Rating Rationale
April 26, 2019 | Mumbai
Avenue Supermarts Limited
Ratings Reaffirmed 
 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reassigned)
 
Non-Convertible Debentures Aggregating Rs.381 Crore CRISIL AA+/Stable (Reaffirmed)
Rs.500 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 ratings on the long term bank facilities and debt instruments of Avenue Supermarts Limited (ASL) at 'CRISIL AA+/Stable/CRISIL A1+' while reassigning it's 'CRISIL A1+' rating to the short term bank facility. CRISIL has also withdrawn its rating on the non-convertible debenture of Rs 135 crore (See Annexure 'Details of Rating Withdrawn' for details) as they are fully redeemed. The rating is withdrawn in line with CRISIL's policy.

The reaffirmation reflects expectation of sustained improvement in business profile supported by strong ramp up in scale of operations, along with cluster focused store expansion and superior store productivity. Ramp up in operations will be supported by increase in new store roll out  and healthy like to like growth of about 15% going forward. As a result, CRISIL expects the company to maintain about annual growth of 20-25% growth going forward.

Further, CRISIL expects the company to maintain its healthy operating profitability of around  8.5-9% backed by faster breakeven of stores (~6-9 months), superior per store revenue compared to peers, improving proportion of private label and non-Food & Grocery (F&G) sales and high inventory turnover.

In nine months ended 31st December 2018, the company posted revenue of Rs 14883 crore, a growth of 32.9% as compared to similar period in the previous fiscal. The EBIDTA (Earnings before interest, depreciation, taxes and amortization) margin stood at 8.5% in nine months ended 31st December 2018 as against 9.3% in the similar period in the previous fiscal primarily due to gross margin reduction on account of price cuts.  

CRISIL expects ASL's financial risk profile to remain robust characterized by strong cash accruals (estimated at over Rs 900 crore per annum), healthy liquidity (around Rs 125 crore as on March 31, 2019) as well as healthy return on capital employed of around 25%.

The rating reflects ASL's strong market position in the domestic organised food and grocery retail market and solid financial risk profile, as reflected in sizeable net worth and strong debt protection metrics. These strengths are partially offset by the company's moderate though improving geographic spread, and susceptibility of operating performance to regulatory changes and competition.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position in the organised retail market: ASL's market position is reinforced by steady same-store growth and retail productivity, and short gestation for new stores. ASL currently operates 164 stores (as on December 31, 2018) under the D-Mart brand, which have consistently reported higher same-store sales growth (irrespective of their vintage) of about 20% per annum till fiscal 2017. The same-store sales growth stood 14.2% in fiscal 2018 owing to lower staples inflation and GST adjusting impact. Strong procurement abilities, lower priced products along with strong cost control leads to strong growth in footfalls. This leads to high inventory turnover and revenue per sq ft and translates into industry leading retail store productivity. Aggregate revenue per square foot at about Rs. 32719 in fiscal 2018, is significantly higher than most retailers in the same segment. The operating profitability of the company has seen improvement over the years with EBIDTA margin of 7.1% in fiscal 2015 to around 9% in fiscal 2018. In first nine months ended 31st December 2018, the operating margin moderated to 8.5% as company reduced the prices across categories.

Currently, ASL's operations are largely concentrated in West and South India. Expected large cluster focused store addition over next 3 years will benefit to diversify geographic reach of the company. CRISIL believes strong track record of outpacing its peers in growth, its strong merchandising and compelling value proposition, benefit of economies of scale will benefit to strengthen ASL' market share in organised food and grocery retail in India in the medium term.

Further, the company has also initiated to ramp up its online strategy and a platform to support future sales channels. Improvement in geographic diversity along with sustenance of healthy operating performance will be key rating drivers in the medium term.

* Solid financial risk profile and healthy liquidity
Financial risk profile is driven by a sizeable net worth (Rs 5129 crore as on September 30, 2018), and strong annual cash generation, despite continuing store addition. The company has been able to maintain healthy operating metrics, while adding stores, and also prepaid sizeable debt through proceeds of its initial public offering totalling Rs.1870 crore in fiscal 2017. This has translated into strong debt protection metrics.

CRISIL expects ASL's prudent expansion plan will entail a sizeable increase of about 25-35% in existing retail space of around 5.3 million square feet (as on December 31, 2018) by fiscal 2020. Strong cash generation of over Rs 900 crore per annum is expected to be sufficient for capital expenditure (capex), resulting in minimal dependence on external borrowings. Furthermore, liquidity is expected to remain healthy.

Weakness
* Moderate though improving geographical spread
ASL's operations are concentrated mainly Maharashtra (62), Gujarat (30), Andhra Pradesh & Telangana (29), and Karnataka (12) as on March 31, 2018 viz. 90% of stores are in West and South India. Geographical reach of ASL currently is lower compared to its peers who mostly have pan-India presence.  ASL plans to expand gradually in cluster fashion in North and Central India in the medium term. Timely store expansion and replication of similar strong store performance in newer geographies will remain key monitorable.

* Susceptibility of operating performance to regulatory changes and increasing competition
Liberalisation of regulations such as foreign direct investment (FDI) policy for food only retail (in 2016), and multi-brand retail segment as and when it happens, will intensify competition in the domestic F&G sector, including from large international players.

The competitive intensity is also increasing due to increasing focus of online retailers on the F&G segment. While ASL is a small player at present in the online F&G space, earlier entrants such as BigBasket and Grofers are registering aggressive growth.
Liquidity

Liquidity is marked with sufficient accruals as against maturing repayments, adequate liquidity and sufficient availability of bank limits. The accrual are estimated at Rs 900 crore each year, as against the maturing repayments of around Rs 200 crore each year over fiscal 2019 and 2020.  Utilization of fund based working capital limits of Rs 668 crore over last six months ended March 2019 stood at around 50%. Liquidity is further aided by cash and equivalents of Rs 125 crore as on 31st March 2019. The company is expected to incur capital expenditure (capex) of around Rs 1000 crore per annum over fiscal 2019 and 2020 towards store expansion, which is expected to funded mainly from internal accrual.

Outlook: Stable

CRISIL believes that ASL's credit risk profile will continue to benefit on account of improving market position in the organised retail segment, strong annual cash generation, and the healthy financial flexibility.

Upside Scenario
* Substantial improvement geographical diversity and sales channel mix resulting in higher scale of operations and cash accrual and
* Sustenance of strong capital structure and liquidity

Downside Scenario
* Significant weakening of operating margin due to large gestation losses from new stores
* Larger-than-expected debt-funded capex weakening gearing to above 0.5 time.

About the Company

ASL is engaged in the organised retail business through its D-Mart chain of stores. The company was incorporated in 2000 and is promoted by Mr. Radhakishan Damani, a well-known equity market investor. Mr. Ignatius Navil Noronha is ASL's chief executive officer and managing director. As of December 31, 2018, it had 164 hypermarket stores in Maharashtra, Gujarat, Telangana, Karnataka, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, NCR, Tamil Nadu, Punjab, Rajasthan and Daman.

Align Retail Trades Pvt Ltd (ARTPL) procures grocery items, including pulses, rice, wheat, vegetables, and fruits from local agricultural produce market committees, package these, and supplies to ASL. AFPL runs fast-food counters outside the D-Mart stores. AEL is into e-retailing of F&G and operates currently in certain regions of Mumbai.  ASL acquired 50.79% in AEL in February 2018 for Rs 49.2 crore to make it wholly owned subsidiary.

ASL has successfully completed its IPO in March 2017, and raised funds for debt reduction (Rs 1080 crore), capex (Rs 366.6 crore) and general corporate purpose (Rs 394.02 crore). Out of the IPO proceeds, Rs 165 crore remained unutilized as on December 31, 2018. As on December 31, 2018 the promoter shareholding in the company, stood at 81.2%.

Key Financial Indicators (CRISIL Adjusted Numbers)
As on March 31 Unit 2018 2017
Revenue Rs.Cr 15111 11990
Profit After Tax (PAT) Rs.Cr 806 449
PAT Margins % 5.3 3.7
Adjusted Debt/Adjusted Networth Times 0.10 0.39
Interest coverage Times 24.20 8.19

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.Cr) Rating Assigned with Outlook
INE192R07158 Debenture 15-Mar-2016 9.10 14-Mar-2020 16 CRISIL AA+/Stable
INE192R07125 Debenture 29-Jan-2016 9.10 29-Jan-2020 33 CRISIL AA+/Stable
INE192R07075 Debenture 20-Aug-2015 9.40 20-Aug-2020 34 CRISIL AA+/Stable
INE192R07067 Debenture 20-Aug-2015 9.40 20-Aug-2019 33 CRISIL AA+/Stable
INE192R07042 Debenture 20-Nov-2014 10.00 20-Nov-2019 40 CRISIL AA+/Stable
INE192R07018 Debenture 19-Aug-2014 10.38 19-Aug-2019 90 CRISIL AA+/Stable
NA Proposed Fund based bank limits NA NA NA 82 CRISIL AA+/Stable
NA Working Capital Facility NA NA NA 618 CRISIL AA+/Stable
NA Short term loan NA NA NA 50 CRISIL A1+
NA Commercial Paper NA NA 7-365 Days 500 CRISIL A1+

Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity date Issue Size
(Rs. Cr)
INE192R07091 Debenture 18-Dec-2015 9.25 18-Dec-2018 100
INE192R07034 Debenture 20-Nov-2014 10.00 20-Feb-2019 35
 
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  500.00  CRISIL A1+      26-10-18  CRISIL A1+  03-04-17  CRISIL A1+  22-11-16  CRISIL A1+  CRISIL A1+ 
            24-09-18  CRISIL A1+           
            05-03-18  CRISIL A1+           
Non Convertible Debentures  LT  246.00
25-04-19  		CRISIL AA+/Stable      26-10-18  CRISIL AA+/Stable  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  CRISIL AA-/Stable 
            24-09-18  CRISIL AA+/Stable           
            05-03-18  CRISIL AA/Positive           
Fund-based Bank Facilities  LT/ST  750.00  CRISIL AA+/Stable/ CRISIL A1+      26-10-18  CRISIL AA+/Stable  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  CRISIL AA-/Stable 
            24-09-18  CRISIL AA+/Stable           
            05-03-18  CRISIL AA/Positive           
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
Proposed Fund-Based Bank Limits 82 CRISIL AA+/Stable Proposed Fund-Based Bank Limits 432 CRISIL AA+/Stable
Short Term Loan 50 CRISIL A1+ Working Capital Facility 318 CRISIL AA+/Stable
Working Capital Facility 618 CRISIL AA+/Stable -- 0 --
Total 750 -- Total 750 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for rating short term debt

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