Rating Rationale
November 12, 2020 | Mumbai
Future Lifestyle Fashions Limited
Long-term bank facility downgraded to 'CRISIL C', Ratings continues on 'Watch Negative'; NCD downgraded to 'CRISIL D'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1500 Crore
Long Term Rating CRISIL C (Downgraded from 'CRISIL B'; Continues on 'Rating Watch with Negative Implications')
Short Term Rating CRISIL A4 (Continues on 'Rating Watch with Negative Implications')
 
Rs.500 Crore Non Convertible Debentures CRISIL D (Downgraded from 'CRISIL B/Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the non-convertible debentures (NCDs) of Future Lifestyle Fashions Limited (FLFL) to 'CRISIL D' from 'CRISIL B'. CRISIL has also downgraded its rating on the long term bank facilities of FLFL to 'CRISIL C' from 'CRISIL B''. The ratings remain on 'Rating Watch with Negative Implications'.
 
The downgrade reflects non-payment of NCD obligation of around Rs 110 crore (principal plus interest) due on November 09, 2020, post invocation of the put option by one of the investors and sharply reduced likelihood of refinancing of these NCDs or extension of their due date.
 
The rating action follows from one of the NCD holders opting to sell part of these NCDs in the secondary market to independent investors at a sharp discount to the face value. In addition, there is limited clarity from the company on resolution of NCD payments in the near term. Also, legal developments related to sale of the Future group's retail businesses including FLFL to the Reliance group have intensified. Hence, likelihood of any refinancing of NCDs or extension of due date within the grace period1 is remote.
 
The business environment for FLFL has unexpectedly sharply worsened on account of unprecedented lockdowns to contain the Covid-19 pandemic, which led to sudden closure of stores, and thereby revenue fell by nearly around 84% in the first half of fiscal 2021. Consolidated earnings before interest, tax, depreciation, and amortisation (EBITDA) loss for the first half fiscal 2021 was about Rs 270 crore as against an EBITDA gain of Rs 260 crore in the same period last fiscal. This caused significant pressure on cash flow and liquidity. While cash flow improved in the past three months, ramp-up in sales remains slow given the discretionary nature of apparel demand and prevailing uncertainties owing to intermittent lockdowns imposed by various state governments to contain the spread of Covid-19.
 
With business operations being significantly impacted by the pandemic-led lockdown, FLFL had applied for one-time restructuring (OTR) with its lenders under the guidelines issued by the Reserve Bank of India (RBI) on August 06, 2020, 'Resolution framework for Covid-19-related stress'. Based on discussion with the FLFL management, CRISIL understands from FLFL's management that nearly 90% of its lenders are favourably considering the OTR application. CRISIL will take appropriate rating action on the bank lines based on the outcome of the restructuring process.
 
The 'Negative Watch' on bank loans reflect likelihood of further stress on FLFL's credit risk profile in the event of any adverse stance by lenders/investors regarding the restructuring application.

1Please refer the last rating rationale dated Nov 9, 2020 for more clarity.
Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of FLFL and all its subsidiaries, given their common business. CRISIL has also adjusted FLFL's networth 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
Weaknesses
* Delays in meeting NCD obligation and sharply reduced likelihood of refinancing NCDs or extension to due date
FLFL has outstanding NCDs of Rs 350 crore maturing in November 2022, and annual interest obligation of about Rs 30 crore due on November 9 every year. The NCDs also carry a put option, which has been invoked by some investors. While FLFL has requested for an extension of the obligations (both principal plus interest) till February 2021, CRISIL understands that the request has been rejected by one of the investors. Due to subdued cash accrual, the company was unable to meet the NCD obligation of around Rs 110 crore (principal plus interest) which was due to that investor on November 09, 2020. Further, CRISIL understands that the NCD holder has opted to sell part of these NCDs in the secondary market to independent investors at a sharp discount to the face value. In addition, there is limited clarity from the company on resolution of NCD payments in the near term. Also, legal developments related to sale of the Future group's retail businesses including FLFL to the Reliance group have intensified, adversely impacting the possibility of refinancing of NCD in near-term. Hence, CRISIL believe that likelihood of any refinancing of NCDs or extension of due date within the grace period is remote.
 
* Modest operating efficiency
Closure of stores following the lockdown and their gradual recovery will have a sharp impact on profitability as the business is marked by high operating leverage. Cost-optimisation initiatives, including conversion from a fixed rental model to a revenue sharing model and reduction of fixed overheads, should aid profitability. However, FLFL's ability to rebuild its supply chains and sustain operations amid weak financial position remains a monitorable.
 
* Weak debt protection metrics and stretched liquidity
Financial leverage had risen before the pandemic owing to capital expenditure and new store inventories. While any material increase in borrowing is unlikely during fiscal 2021, severe impact on cash flow will weaken debt protection metrics. Interest coverage ratio may significantly weaken in fiscal 2021 from around 3 times in fiscal 2020. Any extended closure of stores will remain a key monitorable.
 
With business operations being significantly impacted by the pandemic-related lockdown, FLFL had applied for OTR with its lenders under the RBI guidelines issued on August 06, 2020-'Resolution Framework for Covid-19-related Stress'. Based on discussion with management, the lenders are considering the OTR application positively and shall take further rating action based on the final outcome of the OTR.
 
Strengths
* Established position in the departmental stores segment and diversified revenue profile
FLFL is one of the largest players in the domestic departmental store format, with a pan-India distribution network across two formats, Central and Brand Factory.
 
Revenue is diversified, aided by presence in the premium apparel segment and the off-price retail format through Brand Factory stores. Wider assortment and balanced product mix across categories helped retail stores clock healthy same store sales growth in the past (about 9% in fiscal 2019). Growth was hit by weak macroeconomic conditions and slowdown in the apparel segment in fiscal 2020. Furthermore, cash flow was severely impacted in the first half of fiscal 2021, following the pandemic-induced lockdown and the consequent economic slowdown; however, revenue should gradually recover over the medium term.
 
* Portfolio of strong brands
The diverse portfolio of strong owned and licensed brands, with presence in retail formats of own and other leading players, has led to a vast footprint across the country. FLFL also has investments in brands that are in an initial stage and have the potential to grow post normalisation of the business environment.
Liquidity Poor

Due to the pandemic, cash flow to service debt has been severely impacted in fiscal 2021. Hence, FLFL's management applied for OTR of debt facilities with its lenders and investors. Some investors have invoked the put option on the NCDs. CRISIL understands that FLFL's request for an extension of the obligation till February 2021 has been rejected by one investor. With subdued cash accrual, this led to delays in meeting the NCD debt obligation of around Rs 110 crore (principal plus interest) due to that investor on November 09, 2020.

Rating Sensitivity Factors
Upward factors
* Regularization of NCD repayments and buildup of sustained track record of timely repayments of 90 days

Downward factors
* Delay in approval and implementation of OTR plan.

About the Company

Incorporated in 2012, FLFL 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 over 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 2020* 2019
Revenue Rs crore 6310 5734
Profit After Tax (PAT)  Rs crore -64 141
PAT Margin % -1.02 2.5
Adjusted debt/adjusted networth Times 0.99 0.61
Interest coverage Times 3.2 4.80
*Abridged financials for FY20

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)		 Complexity level Rating assigned
with outlook
INE452O07047 Non-convertible debentures Nov-17 8.7% Nov-22 350 Complex CRISIL D
NA Non-convertible debentures** NA NA NA 150 NA CRISIL D
NA Cash credit* NA NA NA 550 NA CRISIL C/Watch Negative
NA Letter of credit^ NA NA NA 475 NA CRISIL A4/Watch Negative
NA Long-term loan NA NA Mar-21 85.13 NA CRISIL C/Watch Negative
NA Long-term loan NA NA Sept-24 150 NA CRISIL C/Watch Negative
NA Long-term loan NA NA Jan-25 239.87 NA CRISIL C/Watch Negative
*Interchangeable with working capital demand loan and commercial paper
^Interchangeable with letter of undertaking and bank guarantee
**Yet to be issued
 
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 Pvt Ltd 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    --  12-05-20  Withdrawal  29-11-19  CRISIL A1+  14-11-18  CRISIL A1+  27-10-17  CRISIL A1+  -- 
        21-04-20  CRISIL A1      31-10-18  CRISIL A1+       
        27-03-20  CRISIL A1+               
Non Convertible Debentures  LT  350.00
12-11-20 		 CRISIL D 09-11-20  CRISIL B/Watch Negative  29-11-19  CRISIL AA-/Positive  14-11-18  CRISIL AA-/Positive  27-10-17  CRISIL AA-/Positive  -- 
        27-10-20  CRISIL BB/Watch Negative      31-10-18  CRISIL AA-/Positive       
        05-10-20  CRISIL BBB-/Watch Negative               
        28-09-20  CRISIL BBB-/Watch Negative               
        08-09-20  CRISIL BBB+/Watch Negative               
        22-08-20  CRISIL BBB+/Watch Negative               
        12-05-20  CRISIL A+/Stable               
        21-04-20  CRISIL A+/Stable               
        27-03-20  CRISIL AA-/Negative               
Fund-based Bank Facilities  LT/ST  1025.00  CRISIL C/(Watch) Negative  09-11-20  CRISIL B/Watch Negative  29-11-19  CRISIL AA-/Positive  14-11-18  CRISIL AA-/Positive  27-10-17  CRISIL AA-/Positive  -- 
        27-10-20  CRISIL BB/Watch Negative      31-10-18  CRISIL AA-/Positive       
        05-10-20  CRISIL BBB-/Watch Negative               
        28-09-20  CRISIL BBB-/Watch Negative               
        08-09-20  CRISIL BBB+/Watch Negative               
        22-08-20  CRISIL BBB+/Watch Negative               
        12-05-20  CRISIL A+/Stable               
        21-04-20  CRISIL A+/Stable               
        27-03-20  CRISIL AA-/Negative               
Non Fund-based Bank Facilities  LT/ST  475.00  CRISIL A4/(Watch) Negative  09-11-20  CRISIL A4/Watch Negative  29-11-19  CRISIL A1+  14-11-18  CRISIL A1+  27-10-17  CRISIL A1+  -- 
        27-10-20  CRISIL A4+/Watch Negative      31-10-18  CRISIL A1+       
        05-10-20  CRISIL A3/Watch Negative               
        28-09-20  CRISIL A3/Watch Negative               
        08-09-20  CRISIL A2/Watch Negative               
        22-08-20  CRISIL A2/Watch Negative               
        12-05-20  CRISIL A1               
        21-04-20  CRISIL A1               
        27-03-20  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 C/Watch Negative Cash Credit* 550 CRISIL B/Watch Negative
Letter of Credit^ 475 CRISIL A4/Watch Negative Letter of Credit^ 475 CRISIL A4/Watch Negative
Long Term Loan 475 CRISIL C/Watch Negative Long Term Loan 475 CRISIL B/Watch 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
CRISIL's approach to Covid-19-related restructuring
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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