Rating Rationale

Strengths
* Strong management experience in retail sector
Future group, promoted by Mr Kishore Biyani, is a prominent player in Indian retail with popular supermarket chains such as Big Bazaar and Food Bazaar, lifestyle stores such as Brand Factory, Central etc. The group's presence across the retail value chain differentiates it from its competitors. The management has a successful track record in value retail business and also downstream addition of fashion brands under Future Lifestyle Ltd.

* Derives competitive advantage from group's presence across the retail value chain and strong distribution footprint
FCL derives significant synergies from group companies albeit on an arm's length basis. Over 70% sales of FCL are channelised through FRL - one of the market leaders in organised retail, with a presence of 1500 large and small stores (of Big Bazaar, Eazyday etc.) across 437 cities. Here FCL benefits from favourable positioning within the store. FRL's revenue has grown rapidly at a compound annual growth rate (CAGR) of around 9% over fiscal 2018 and 2019 driven by increasing penetration of organised retail in the overall retail market and high growth of the sector. Consequently, FCL's revenue has also grown quickly at 29% CAGR over fiscals 2018 and 2019.

Further, the group is generating intelligence based on consumer behaviour and preferences within FRL's stores. CRISIL believes that this intelligence will be a key competitive differentiator for FCL against other fast moving consumer goods (FMCG) players as it will help FCL mould its brand strategy faster than competition and thus expect to gain market share.

Given the strong growth drivers of organised retail and the competitive advantage available to FCL being a part of the Future group, FCL is expected to sustain its growth in double digits over the medium term.

* Established sourcing and manufacturing capabilities
FCL has a diverse product portfolio across food and beverages and home and personal care categories. It has established sourcing capacity of 1.5 lakh tonne agri-produce with 71 sourcing hubs across the country, Agricultural Produce Market Committee (APMC) licences in 26 states and over 50 warehousing and processing centres. The manufacturing capabilities are either in-house or through its JVs across India and overseas, where the partner brings significant product expertise. FCL has tie ups with Fonterra and Hain Celestial, who are the leading players globally in the categories, to name a few.

* Healthy financial flexibility
Financial flexibility is healthy reflected through the management's ability to raise funds. FCL has an approval to raise equity of around Rs 350 crore through issuance of Rs 70 crore share warrants to promoter entity and Rs 280 crore compulsorily convertible debentures to existing investors, International Finance Corporation and Verlinvest SA. The group has a proven track record of raising equity from reputed players. The group has also demonstrated successful monetisation of investments in the past and has further plans to divest non-core assets augmenting overall financial flexibility.

Weaknesses
* Modest scale of operations compared to peers with low return on capital employed (ROCE)
Due to the early stage of operations, FCL has a modest scale in its categories compared to peers. Further, the company has a low return profile due to low profitability and high working capital intensity.

The revenue mix is marked by a significant contribution of low margin products (staples). Consequently, operating margin has been low at around 2.75% over fiscals 2018 and 2019. Margin is expected to improve but remain sub-5% over the medium term as the share of high margin product portfolio will improve slowly.

Further the working capital cycle of FCL (consolidated) is relatively high at 55 days owing to higher receivables cycle on new brands (where the cash flows happen only when the product is sold) and higher proportion of new brands in the revenue mix in the recent past. CRISIL expects that the receivables cycle will improve (from 64 days as on March 31, 2019 to 57 days as on March 31, 2021) as the key brands establish themselves in the market and derive better payment terms. Traction in improvement in operating margin and RoCE will remain a rating sensitivity factor.

* Weak but improving debt protection metrics
FCL has weak debt protection metrics with an interest cover of 1.71 times and net cash accrual to total debt of 0.05 time for fiscal 2019, which are sub-par for the rating category. However cash accruals are expected to grow robustly with strong growth and expected improvement in profitability and working capital cycle. Further, FCL has raised equity of Rs 280 crore (through compulsorily convertible debentures issued to existing investors and promoter warrants) and has an approval to raise further Rs.70 crore equity. These proceeds are to be used towards reduction of debt and to fund growth. Consequently, interest cover and net cash accrual to total debt ratios are expected to improve to 1.75 times and 0.08 time, respectively, by March 2021. Traction in the improvement will remain a rating sensitivity factor.

* Exposure to JVs and risks related to moderate expansion plans over the medium term
FCL extends support to its JVs and associates by providing inter corporate deposits (ICDs), loans and advances, making investments and extending guarantees towards their external borrowings. As on March 31, 2019, FCL has exposure of ~Rs 140 crore to JVs and associates through investments, ICDs and loans. Guarantees extended for JVs and associates outstanding at the end of fiscal 2019 amount to Rs 51.6 crore. CRISIL understands that FCL is expected to continue moderate expansion through its JVs and associates with Rs 70-100 crore additional investments over fiscals 2020 and 2021.

* Exposure to intense competition and susceptibility of performance to economic down-cycles
The Indian food and FMCG industry has both organised and unorganised players across segments and products. The intensity of competition in the industry is increasing led by foray of foreign players, expansion by regional players as well as introduction of innovative products being launched by various players in the industry. Additionally, FCL is also susceptible to economic down-cycles.

Liquidity: Adequate
Liquidity is adequate driven by expected cash accruals of around Rs 55 crore in fiscal 2020 and around Rs 125 crore in fiscal 2021 and cash and cash equivalents of Rs 71.8 crore as on March 31, 2019. Fund-based limits of Rs 425 crore were utilised 82% on an average over the 12 months through May 2019. The company has long term repayment obligations of around Rs 92 crore in fiscal 2020 and around Rs 56 crore in fiscal 2021 and capital expenditure plans of Rs 15 crore each year. Almost Rs 70-100 crore additional investments over fiscals 2020-2021 are expected towards capital expenditure/ expansion plans through its JVs and associates. CRISIL expects internal accruals, cash & cash equivalents and unutilised bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements. Liquidity is further supported by equity raised.

Rating sensitivity factors
Upward Factor
* Improvement in group's credit profile by 1 notch

Downward Factor
* Deterioration in group's credit profile by 1 notch
* Weaker-than-expected operating performance or weaker debt protection metrics with consolidated interest cover moving below 1.5 times.