 8,118 crore in fiscal 2019. 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/Positive/CRISIL A1+'), Shoppers Stop Ltd (rated 'CRISIL A1+'), and Future Lifestyle Fashions Ltd (rated 'CRISIL AA-/Positive/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
Liquidity is strong. Net cash accrual-expected at Rs 500-750 crore per annum over the medium term'should be sufficient to cover yearly debt obligation of Rs 400-500 crore. NCDs of Rs 500 crore due in fiscal 2020 have already been redeemed. The company has a track record of raising funds from capital markets at competitive rates. Liquidity is further aided by availability of support from ABG in the event of an exigency. Utilisation of working capital limits of Rs 1041 crore averaged 42% in the 12 months through June 2019. The company is in the process of enhancing its working capital limit further in the next few months. It also has monthly commercial paper repayments of Rs 300-400 crore on average. Moreover, capex of Rs 350-400 crore expected to be undertaken per annum over the medium term is expected to be funded mainly via internal accrual.
Outlook: Stable

CRISIL believes ABFRL will continue to benefit from the established market position of its brands under Madura and the improving performance of the Pantaloons division.

Rating sensitivity factors
Upward Factor:
* 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 debt-to-EBIDTA falling below 1 time
* Significant improvement in the business and financial risk profiles of ABG
 
Downward Factor:
* Potential High debt levels in future , leading to weakening of debt protection metrics for instance Debt to EBIDTA increases beyond 3.5 times.
* 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 also entered the innerwear segment, with a retail reach of 16000 outlets as on June 30, 2019.

As on June 30, 2019, the company operated on a retail area of 7.7 million square feet, with over 2,486 exclusive brand outlets for Lifestyle brands and 314 Pantaloons stores.

For the three months ended June 30, 2019, ABFRL reported net profit of Rs 22 crore (net profit of Rs 6 crore for the corresponding period the previous year) on operating income of Rs 2065 crore (Rs 1914 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. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Rating assigned
with outlook
INE647O08057 NCD 10-Oct-16 8.20% 20-Apr-20 400 CRISIL AA/Stable
INE647O08073 NCD 07-Sep-18 0% 14-Aug-21 300 CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 1250 CRISIL A1+
NA Long-Term Loan NA NA Mar-22 7.9 CRISIL AA/Stable
NA Long-Term Loan NA NA Mar-23 20 CRISIL AA/Stable
NA Cash Credit NA NA NA 841 CRISIL AA/Stable
NA Working Capital Demand Loan NA NA NA 200 CRISIL AA/Stable
NA Proposed Long-Term Bank Loan Facility NA NA NA 181.10 CRISIL AA/Stable
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity date Issue size
(Rs crore)
INE647O08024 Non-convertible debentures 22-May-13 9.20% 22-May-18 100
INE647O08032 Non-convertible debentures 5-May-16 8.84% 12-Apr-19 200
INE647O08040 Non-convertible debentures 31-May-16 8.73% 31-May-19 300
INE647O08065 Non-convertible debentures 17-Mar-17 7.70% 17-Jun-21 260
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1250.00  CRISIL A1+      31-08-18  CRISIL A1+  02-11-17  CRISIL A1+    --  -- 
Non Convertible Debentures  LT  700.00
31-08-19  		CRISIL AA/Stable      31-08-18  CRISIL AA/Stable  02-11-17  CRISIL AA/Stable  18-11-16  CRISIL AA/Stable  -- 
                14-03-17  CRISIL AA/Stable  22-09-16  CRISIL AA/Stable   
                    27-04-16  CRISIL AA/Stable   
Short Term Debt (Including Commercial Paper)  ST              14-03-17  CRISIL A1+  18-11-16  CRISIL A1+  -- 
                    22-09-16  CRISIL A1+   
                    27-04-16  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  1250.00  CRISIL AA/Stable      31-08-18  CRISIL AA/Stable  02-11-17  CRISIL AA/Stable  18-11-16  CRISIL AA/Stable  -- 
                14-03-17  CRISIL AA/Stable  22-09-16  CRISIL AA/Stable/ CRISIL A1+   
                    27-04-16  CRISIL AA/Stable/ CRISIL A1+   
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 841 CRISIL AA/Stable Cash Credit 881 CRISIL AA/Stable
Long Term Loan 27.9 CRISIL AA/Stable Long Term Loan 30.24 CRISIL AA/Stable
Proposed Long Term Bank Loan Facility 181.1 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 138.76 CRISIL AA/Stable
Working Capital Demand Loan 200 CRISIL AA/Stable Working Capital Demand Loan 200 CRISIL AA/Stable
Total 1250 -- Total 1250 --
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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