Rating Rationale
September 24, 2018 | Mumbai
Avenue Supermarts Limited
Long-term rating upgraded to 'CRISIL AA+/Stable' ; short-term rating reaffirmed 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Non Convertible Debentures Aggregating Rs.416 Crore  CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Rs.200 Crore Commercial Paper (Enhanced from Rs.70 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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

The upgrade 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 (25-30 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 20-25% growth going forward.

Further, CRISIL expects the company to maintain its healthy operating profitability of around  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 three months ended 30th June 2018, the company posted revenue of Rs 4559 crore, a growth of 27% as compared to similar period in the previous fiscal. The EBIDTA (Earnings before interest, depreciation, taxes and amortization) margin stood at 9.3% in three months ended 30th June 2018 as against 8.4% in the similar period in the previous fiscal.  

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 (over Rs 450 crore as on August 31, 2018) 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.

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), Avenue E-commerce Limited (AEL) and Reflect Wholesale and Retail Private Limited. The subsidiaries are an integral part of ASL's operations. All these companies are referred to as ASL.

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 currently operates 157 stores (as on June 30, 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 grown consistently with EBIDTA margin of 7.1% in fiscal 2015 to around 9% in fiscal 2018 and 9.3% in first three months of fiscal 2019.   

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 4643 crore as on March 31, 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 30-35% in existing retail space of around 5.0 million square feet (as on June 30, 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.

* 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.
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 June 30, 2018, it had 157 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, 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 490 crore remained unutilized as on March 31, 2018. As on June 30, 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.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
INE192R07091 Debenture 18-Dec-2015 9.25 18-Dec-2018 100 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
INE192R07034 Debenture 20-Nov-2014 10.00 20-Feb-2019 35 CRISIL AA+/Stable
INE192R07018 Debenture 19-Aug-2014 10.38 19-Aug-2019 90 CRISIL AA+/Stable
INE192R07026 Debenture* 20-Nov-2014 10.00 20-Apr-2018 35 CRISIL AA+/Stable
NA Proposed Fund based bank limits NA NA NA 632 CRISIL AA+/Stable
NA Working Capital Facility NA NA NA 118.0 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 Days 200 CRISIL A1+
*Redeemed as on due date.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  200.00  CRISIL A1+  05-03-18  CRISIL A1+  03-04-17  CRISIL A1+  22-11-16  CRISIL A1+  15-12-15  CRISIL A1+  -- 
                    18-03-15  CRISIL A1+   
                    13-03-15  CRISIL A1+   
Non Convertible Debentures  LT  381.00
CRISIL AA+/Stable  05-03-18  CRISIL AA/Positive  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  15-12-15  CRISIL AA-/Stable  CRISIL AA-/Stable 
                    18-03-15  CRISIL AA-/Stable   
                    13-03-15  CRISIL AA-/Stable   
Fund-based Bank Facilities  LT/ST  750.00  CRISIL AA+/Stable  05-03-18  CRISIL AA/Positive  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  15-12-15  CRISIL AA-/Stable  CRISIL AA-/Stable 
                    18-03-15  CRISIL AA-/Stable   
                    13-03-15  CRISIL AA-/Stable   
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 632 CRISIL AA+/Stable Proposed Term Loan 482 CRISIL AA/Positive
Working Capital Facility 118 CRISIL AA+/Stable Proposed Working Capital Facility 150 CRISIL AA/Positive
-- 0 -- Working Capital Facility 118 CRISIL AA/Positive
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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