Rating Rationale
March 05, 2018 | Mumbai
Avenue Supermarts Limited
Rating outlook revised to 'Positive', ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA/Positive (Outlook revised from 'Stable' and rating reaffirmed)
 
Non Convertible Debentures Aggregating Rs.416 Crore (Reduced from Rs.800 Crore) CRISIL AA/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Rs.70 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank loan facilities and non-convertible debentures of Avenue Supermarts Limited (ASL) to 'Positive' from 'Stable' and reaffirmed rating at 'CRISIL AA'. CRISIL has also reaffirmed its rating on the commercial paper programme at 'CRISIL A1+'

The positive outlook 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 (20-25 stores per annum) 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% growth going forward.

Further, CRISIL expects the company to maintain its healthy operating profitability of ~8-9% backed by faster breakeven of stores (~6-9 months), superior per store revenue compared to peers, and high inventory turnover.

CRISIL expects ASL's financial risk profile to remain robust characterised by strong cash accruals (estimated at over Rs 900 crore), healthy liquidity (over Rs 500 crore as on December 31, 2017) as well as healthy return on capital employed of over 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.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of ASL and its wholly owned subsidiaries, Align Retail Trades Pvt Ltd (ARTPL), Avenue Food Plaza Pvt Ltd (AFPL) and Avenue E-commerce Limited (AEL). The subsidiaries are an integral part of ASL's operations. All the four companies are referred to as ASL.

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 141 stores (as on December 31, 2017) under the D-Mart brand, which have consistently reported higher same-store sales growth (irrespective of their vintage) of about 21.2% (for fiscal 2017), compared to peers that have registered 10-15% growth. 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 sqft and translates into industry leading retail store productivity. Aggregate revenue per square foot at about Rs. 31120 in fiscal 2017, is about 50% higher than most retailers in the same segment.  

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 4214 crore as on September 30, 2017), 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 50-55% in existing retail space of around 4.2 million square feet (as on September 30, 2017) by fiscal 2020. Strong cash generation of over Rs 850 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 (60), Gujarat (29), Andhra Pradesh & Telangana (20), and Karnataka (11) as on March 31, 2017 viz. 90% of stores are in West and South India. Geographical reach of ASL currently is lower compared to its peers which 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.
Outlook: Positive

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

Upside Scenario:
* Substantial increase in scale of operations with improving geographical diversity leading to better then expected cash accrual
* 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, who also has large real estate holdings in Mumbai. Mr. Ignatius Navil Noronha is ASL's chief executive officer and managing director. As of December 31, 2017, it had 141 hypermarket stores in Maharashtra, Gujarat, Karnataka, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, NCR, and Rajasthan.

ARTPL procures grocery items, including pulses, rice, wheat, vegetables, and fruits from local agricultural produce market committees, packages 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 utilised funds for debt reduction (Rs 1080 crore), capex (Rs 366.6 crore), and general corporate purpose (Rs 423.4 crore). Out of the IPO proceeds, Rs 540 crore remained unutilized as on December 31, 2017. Post the IPO, promoter shareholding reduced to 82.2%.

Key Financial Indicators (CRISIL adjusted)
As on March 31 Unit 2017 2016
Revenue Rs. Cr. 11990 8,679
Profit After Tax Rs. Cr. 449 321
PAT margins % 3.7 3.7
Adjusted Debt/Adjusted Net worth Times 0.39 0.79
Interest coverage Times 8.19 7.51

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
INE192R07158 Debenture 15-Mar-2016 9.10 14-Mar-2020 16 CRISIL AA/Positive
INE192R07125 Debenture 29-Jan-2016 9.10 29-Jan-2020 33 CRISIL AA/Positive
INE192R07091 Debenture 18-Dec-2015 9.25 18-Dec-2018 100 CRISIL AA/Positive
INE192R07075 Debenture 20-Aug-2015 9.40 20-Aug-2020 34 CRISIL AA/Positive
INE192R07067 Debenture 20-Aug-2015 9.40 20-Aug-2019 33 CRISIL AA/Positive
INE192R07042 Debenture 20-Nov-2014 10.00 20-Nov-2019 40 CRISIL AA/Positive
INE192R07034 Debenture 20-Nov-2014 10.00 20-Feb-2019 35 CRISIL AA/Positive
INE192R07018 Debenture 19-Aug-2014 10.38 19-Aug-2019 90 CRISIL AA/Positive
INE192R07026 Debenture 20-Nov-2014 10.00 20-Apr-2018 35 CRISIL AA/Positive
NA Proposed Term Loan NA NA NA 482.0 CRISIL AA/Positive
NA Proposed Working Capital Facility NA NA NA 150 CRISIL AA/Positive
NA Working Capital Facility NA NA NA 118.0 CRISIL AA/Positive
NA Commercial Paper NA NA 7-365 Days 70.0 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  70  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  13-03-15  CRISIL A1+  -- 
Non Convertible Debentures  LT  416  CRISIL AA/Positive    No Rating Change  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive    No Rating Change  CRISIL AA-/Stable 
Fund-based Bank Facilities  LT/ST  750  CRISIL AA/Positive    No Rating Change  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive    No Rating Change  CRISIL AA-/Stable 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Term Loan 482 CRISIL AA/Positive Proposed Term Loan 170.24 CRISIL AA/Stable
Proposed Working Capital Facility 150 CRISIL AA/Positive Proposed Working Capital Facility 119.36 CRISIL AA/Stable
Working Capital Facility 118 CRISIL AA/Positive Term Loan 357.4 CRISIL AA/Stable
-- 0 -- Working Capital Facility 103 CRISIL AA/Stable
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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