Rating Rationale
September 04, 2019 | Mumbai
Avenue Supermarts Limited
'CRISIL AA+/Stable' assigned to NCD
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Rs.200 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
Non-Convertible Debentures Aggregating Rs.123 Crore  CRISIL AA+/Stable (Reaffirmed)
Rs.258 Crore Non Convertible Debentures CRISIL AA+/Stable (Withdrawn)
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 assigned its 'CRISIL AA+/Stable' rating to the Rs.200 crore non-convertible debenture (NCD) of Avenue Supermarts Limited (ASL); the ratings on the company's long-term bank facilities and debt programmes have been reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+'. CRISIL has also withdrawn its rating on the non-convertible debentures of Rs 258 crore (See Annexure 'Details of Rating Withdrawn') as they are fully redeemed. The withdrawal is in 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 higher retail area addition and healthy like-to-like growth of about 15% going forward. As a result, CRISIL expects the company to maintain an annual revenue growth of 20-25%.

Further, CRISIL expects the company to maintain its healthy operating profitability of around 8.5% backed by faster breakeven of stores (6-12 months), superior per store revenue compared to peers, high inventory turnover as well as maintenance of gross margin at around 15% despite growing competition.

In the three months ended June 30, 2019, the company posted revenue of Rs 5815 crore, a 28% growth over the corresponding period in the previous fiscal. The earnings before interest, depreciation, taxes and amortisation (EBIDTA) margin stood at 9.9% (comparable; excluding the impact of Ind-AS 116 on lease accounting) as against 9.3% in the corresponding period of the previous fiscal primarily due to higher gross margins and continued operational efficiency. In fiscal 2019, revenue stood at Rs 20075 crore, a 33% year-on-year growth while EBIDTA margin fell to 8.2% from 9.0% due to lower gross margins on account of higher discounting owing to heightened competitive intensity. The capital expenditure (capex) stood at Rs 1447 crore in fiscal 2019 as the company added 21 stores (retail area addition of 1 million square feet - sq. ft.). Moreover, some of the capex incurred in fiscal 2019 was towards stores added in the first quarter of fiscal 2020 (8 stores added with retail area addition of 0.4 million sq. ft.).

CRISIL expects ASL's financial risk profile to remain robust characterised by strong cash accruals (estimated at over Rs 1300 crore per annum), annual capex of Rs 1500 crore, healthy liquidity (Rs 170 crore as on July 31, 2019) as well as comfortable return on capital employed ratio (RoCE) of over 26%.

The ratings reflect ASL's strong position in the domestic organised F&G 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 Trade Pvt Ltd (ARTPL), Avenue Food Plaza Pvt Ltd (AFPL), Avenue E-commerce Ltd (AEL), Nahar Seth and Jogani Developers Pvt Ltd and Reflect Wholesale and Retail Pvt Ltd. The subsidiaries are an integral part of ASL's operations. All the companies are referred to as ASL.

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
* 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 operates 184 stores (as on June 30, 2019) under the D-Mart brand, which reported high same-store sales growth (irrespective of their vintage) of about 17.8% in fiscal 2019. Strong procurement abilities, lower priced products along with healthy cost control results in robust 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 Rs 35647 in fiscal 2019, is significantly higher than peers. The operating profitability of the company has seen improvement over the years with EBIDTA margin increasing from 7.1% in fiscal 2015 to 9% in fiscal 2018. In fiscal 2019, operating margin moderated to 8.2% as the company reduced prices across categories.

Currently, ASL's operations are largely concentrated in West and South India. Expected large cluster focused store addition over the 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 from economies of scale will strengthen ASL's market share in organised F&G 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
Financial risk profile is driven by sizeable networth (Rs 5480 crore as on March 31, 2019), 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 (IPO) 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 20% per annum increase in existing retail space of around 6.3 million sq. ft. (as on June 30, 2019) by fiscal 2020. Strong cash generation of over Rs 1300 crore per annum is expected to fund the capex partly of Rs 1500 crore, resulting in low dependence on external borrowings. Further, liquidity is expected to remain healthy.
Moreover in May 2019, the company has received approval from the board of directors for qualified institutional placement (QIP) of 2.5 crore shares. Partial or full QIP will result in further strengthening of financial risk profile and will support ASL to pursue large capex without depending on external debt.

* Moderate though improving geographical spread
ASL's operations are concentrated mainly in Maharashtra (70 stores), Gujarat (34), Andhra Pradesh & Telangana (32), and Karnataka (16) as on March 31, 2019 that means 89% of stores are in West and South India. Geographical reach of ASL currently is lower than 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 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. Competitive intensity is also increasing from other large domestic F&G retailers such as Reliance Retail Ltd (CRISIL AAA/Stable/CRISIL A1+) and Future Retail Ltd.

Also, competition is increasing due to greater 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, Grofers, Amazon Pantry are registering aggressive growth.

Liquidity: Strong

Liquidity remains strong supported by large cash accruals, expected at Rs 1400-2300 crore over fiscals 2020 to 2022 should comfortably cover annual repayment obligations of Rs 200-300 crore. Working capital limit of Rs 668 crore was utilised negligibly at 5% over the six months through July 2019. The company also has commercial papers outstanding to the tune of around Rs 300-500 crore on an average. Liquidity is further aided by cash and equivalents of Rs 170 crore as on March 2019. The company is expected to incur capex of around Rs 1500-1900 crore per annum over fiscal 2020 and 2022 towards store expansion, which is expected to be funded primarily 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 healthy financial flexibility.

Rating sensitivity factors
Upward factors:
* Substantial improvement in geographical diversity and sales channel mix resulting in higher scale of operations with operating profitability of 8.5-9.0% on a sustained period of time.
* Sustenance of strong capital structure, for instance gearing remaining below 0.20 times sustainably and adequate liquidity.

Downward factors:
* Significant weakening of operating margin due to large gestation losses from new stores, for instance, operating margin consistently remaining below 7.5%.
* Larger-than-expected debt-funded capex increasing 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 on June 30, 2019, it had 184 hypermarket stores in Maharashtra, Gujarat, Telangana, Karnataka, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, NCR, Tamil Nadu, Punjab, Rajasthan and Daman.

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 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 a 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 66 crore remained unutilised as on June 30, 2019. The promoter shareholding in the company, stood at 81.2% as on June 30, 2019. The promoters need to reduce the stake to 75% or below before March 2020 for complying with minimum shareholding norms as per the Securities and Exchange Board of India regulations.

In the first quarter of fiscal 2020, the company posted revenue and net profit of Rs 5815 crore and Rs 323 crore, respectively, as compared to Rs 4576 crore and Rs 245 crore, respectively, in the corresponding quarter of last year.

Key Financial Indicators
As on March 31 Unit 2019 2018
Revenue Rs crore 20075 15111
Profit after tax (PAT) Rs crore 902 806
PAT Margin % 4.5 5.3
Adjusted debt/Adjusted networth Times 0.13 0.10
Interest coverage Times 35.63 24.20

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+/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
INE192R07042 Debenture 20-Nov-2014 10.00 20-Nov-2019 40 CRISIL AA+/Stable
NA Debenture* NA NA NA 200 CRISIL AA+/Stable
NA Proposed Fund based bank limits NA NA NA 110 CRISIL AA+/Stable
NA Working Capital Facility NA NA NA 640 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 Days 500 CRISIL A1+
*Yet to be issued
Annexure - Details of rating withdrawn
ISIN Name of instrument Date of
rate (%)
Maturity date Issue Size
(Rs crore)
INE192R07091 Debenture 18-Dec-2015 9.25 18-Dec-2018 100
INE192R07034 Debenture 20-Nov-2014 10.00 20-Feb-2019 35
INE192R07018 Debenture 19-Aug-2014 10.38 19-Aug-2019 90
INE192R07067 Debenture 20-Aug-2015 9.40 20-Aug-2019 33
Annexure - List of entities consolidated
S No Name of Subsidiary
1 Align Retail Trade Pvt Ltd (ARTPL),
2 Avenue Food Plaza Private Ltd (AFPL)
3 Avenue E-commerce Ltd (AEL),
4 Nahar Seth and Jogani Developers Pvt Ltd
5 Reflect Wholesale and Retail Pvt Ltd
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+  26-04-19  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  123.00
CRISIL AA+/Stable  26-04-19  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  26-04-19  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 110 CRISIL AA+/Stable Proposed Fund-Based Bank Limits 82 CRISIL AA+/Stable
Working Capital Facility 640 CRISIL AA+/Stable Short Term Loan 50 CRISIL A1+
-- 0 -- Working Capital Facility 618 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 Consolidation
CRISILs Criteria for rating short term debt

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