Rating Rationale
March 27, 2020 | Mumbai
Future Lifestyle Fashions Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1500 Crore
Long Term Rating CRISIL AA-/Negative (Outlook revised from 'Positive' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Non Convertible Debentures CRISIL AA-/Negative (Outlook revised from 'Positive' and rating reaffirmed)
Rs.290 Crore Commercial Paper# CRISIL A1+ (Reaffirmed)
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 revised its outlook on the long term bank facilities and non convertible debentures of Future Lifestyle Fashions Limited (FLFL) to 'Negative' from 'Positive'  while reaffirming the rating at 'CRISIL AA-'. The short term rating and commercial paper has been reaffirmed at 'CRISIL A1+'.

The rating action follows measures taken by Central and various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures have impacted the business profile of the company as it has led to closure of FLFL stores (Central, Brand factors, aLL and other exclusive business outlets) and thereby may have an impact on its credit quality, especially liquidity position. Revocation of these 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 significant deterioration in the credit profile of the company. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely in credit quality of the company. That said, the ability of the group's businesses to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.

Further as FLFL is backed by marquee investors like Blackstone, L Catterton and PremjiInvest, CRISIL based on discussion with FLFL`s management understands that, the investors have a long term investment horizon in the company and a need based support from investors through fund infusion is likely to come in on a timely basis to support the business operations in the interim. In addition FLFL also plans to defer lease rental which shall provide some cushion to the liquidity. The company is also working towards raising bridge loans which shall also support the liquidity position to certain extent. These efforts will be a key monitorable.

The business risk profile is backed by an established position in departmental stores segment, a diversified revenue profile, and strong brand portfolio of owned and licensed brands, along with successful track record of building value of its investee brands. FLFL's financial risk profile continues to be supported by relatively moderate debt protection metrics and healthy financial flexibility.

These strengths are partially offset by increasing competition in the apparel retail segment, moderate operating efficiency, susceptibility to economic downturns and risks related to sizable expansion and constrained liquidity position over near term.

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 viz. Central and brand factory.

 The revenues are also diversified with presence in both premium apparel segment and off-price retail format through brand factory stores. Although the Covid pandemic has impacted the revenues in the interim, a wider assortment and balance product mix across categories has helped the retail stores clock healthy SSG in the past (~9% in fiscal 2019). The SSG fell to about 2% in the first 9 months of fiscal 2020 impacted on account of weak macro-economic conditions and slowdown in apparel segment.

* Portfolio of strong brands
FLFL has a portfolio of strong owned and licensed brands (contributing ~40% of revenue) which includes own brands - John Miller, Indigo Nation, Scullers, and Jealous 21, among others and licensed brands- Lee Cooper (apparels and footwear), Converse, and Umbro. Apart from its own retail formats, these brands also have presence in retail formats of other leading players, resulting in strong footprint across the country. Apart from owned and licensed brands, FLFL also has investments in brands that are at a nascent stage and growing at a fast pace. These include brands such as Celio, Turtle, and Cover Story, to name a few. 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 increasing retail presence and strong focus on top brands, FLFL should continue to benefit from its strong portfolio of brands over the medium term.
 
* Healthy financial flexibility
FLFL has healthy financial flexibility driven by its ability to monetise brands, past equity infusion from promoters and its ability to raise funds from capital markets. In the past 2017, FLFL transferred majority of the investments held by it in various investments to FLFL Lifestyle Brands Ltd. (FLBL) and divested 51% stake to raise Rs.450 crores. Also, the company transferred 'Lee Cooper' business into a stepdown subsidiary Future Speciality Retail Limited and raised Rs.250 crore from strategic investor for 26% stake. The proceeds received from divestments were used to reduce debt and for funding capital expenditure.

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.

Weaknesses:
* Modest operating efficiency
Over the last one week, multiple state governments have issued orders for closure of mall operations to contain the spread of Covid-19. Also subsequently central government has issued complete lockdown till April 15, 2020 which has led to closure of all the Central and Brand Factory stores and has resulted in decline in the cashflows of the company. A sustained long period of closures can further impact the ability to meet fixed costs. The ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable.

Also FLFL has large working capital requirement and modest RoCE. The working capital cycle is marked by higher inventory maintained for own and third party brands. The risk of liquidation of the inventory is partially mitigated by the sale or return arrangement between FLFL and third-party brands. However, the company maintains a higher assortment of products for its own brands compared to other apparel retailers, leading to increased inventory.

  * Moderate debt protection metrics
FLFL's financial profile has improved over the past few years, driven by strong cash generation, equity infusion by the promoter, and liquidation of the stake in brands for deleveraging resulting in improvement in the debt protection metrics. Furthermore, FLFL's exposure/support to other group companies is expected to remain limited in future. Despite the same, the debt protection metrics are moderate with interest coverage of 4.7 times in fiscal 2019. The interest cover has improved from about 3.1 times in fiscal 2017 supported by increase in operating margins and lower finance cost post refinancing and going forward, is expected to remain range bound over medium term. Also, ratio of debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) improved to 1.6 times as on March 31, 2019, from 1.9-2.0 times as on March 31, 2017. Any extended closure of stores due to Covid-19 issue, will significantly impact the accruals and subsequently weaken the debt protection metrics over near term.
 
 * Exposure to increasing competitive intensity in the apparel retail segment
The competitive landscape for the apparel retail sector remains high. FLFL faces intense competition from strong players, such as Lifestyle International Pvt Ltd (rated 'CRISIL AA/Positive/CRISIL A1+'), Shoppers Stop Ltd (rated 'CRISIL A1+'), and Aditya Birla Fashion and Retail Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'). Many of India's large corporate groups-including the Tata group and Reliance Retail Ltd (a step-down subsidiary of Reliance Industries Ltd [rated '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. However, FLFL's strong brand franchise, coupled with its robust retail presence, should support operations over the medium term.

 * Susceptibility to economic downturns and large annual addition of stores
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. While a large portion of FLFL's stores have broken even, significant improvement in profitability is unlikely due to gestation losses from new stores and increasing proportion of sales from brand factory 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 unencumbered cash balance of Rs 80 crore and expected need based support from the investors. FLFL also plans to avail interim bridging financing which shall support overall liquidity. The company has overall repayment obligations of around Rs 115 crore in fiscal 2021. In addition, while the non-convertible debentures (NCD) have bullet repayment of Rs 350 crore in November 2022, the same has a call and put option in fiscal 2021. FLFL plans to refinance this NCD in fiscal 2021. Current cash & cash equivalents and timely fund infusion shall be the key to meet debt obligations over near term and shall be key monitorable.

Outlook: Negative

CRISIL believes the business and the financial risk profile may weaken in case of continued closure of its stores due to Covid pandemic. To mitigate risk, FLFL plans to curtail some of the fixed cost which shall support liquidity to certain extent. CRISIL also expects need based support from investors on a timely basis to help meet company's business and debt obligations.

Rating Sensitivity Factors
Upward factors
* Revival and stabilization of the business to normalcy levels leading to improvement in the cash collections (~Rs 500 crore on month on month basis)
* Stronger-than-anticipated business performance due to faster ramp-up of stores while maintaining stable profitability of around 9-10% and debt to EBITDA of around 1.5 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 above 2 times on a sustained basis
* Larger-than-expected debt-funded capex or acquisition leading to weakening of the financial risk profile.

About the Company

FLFL, incorporated in 2012, is the apparel retail venture of the Future Group. It was incorporated 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
Adjusted networth   Rs crore 1472 1141
Adjusted ROCE % 16.9 18.0

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 AA-/Negative
NA Non-Convertible Debentures** NA NA NA 150 CRISIL AA-/Negative
NA Cash Credit* NA NA NA 550 CRISIL AA-/Negative
NA Letter of Credit^ NA NA NA 475 CRISIL A1+
NA Long-Term Loan NA NA Mar-21 85.13 CRISIL AA-/Negative
NA Long-Term Loan NA NA Sept-24 150 CRISIL AA-/Negative
NA Long-Term Loan NA NA Jan-25 239.87 CRISIL AA-/Negative
*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+      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
26-03-20  		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 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+      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 AA-/Negative Cash Credit* 550 CRISIL AA-/Positive
Letter of Credit^ 475 CRISIL A1+ Letter of Credit^ 475 CRISIL A1+
Long Term Loan 475 CRISIL AA-/Negative Long Term Loan 475 CRISIL AA-/Positive
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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