Rating Rationale

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 of 322 stores across 42 Central stores, 69 Brand Factory and 211 Exclusive Brand Outlets (EBOs) stores covering a retail space of about 6.0 million square feet as on June 30, 2018. As on March 31, 2018 the total area of Central format comprised of about 3.7 million and Brand Factory 1.8 million.

FLFL benefits from its diversified revenue profile due to presence in premium apparel segment through Central (contributes about 56% to total sales in fiscal 2018) and off-price retail format through Brand Factory (contributes about 31%). The formats have a healthy mix of sales ' with apparel segment contributing 75% and non-apparel segment contributing 25% of the sales. The distribution of sales from segments belonging to men and women categories is about 50% each. Wider assortment and balance product mix across categories has helped the retail stores clock strong same store growth rate of around 12% in fiscal 2018. The same store growth rate has also been benefited by FLFL's presence across the value chain with Central positioned as a premium department store and Brand Factory positioned as a discount store for customers graduating to lifestyle retailing.

* Healthy business risk profile with portfolio of strong brands
FLFL has a strong portfolio of owned and licensed brands which contribute 40% to the company's revenue. The portfolio of own brands includes John Miller, Indigo Nation, Scullers, and Jealous 21 among others whereas licensed brands include names such as Lee Cooper, Converse, and Umbro. FLF has also acquired footwear business license of Lee Cooper in the current financial year 2018-19 which shall further add to top line of the company. The contract for the licensed brands is for an average period of 10 years. Sales from owned and licensed brands has increased over past 5 fiscal to Rs.1,665 crore in fiscal 2018 from Rs.1,045 crores in fiscal 2014 with the top six brands having a turnover of over Rs.100 crores each. Apart from its own retail formats, these brands also have presence in retail formats of other leading retail players leading to strong footprint across the country.

Apart from owned and licensed brands, FLFL also has investments in 12 brands which are at a nascent stage and most of them 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 specialized skills and products across apparel, footwear and accessories segments.

With FLFL's increasing retail presence and strong focus on top brands, CRISIL believes FLFL will continue to benefit from its strong portfolio of brands over the medium term.

* Healthy financial risk profile
FLFL's financial risk profile is marked by healthy adjusted networth, strong cash generation and improving debt protection metrics. FLFL's financial profile has improved over the past few years driven by strong cash generation, equity infusion by its promoter, and liquidation of stake in brands for deleveraging. The interest coverage is moderate at 4.5 times in fiscal 2018; improved from 3.1 times in fiscal 2017 owing to lower finance cost due to refinancing and improved operating margins in fiscal 2018. Also, ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA) has improved to 1.6 times as on March 31, 2018 from 1.9-2.0 times as on March 31, 2017. Despite strong accrual generations, the debt to EBITDA is expected to be stable in fiscal 2019 owing to capex towards store addition.

FLFL has also shown a track record of monetizing investments in brands to raise proceeds for debt repayment. Although the monetization process might take time, the ability to do so gives the company financial flexibility to raise funds whenever necessary. Furthermore, FLFL's exposure/support to other group companies, which is reduced to minimal in the current fiscal, is expected remain limited in future.

Improvement in financial risk profile through healthier debt protection metrics and better financial flexibility would remain a key rating sensitivity factor going forward.

Weaknesses
* Moderate operating efficiency
FLFL has high working capital cycle and moderate Return on Capital Employed (RoCE). The working capital cycle of FLFL is higher due to 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 as compared to other apparel retailers leading to higher inventory. The working capital management has improved in fiscal 2018 supported by improvement in inventory management of owned/licensed brands.

The profitability of FLFL has been under pressure over the last 2-3 years due to increasing contribution from Brand Factory. The operating margins improved in fiscal 2018 to about 9.8%. Going forward, margins are expected to remain around 9-10% with increase in proportion of sales from own brands expected to support profitability going forward.

FLFL plans to add 0.70-1.00 million square feet of retail space across Central and Brand Factory every year over the next 2-3 years. Weaker than expected performance of existing and new stores impacting revenue growth or profitability of FLFL will be a key rating sensitivity factor.

The RoCE for the company has been moderate in the past at around 10% average in the last 3 years. However the RoCE has been improving with improvement in scale and accruals. With reduction in debt and expected stable operating margins going forward, the RoCE is expected to improve to about 17-19% over the medium term.

* Exposure to increasing competitive intensity in apparel retail segment
The competitive landscape for the apparel retail sector remains high. Apart from FLFL, 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+']) have ventured into apparel retail. Additionally, the sector has established players such as Lifestyle International Pvt. Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'), Shoppers Stop Ltd (rated 'CRISIL A1+'), and Aditya Birla Fashion and Retail Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'). Large global apparel chains such as Marks and Spencer Plc and Inditex S.A. have also entered into joint ventures with local partners to capture a slice of the market. However, CRISIL believes the strong brand franchise of FLFL, coupled with strong retail presence will benefit the company over the medium term.

* Susceptibility of performance to economic down-cycles and to large annual addition of stores
FLFL is also susceptible to economic down-cycles due to the discretionary nature of products. This renders the revenue and profitability of players susceptible to economic cycles. Furthermore, large expansion by retailers can lead to pressure on their operating margins as earnings from existing stores may not adequately offset losses from high proportion of new stores added. While large portion of FLFL's stores have broken even, significant improvement in its operating profitability is unlikely due to gestation losses from new stores and increasing proportion of Brand Factory sales.