| Fabindia Limited | ||||
| Rating downgraded to 'CRISIL AA-/Negative' | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its rating on the long-term bank facilities of Fabindia Limited (Fabindia; part of the Fabindia group). to ‘CRISIL AA-/Negative’ from ‘CRISIL AA/Stable’.
The rating action follows deterioration in operational performance in subsidiary Organic India Private Limited (“OIPL”), (mainly deals in herbal and ayurvedic products) with losses being reported in fiscal 2023 and deterioration in financial risk profile with increased borrowings on account of inventory build-up at Fabindia (standalone), and availment of NCDs of Rs. 250 Crs. (For acquiring additional stake in subsidiary OIPL), adversely impacting its capital structure and debt protection metrics. Management has articulated its focus on reducing the overall debt levels by rationalizing its inventory holdings, pre-paying the NCDs through cash flows and other means (including through additional equity raise). Further, they have also taken corrective actions in OIPL and expects the performance to improve by next fiscal.
Consolidated revenue in fiscal 2023 is estimated at about Rs. 1650 Crs. compared to Rs. 1335 Crs. in fiscal 2022 (~23.5% growth YoY) and Rs. 1,496 Crs. in pre-covid fiscal 2020 (11% growth). The growth is estimated to be driven by improvement in performance of FabIndia standalone (mainly into retail of apparel, home and personal care products) with revenue estimated at Rs. 1,330 Crs. for fiscal 2023 against Rs. 948 Crs. in fiscal 2022 (40% growth YoY) and Rs. 1,153 Crs. in pre-covid fiscal 2020 (15% growth). Revenues of OIPL is expected to remain flattish at Rs. 330 Crs. against Rs. 385 Crs. in fiscal 2022 and Rs. 346 Crs. in pre-covid fiscal 2020. With increase in store count done recently as well as further expansion under CoFo (Company owned franchisee operated) coming into operations, revenue on the whole is expected to log double-digit growth over the medium term.
In fiscal 2023, consolidated post IndAS EBITDA is estimated at Rs 290-310 crores (~17-18%) as compared to Rs 228 crores (17.1%) in previous fiscal and Rs. 291 crores (19.4%) in pre-covid fiscal 2020. Healthy operational efficiencies expected to continue in FabIndia standalone with estimated margins ~23-24% (post INDAS) in fiscal 2023 against 18.2% in fiscal 2022. However, consolidated margins shall continue to remain significantly lower due to substantial losses expected in OIPL in fiscal 2023 against EBITDA profits of ~Rs. 35 crores (9.2%) in fiscal 2022.
Over the medium term, with ramp up in stores added (~1.2 lakh sq. feet added during 9M fiscal 2023) benefitting operating leverage, cost optimization measures undertaken, closure of loss-making stores and improvement in gross margins with calibrated price hikes, standalone FabIndia post IndAS operating margins are expected to reach ~26-27%. However, timely turnaround in OIPL to ensure operational profitability going back to preceding years shall remain a key monitorable.
Company’s capital structure has moderated with total debt (excluding lease liabilities) estimated at ~Rs 700-750 crores as on March 31, 2023 against Rs. 646 crores as on March 31, 2022. Debt had earlier increased to Rs. 646 crores in fiscal 2022 from Rs. 289 crores in fiscal 2021 primarily due to company availing NCDs of Rs. 250 crore for acquiring additional stake of ~13% in OIPL. The NCD was proposed to be pre-paid from planned IPO proceeds but as the same did not go through, company has refinanced the same in September, 2022 for a period of 2 years. Further. during the year company had converted 70 of its stores from FOFO (franchise owned franchise operated) model to COFO model (inventory risk being borne by Fabindia) resulting in an increase in inventory levels to ~Rs. 550 crore as on December 31, 2022 from ~Rs. 445 crore as on March 31, 2022. This resulted in increase in working capital borrowings. Management has articulated its focus on reducing inventory going forward and improving inventory days. While the Company plans to raise funds through private investors and bring down inventory levels, same shall remain key monitorable.
While the financial risk profile is expected to get impacted in the current fiscal, the company has adequate networth. With planned PE fund raising, financial risk profile is expected to improve by the end of next fiscal. Hence, timely fund raising and working capital correction shall remain key monitorable. Due to current challenges, debt protection metrics are to remain subdued until next fiscal and gradually improve only thereafter; interest cover is expected to be around 4-5 times next fiscal. Further, major expansion going ahead would be under COFO model thereby limiting the overall capex outgo to ~Rs. 20-25 crore per annum as the capex would be largely borne by the franchise partner but inventory risk would remain with the company.
The rating reflects the Fabindia group’s strong business profile, driven by a strong market position in the ethnic and handicraft retail segment as well as improving revenue diversity and adequate operating efficiency. The financial risk profile has moderated with increase in borrowings but is supported by strong networth and liquidity. These strengths are partially offset by majority of the group’s revenue being derived from the intensely competitive apparel segment and moderate susceptibility of operating performance to economic down-cycles. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Fabindia and its subsidiaries; Organic India, Fabindia International Pte Ltd (FIPL), Fabcafe Foods Pvt Ltd, Biome Life Sciences India Private Limited and the step-down subsidiaries and associates under these subsidiaries. All these entities have been consolidated and are collectively referred to as the Fabindia group, as they have operational and financial linkages. CRISIL Ratings has also amortised goodwill of ~Rs 51 crore, pertaining to the acquisition of Organic India, over the five fiscals from fiscal 2017. Brand and trademarks has been amortized over a period of 10 years. Goodwill arising out of acquisition from additional stake in OIPL (~Rs. 190 crore) has been amortized over a period of 5 years.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The Fabindia group has a strong brand positioning in the ethnic/handicraft retail segment, with a product portfolio comprising apparel, home, personal care and organic products. Fabindia standalone business had 360 stores (234 own and 126 franchisee) across India as on December 31, 2022; and plans to gradually increase the number of franchisee stores over the medium term , supported by a prudent expansion policy. Stabilisation in recently set up stores, along with expansion in franchisee stores are expected to drive Fabindia’s growth over the medium term.
Revenue diversity has improved in the recent fiscals with growing contribution from herbal and ayurvedic products. Higher focus on organic products by customers, tie-ups with professionals working in the wellness field and recovery in scale of operations with re-focused management on core segments are expected to drive the growth of Organic India.
Revenues are expected to grow at double digits going forward with ramp up of new stores added during fiscal 2023 and like to like growth from existing stores. Company added ~32 owned stores during YTD fiscal 2023, ~20 stores under COFO model and converted ~70 stores from FOFO to COFO. It is estimated to add ~1.8 lakh sq. ft of retail space this year, taking the total area under operations to ~10 lakh sq. ft at an expense of ~Rs. 80-85 crore during the fiscal.
FabIndia (standalone) operating in a niche segment of the retail industry, sources its products from over 55,000 artisans in rural areas and sells them through its stores across India and abroad. The group has more than 25-year-long relationships with almost half of its suppliers. It has set up an efficient sourcing and supplier management system, which fulfils the product requirement and helps the group maintain healthy relationships with suppliers. The well-managed supply chain supports the operating efficiency, as reflected in healthy standalone EBIDTA margin of 16-20% over the years. Though the EBIDTA margin was impacted in fiscals 2020 and 2021, the margins recovered to pre-pandemic levels in fiscal 2022. With cost optimization measures undertaken by the company including closure of unprofitable stores, cost rationalization measures, further improvement is expected over the medium term.
While the financial risk profile is expected to get impacted in the current fiscal with increased working capital borrowings, the company has adequate networth. Total debt stood at Rs. 781 crore at September 30, 2022 and at Rs 646 crore as on March 31, 2022, increasing by Rs 356 crore compared to the previous fiscal, primarily on account of NCD of Rs. 250 crore raised for acquisition of additional stake in subsidiary OIPL. With planned PE fund raising, financial risk profile is expected to improve by the end of next fiscal. The debt is further expected to decrease over the medium term with regular repayment of term debt. As a result, Interest cover is expected to be about ~4-5 times next fiscal. Further, major expansion going ahead would be under COFO model thereby limiting the overall capex outgo to ~Rs. 20-25 crore per annum.
Weaknesses:
OIPL witnessed a sharp fall in operating profitability in fiscal H1-fiscal 2023. Further, losses of Rs. 40 crores in H1 fiscal 2023 occurred due to write down of non-core investments made, and additional provisions of ~Rs. 28 crore were taken on account of doubtful receivables/loans and advances and slow moving inventory. With corrective measures being undertaken, management is confident of recovery in operational performance of OIPL to previous levels and recovery of amounts provisioned for, over the medium term.
The Fabindia group operates in the intensely competitive consumer retail market, deriving almost ~70% of its revenue from the apparel segment in fiscal 2023, wherein it faces stiff competition from various established players.. While the acquisition of Organic India has benefitted the diversity of the Fabindia group, dependence on the apparel segment will remain high.
The branded apparel segment relies heavily on the disposable income of its customer segment and is susceptible to economic cycles because of the discretionary nature of purchases. Post the pandemic impacted fiscal 2021, operating performance was affected in the fiscal 2022 as well due to the bearing of the second wave. However, the business has recovered strong in fiscal 2023, with FabIndia standalone operational performance exceeding pre-pandemic levels. |
Liquidity: Strong Internal cash accrual, expected at over Rs. 50 crore in fiscal 2023 and over Rs 220-240 crore per annum over the medium term, will sufficiently cover yearly debt obligation of Rs 50-60 crore in fiscal 2023 and Rs. 180-200 crore over the medium term as well as nominal capital expenditure (capex). The consolidated fund-based bank limits of Rs 576 crore have been utilised ~80%, on average, over the 12 months through December, 2022 providing additional cushion. Further, company also had liquid surplus of ~Rs. 36 crore as on Sep 30, 2022. |
Outlook: Negative CRISIL Ratings believes that the financial risk profile of FabIndia can be materially impacted if borrowings remain at elevated levels and OIPL continues making operational losses. However, access to timely support from promoters, fund raising ability & unutilised bank lines in case of financial exigencies will continue to support the liquidity profile of the company. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Group Fabindia Ltd (formerly known as Fabindia Overseas Pvt Ltd) was incorporated by the late Mr. John Bissell in 1960 to export upholstery fabrics, durries and rugs to the US and other western countries. The company sells ethnic garments, home products, personal care products, organic foods, and jewellery under the FabIndia brand. Fabindia commenced domestic sales in 1976, when it opened its first outlet in New Delhi. The company’s high-growth phase began after 2004, following which it increased the number of domestic stores to 360 as on December 31, 2022, from 20 in 2004.
Fabindia increased its stake in Organic India, a Lucknow-based organic herbal and health products firm, to around 64% in the fiscal 2022 from 51% earlier. In fiscal 2017, Fabindia divested the majority stake in its UK-based subsidiary, East Lifestyle. Subsequently, East Lifestyle went into administration in January 2018 and the liquidation was completed in fiscal 2023. |
Key Financial Indicators
*Excluding the impact of IndAS 116 accounting CRISIL Ratings Adjusted numbers |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||
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This Annexure has been updated on 21-Mar-23 in line with the lender-wise facility details as on 19-Aug-21 received from the rated entity.
Criteria Details
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