Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long term bank facilities of Benetton India Private Limited (BIPL) at ‘CRISIL BBB/Stable’.

 

The rating continues to reflect strong support from the parent, Benetton Group SRL and the ultimate parent, Edizione SRL coupled with strong brand presence and established distribution network. These strengths are partially offset by modest operating performance on account of intense competition in apparel retail industry and below average debt protection metrics and modest albeit improving business risk profile of parent.

 

The operating performance is expected to recover in CY 2021 on a lower base of CY 2020. Profitability too is expected to recover in the current year owing to higher scale but may remain weaker compared to the pre-pandemic period. In the first quarter of CY 2021 (Jan’21 – Mar’21), the company recorded 28% increase in the revenues year-on-year however operations were impacted in second quarter due to the second wave of pandemic in India. Nevertheless, the performance in CY 2021 is expected to be better compared to CY 2020, wherein pandemic induced lockdowns and reduced mobility impacted the operating performance significantly with around 60% de-growth in revenue and high operating losses. 

 

The equity infusion from parent to the tune of Rs 120 crore in first quarter of CY 2021 and Rs 60 crore in CY 2020 has aided the financial profile which remained healthy in spite of the weak operating performance. The overall debt has reduced from Rs 186 crore as on December 31, 2019 to Rs 107 crore as on March 31, 2021. The financial risk profile also benefits from low term debt obligations and sufficient liquidity in the form of unutilized fund based limits (Rs 296 crore as on March 31, 2021). The parent, Benetton Group SRL, holding company of Benetton Group’s clothing business was also benefitted from the equity infusions from the ultimate parent, Edizione SRL, through equity infusion of EUR 200 million in CY 2020 and EUR 180 million planned for CY 2021 to 2023. The parent is expected to continue to support the company as per business requirements.

 

Longer than expected impact of second wave of the pandemic on the operations and continued support from parents in case of exigencies and to keep capital structure stable will remain monitorables. 

Analytical Approach

The rating of BIPL factor in support expected from its ultimate parent, Edizione S.R.L. to BIPL as well as BIPL’s parent, Benetton Group S.R.L. CRISIL Ratings believes that BIPL will, in case of exigencies, receive support from its parent and ultimate parent for timely repayment of debt obligations, considering BIPL’s strategic importance, 100% ownership and continued funding support in past.

Key Rating Drivers & Detailed Description

Strengths

* Technical, managerial and financial support from the parent as well as the ultimate parent

BIPL is a wholly owned subsidiary of Italy-based Benetton Group, which has a presence in more than 120 countries. Benetton Group works jointly with BIPL on the designs for the latter’s various products. Though operations are managed locally, the board of directors includes representatives from the parent, in consultation with which all strategic decisions are taken. There has been regular equity support from the parent. The parent, Benetton Group SRL, infused equity of Rs 120 crore in 2020 and Rs 60 crore in the previous year. Further, company’s bank limits have been sanctioned based on corporate guarantee from the parent. India continues to remain a focus market for the Group with contribution of 8-9% of the group’s revenues.

 

* Established brand and strong distribution network

Benetton Global has maintained a strong market presence for more than two decades in India. Initially, it launched only the United Colors of Benetton brand of apparel and accessories at premium locations in top cities. Subsequently, it launched its innerwear brand Undercolors of Benetton in India. BIPL has expanded rapidly and operates 844 stores at end of December 2020 against 391 in fiscal 2010.

 

Weaknesses

* Modest operating performance due to intense competition in the apparel retailing

Increasing competition from international as well as domestic brands has impacted the profitability. BIPL has reported losses at operating level in the recent years. Profitability in 2020 was further impacted in 2020 due to pandemic impact. The losses are expected to reduce over the medium term due to various initiatives taken by the management to improve its gross margin and overall profitability.

 

* Below average debt protection metrics

Company’s debt protection metrics such as interest coverage and ratio of net cash accruals to adjusted debt are expected to remain weak on account of subdued profitability. The networth was impacted severely in CY 2020 due to large losses due to pandemic, resulting into gearing deteriorating to ~4 times as on December 31, 2020 against 1 time as on December 31, 2019, however with equity infusion, same is expected to improve to below 3 times as on December 31, 2021. However, the financial risk profile of BIPL remains supported by low term debt obligations, adequate liquidity and continued funding support from parent.

 

* Modest albeit improving business risk profile of Parent company – Benetton Group S.R.L

Parent company of BIPL – Benetton Group S.R.L has seen modest losses since demerger in calendar year 2016. Parent group has a turnaround plan in place which involves reduction in overall losses through improvement in collection and cost control measures. The changes at top management level at parent level are expected to drive the turnaround of the business performance. However, considering that ratings factor in support from parent, any significant deterioration in business profile of parent will have a bearing on overall ratings of BIPL.

Liquidity: Adequate

The adequate liquidity position is marked by moderate bank limit utilisation (BLU), low debt repayment obligations and equity infusions by parent. The company had on average BLU of 60% for 12 months ended Apr-21. Parent infused Rs 120 crore in the current year and Rs 60 crore in the previous year. Financial flexibility has improved in the current year with available unutilised bank lines of around Rs 296 crore as of March 31, 2021. The company does not have any major capital expenditure plans and is not expected to draw any term loan over medium term.

Outlook: Stable

CRISIL Ratings believes that, over the medium term, BIPL will maintain its business risk profile driven by strong brand presence and established distribution. Financial risk profile will be supported by equity infusion from parent but will continue to be constrained on account of low profitability.

Rating Sensitivity factors

Upward Factors:

• Significant improvement in operating performance, in terms of revenue, profitability and return on capital employed
• Improvement in key credit metrics with interest coverage ratio over 1.5 times on sustainable basis

 

Downward Factors:

• Diminution in support from the ultimate parent (Edizione SRL) and parent (Benetton Group SRL) or significant deterioration of business profile of parent Benetton Group S.R.L
• Worsening of financial risk profile with gearing of more 3 times on sustained basis.

About the Company

Benetton is a leading global player in the casual apparel market, with a presence in more than 120 countries. It delisted from the Italian stock exchange in 2012. Benetton entered the Indian market in fiscal 1992 through a joint venture (JV), DCM Benetton India Ltd (DCM Benetton), with the Delhi-based DCM group. In December 2004, Benetton acquired the DCM group’s entire stake in the JV and renamed the entity as BIPL. BIPL sells its products in India through 844 stores.

Key Financial Indicators

As on/for the period ended December 31		2020	2019
Revenue*	Rs.Crore	296	765
Adjusted profit after tax (PAT)	Rs.Crore	-194	-51
PAT margin	%	-65.7	-6.7
Adjusted debt / adjusted networth	Times	4.26	1.01
Interest coverage	Times	-7.23	-1.12

*Net of discounts and commission on sales

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Complexity level	Issue size (Rs.Crore)	Rating assigned with outlook
NA	Working capital facility*	NA	NA	NA	NA	90.0	CRISIL BBB/Stable
NA	Working capital facility@	NA	NA	NA	NA	125.0	CRISIL BBB/Stable
NA	Working capital facility^	NA	NA	NA	NA	70.0	CRISIL BBB/Stable
NA	Working capital facility#	NA	NA	NA	NA	21.6	CRISIL BBB/Stable
NA	Working capital facility$	NA	NA	NA	NA	60.0	CRISIL BBB/Stable

*Fully Interchangeable with WCDL (Rs 80 Cr.), Overdraft (Rs 20.80 Cr.), bank guarantee (Rs 5 crore), letter of credit (Rs 45 crore).

@Fully interchangeable with WCDL (Rs 125 crore), Cash credit (Rs 50 crore), export packing credit (Rs 20 crore), export post shipment credit (Rs 20 crore), import / inland letter of credit (Rs 25 crore), vendor finance (Rs 65 crore), cash management service (Rs 0.05 crore)

^Fully interchangeable with WCDL (Rs 55 crore), overdraft (Rs 25 crore), purchase invoice discounting (Rs 70 crore), bank guarantee (Rs 10 crore), letter of credit (Rs 25 crore)

#Fully interchangeable with WCDL (Rs 21.6 crore), overdraft facility (Rs 8.64 crore)

$Fully interchangeable with WCDL (Rs 60 crore), Cash credit (Rs 24 crore), vendor bill discounting (Rs 60 crore), bank guarantee/letter of credit (Rs 10 crore)