Rating Rationale
April 21, 2020 | Mumbai
Future Lifestyle Fashions Limited
Ratings downgraded to 'CRISIL A+/Stable/CRISIL A1'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1500 Crore
Long Term Rating CRISIL A+/Stable (Downgraded from 'CRISIL AA-/Negative')
Short Term Rating CRISIL A1 (Downgraded from 'CRISIL A1+')
 
Rs.500 Crore Non Convertible Debentures CRISIL A+/Stable (Downgraded from 'CRISIL AA-/Negative')
Rs.290 Crore Commercial Paper# CRISIL A1 (Downgraded from 'CRISIL A1+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
#Rs 140 crore carved out of Working capital limits
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities and debt instruments of Future Lifestyle Fashions Limited (FLFL) to 'CRISIL A+/Stable/CRISIL A1'. from 'CRISIL AA-/Negative/CRISIL A1+'.

The rating action reflects deterioration in the business risk profile of the company as CRISIL expects a delayed recovery in cash flows than earlier given the extension of lockdowns in the country and discretionary nature of the apparel products. The measures taken by Central and various state governments towards containment of Novel Coronavirus (Covid-19) has led to closure of all the FLFL stores (Central, Brand Factory, aLL and other exclusive business outlets) which has significantly impacted the cashflows in the near term. Further, the recovery in the cash flows, once the lockdown is removed, is expected to be gradual given the discretionary nature of the products. Although the pick-up would be gradual, sales ramp-up is likely to be swifter for Brand factory as compared to Central stores owing to a relatively higher priced apparel portfolio in Central and thus relatively higher on discretionary scale. Brand Factory being a liquidation channel along its online presence is expected to show a faster recovery given steep discounts and thus a perceived higher value product portfolio. Given lower cash flows than earlier expectation, leverage and interest coverage are expected to significantly weaken vis-a-vis earlier expectation of around 5-5.5 times and 1.5-1.7 times respectively by March 2022. 

Revocation of the lockdown measures will be contingent upon directives from the government and extent of spread of COVID-19. A sustained long period of closures can result in further deterioration in the credit profile of the company. The ability of the company to revert back to operational stability, monetise some of the investments in the near term, and any relief measure given by the government will be a key monitorable.
 
The ratings factor in need based support from the investors through fund infusion in the near term in case of any exigency.  FLFL is backed by marquee investors such as Blackstone, L Catterton and PremjiInvest which together holds majority of the shareholding directly through equity holding and through pledge of promoter shares. Further, post the transaction with Blackstone in September 2019, majority of the promoter holding is encumbered with Blackstone which prevents them from further increase the share pledging.  The investors have a long term investment horizon in the company and believe FLFL has a sustainable business model supported by established retail store formats (Central and Brand Factory) and brands. Hence, based on the discussion with the investors and the long term investment horizon, CRISIL expects need based support from investors through timely fund infusion to support the business operations and debt servicing obligations.

The ratings also factor in the moratorium availed by FLFL on debt servicing (for the period March 2020-May 2020), and the cost optimisation initiatives, including deferral of rentals, or converting from fixed rental model to a revenue sharing model and reduction of the fixed overheads. These steps shall support liquidity in the near term. Liquidity is expected to be also supported by additional working capital lines and refinancing of upcoming obligations over longer tenure. Further efforts towards divestment of one of the investee brands are also being made. In the near term accruals are likely to be supported by gradual ramp-up of sales by Q3 of fiscal 2021 and liquidation of inventory post lockdown, against which salary, rentals are the major expenses to be incurred.

These strengths are partially offset by increasing competition in the apparel retail segment, moderate operating efficiency, moderate refinancing risk, and susceptibility to economic downturns.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of FLFL and all its subsidiaries, given the common line of business. CRISIL has also adjusted FLFL's net worth for revaluation reserve.

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
* Established position in departmental stores segment and diversified revenue profile
FLFL is one of the largest in domestic departmental store format, with a well-spread Pan-India distribution network across two formats, Central and Brand Factory.

Revenue is also diversified, with presence in both premium apparel segment and off-price retail format through Brand Factory stores. A wider assortment and balance product mix across categories has helped the retail stores clock healthy store sales growth (SSG) in the past (about 9% in fiscal 2019). SSG fell to about 2% in the first nine months of fiscal 2020 owing to weak macro-economic conditions and slowdown in the apparel segment. Further, the growth will be impacted in the near term due to store closures and is expected to gradually recover over the medium term.

* Portfolio of strong brands
FLFL has a portfolio of strong owned and licensed brands (contributing about 40% of revenue) which have a presence in retail formats of own and other leading players, resulting in strong footprint across the country. Along with owned and licensed brands, FLFL also has investments in brands that are at a nascent stage and growing at a fast pace. FLFL has shown the ability to successfully scale up the brands by providing retail footprint and strategic guidance. The brands provide FLFL with specialised skills and products across apparel, footwear, and accessories segments. With FLFL's established retail presence and strong focus on top brands, FLFL is likely to benefit from its strong portfolio of brands over the medium term.

* Healthy financial flexibility being backed by strong investors and investment in brands
FLFL has healthy financial flexibility, driven by the ability to monetise brands, past equity infusion from investors and its ability to raise funds from capital markets. In fiscal 2021, FLFL plans to monetise one of its brands for about Rs 350 crore, thereby strengthening liquidity.

It also has a track record of raising funds from capital markets, backed by strong investors, such as Blackstone, L-Catterton, and Aion Capital, who have invested funds either in promoters' companies of FLFL or in FLFL directly. Based on the discussion with investors, CRISIL understands, given that FLFL is majorly held by institutional investors with long term investment horizon, need based support shall come in on timely basis in case required.

Weaknesses:
* Moderate refinancing risk
FLFL has NCDs outstanding of Rs 350 crore, with maturity in November 2022. However, there is a call and put option in November 2020. FLFL is in process of refinancing the same with bank loans over longer tenure. There is also a presence of accelerated redemption clauses in case of event of default on the NCDs or the bank loans which shall be monitored. CRISIL expects FLFL to be able to refinance the NCDs on timely basis if the put option is exercised by the investors based on its healthy financial flexibility. Delays in getting the refinancing arranged will be a rating sensitive factor.

* Modest operating efficiency
Multiple state government's orders for closure of mall operations over past few weeks and Central government order of complete lockdown till May 3, 2020, has led to closure of all the Central and Brand Factory stores, thereby impacting the cash flow. Long-term closures can further impact the ability to meet fixed cost and debt obligation. The ability of the business to revert to operational stability and any relief measure given by the government will be key monitorables.

* Weakening of debt protection metrics in interim; with gradual improvement expected over the medium term
On account of the lockdown due to the Covid-19, the leverage and interest coverage are expected to weaken significantly in fiscal 2021 and shall gradually improve to about 2.2-2.5 times and 3.5-4.0 times respectively by fiscal 2022. Overall FLFL intends to keep leverage below 2 times on sustained basis. The ability of the company to restore the business to normalcy and subsequently correct the leverage shall be one of rating sensitivity factor. Any extended closure of stores will further impact the accruals and subsequently weaken the debt protection metrics and also remains a key monitorable.

* Exposure to increasing competitive intensity in the apparel retail segment and susceptibility to economic downturns
The competitive landscape for the apparel retail sector remains high. FLFL faces intense competition from strong players, such as Lifestyle International Pvt Ltd ('CRISIL AA/Stable/CRISIL A1+'), Shoppers Stop Ltd ('CRISIL A1+'), and Aditya Birla Fashion and Retail Ltd ('CRISIL AA/Stable/CRISIL A1+'). Many of India's large corporate groups such as the Tata group and Reliance Retail Ltd (a step down subsidiary of Reliance Industries Ltd ['CRISIL AAA/Stable/CRISIL A1+']) and large global apparel chains, such as Marks and Spencer Plc and Inditex SA, also capture a share of the market through joint ventures with local partners.

FLFL is also susceptible to economic downturns due to the discretionary nature of products. This renders revenue and profitability susceptible to adverse economic cycles. Furthermore, large expansion by retailers can lead to pressure on their operating margin, as earnings from ongoing stores may not adequately offset losses from the high proportion of new stores.
Liquidity Adequate

Despite closure of stores resulting in significant weakening of cash flows, liquidity position for the company remains adequate. While fund based facility of Rs 550 crore has been almost utilized, liquidity is supported by plans of the company to avail interim working capital lines of ~ Rs. 80-100 crore. The company has also availed the moratorium on the debt servicing requirements. In fiscal 2021, cash accruals generated with gradual ramp-up of store along with additional lines are likely to meet fixed and debt obligations of the company. CRISIL has also factored need based support to come from investors through infusion of funds, in case of any exigency.

Outlook: Stable

CRISIL believes additional bank lines, cost optimisation initiatives shall help liquidity of the company in the near term. CRISIL also takes comfort from the fact that need based support will come from the investors through infusion of funds, in case of any exigency.

Rating Sensitivity Factors
Upward factors
* Revival and stabilization of the business to normalcy levels leading to improvement in the cash accruals and resulting in debt to EBITDA of around 2 times on a sustained basis
* Improvement in financial flexibility through monetisation of brands or through fresh equity infusion leading to strengthening of financial risk profile.

Downward factors
* Further weakening in the liquidity position of the company owing to extended closure of stores or delay in need based support from the investors
* Deterioration in profitability or revenue growth impacting accrual and resulting in debt to EBITDA around 3 times on a sustained basis.

About the Company

FLFL, incorporated in 2012, is the apparel retail venture of the Future group. It was established by combining apparel retail formats and fashion brands that were demerged from Pantaloon Retail India Ltd and Future Ventures India Ltd, respectively.

FLFL has a portfolio of fashion brands that cover a range of fashion categories, including apparel and footwear. The company has Central and Brand Factory stores, along with exclusive brand factory outlets covering an area of 7.5 million square feet. Central operates primarily in the premium apparel, footwear, watches and fashion accessories segment, while Brand Factory operates mainly in the off-price apparel retailing (discounting-based) segment.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 5734 4509
Profit After Tax (PAT)  Rs.Crore 141 126
PAT Margin % 2.5 2.8
Adjusted debt/adjusted networth Times 0.61 0.63
Interest coverage Times 4.80 4.50

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.Cr)		 Rating assigned
with outlook
NA Commercial Paper# NA NA 7-365 days 290 CRISIL A1
INE452O07047 Non-Convertible Debentures Nov-17 8.7% Nov-22 350 CRISIL A+/Stable
NA Non-Convertible Debentures** NA NA NA 150 CRISIL A+/Stable
NA Cash Credit* NA NA NA 550 CRISIL A+/Stable
NA Letter of Credit^ NA NA NA 475 CRISIL A1
NA Long-Term Loan NA NA Mar-21 85.13 CRISIL A+/Stable
NA Long-Term Loan NA NA Sept-24 150 CRISIL A+/Stable
NA Long-Term Loan NA NA Jan-25 239.87 CRISIL A+/Stable
*Interchangeable with Working Capital Demand Loan and Commercial Paper
^Interchangeable with Letter of Undertaking and Bank Guarantee
**Yet to be issued
#Rs 140 crore carved out of Working capital limit
 
Annexure - List of Entities Consolidated
Name of the company Extend of Consolidation Rationale for consolidation
FLFL Business Services Ltd Full Subsidiary
Future Special Reality Ltd Full Subsidiary
Future Trendz Ltd Full Subsidiary
Celio Future Fashion Pvt Ltd Equity Joint Venture
Clarks Future Footwear Pvt Ltd Equity Joint Venture
FLFL Lifestyle Brands Ltd Equity Joint Venture
FLFL Travel Retail West Pvt Ltd Equity Joint Venture
FLFL Travel Retail Bhubaneswar Pvt Ltd Equity Joint Venture
FLFL Travel Retail Guwahati Pvt Ltd Equity Joint Venture
FLFL Travel Retail Lucknow Private Limited Equity Joint Venture
Elisir Lifestyle Pvt Ltd Equity Associate
Future Style Labs Equity Associate
Future Style Labs UK Ltd Equity Associate
Indus-League Clothing Equity Associate
Indus 'Tree Crafts Pvt Ltd Equity Associate
Indus Tree Producer Transform Pvt Ltd Equity Associate
Mineral Fashions Ltd Equity Associate
Rachika Trading Ltd Equity Associate
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  290.00  CRISIL A1  27-03-20  CRISIL A1+  29-11-19  CRISIL A1+  14-11-18  CRISIL A1+  27-10-17  CRISIL A1+  -- 
                31-10-18  CRISIL A1+       
Non Convertible Debentures  LT  350.00
21-04-20  		CRISIL A+/Stable  27-03-20  CRISIL AA-/Negative  29-11-19  CRISIL AA-/Positive  14-11-18  CRISIL AA-/Positive  27-10-17  CRISIL AA-/Positive  -- 
                31-10-18  CRISIL AA-/Positive       
Fund-based Bank Facilities  LT/ST  1025.00  CRISIL A+/Stable  27-03-20  CRISIL AA-/Negative  29-11-19  CRISIL AA-/Positive  14-11-18  CRISIL AA-/Positive  27-10-17  CRISIL AA-/Positive  -- 
                31-10-18  CRISIL AA-/Positive       
Non Fund-based Bank Facilities  LT/ST  475.00  CRISIL A1  27-03-20  CRISIL A1+  29-11-19  CRISIL A1+  14-11-18  CRISIL A1+  27-10-17  CRISIL A1+  -- 
                31-10-18  CRISIL A1+       
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
Cash Credit* 550 CRISIL A+/Stable Cash Credit* 550 CRISIL AA-/Negative
Letter of Credit^ 475 CRISIL A1 Letter of Credit^ 475 CRISIL A1+
Long Term Loan 475 CRISIL A+/Stable Long Term Loan 475 CRISIL AA-/Negative
Total 1500 -- Total 1500 --
*Interchangeable with Working Capital Demand Loan and Commercial Paper
^Interchangeable with Letter of Undertaking and Bank Guarantee
Links to related criteria
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for Consolidation
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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