| Future Lifestyle Fashions Limited | ||||||
| Ratings continues on 'Watch Negative' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL's ratings on the bank facilities and non-convertible debentures of Future Lifestyle Fashions Limited (FLFL) continues on 'Rating Watch with Negative Implications'. |
| Analytical Approach |
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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. |
| Key Rating Drivers & Detailed Description |
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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, with presence in both premium apparel segment and off-price retail format through Brand Factory stores. A wider assortment and balanced product mix across categories helped the retail stores clock healthy same store sales growth in the past (about 9% in fiscal 2019). Growth was hit in fiscal 2020 by weak macroeconomic conditions and slowdown in the apparel segment. Furthermore, cash flow was severely impacted in the first quarter of fiscal 2021 by the pandemic-induced lockdown and economic slowdown and is expected to recover gradually over the medium term. * Portfolio of strong brands FLFL has a portfolio of strong owned and licensed brands 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 in a nascent stage and growing at a fast pace. Weaknesses * Refinancing risk FLFL has outstanding NCDs of Rs 350 crore maturing in November 2022 with a call and put option in November 2020. There is also a presence of accelerated redemption clauses in case of event of default on the NCDs or the bank loans in case the rating is 'A' or lower or withdrawal/suspension of the long term credit rating on the instrument. In case of receipt of notice from the debenture trustee, the company needs to meet obligations within 90 days. Any invocation of this option or call for accelerated redemption of these liabilities remains a key monitorable. * Modest operating efficiency Operating margin had been impacted to about 7% as on March 31, 2020 because of high operating leverage and impact of the lockdown on sales. Closure of all the Central and Brand Factory stores severely impacted cash flow in the first quarter of fiscal 2021. Cost optimisation initiatives, including conversion from fixed rental model to a revenue sharing model (most of the stores have been converted to revenue sharing model) and reduction of the fixed overheads shall support profitability. Ability to revert to operational stability will be a key monitorable. Also, FLFL has large working capital requirement and modest return on capital employed (RoCE). As on March 31, 2020, the company's inventory increased because of slowdown in sales due to the lockdown since March 25, 2020. * Weakening of debt protection metrics in interim; with gradual improvement expected over the medium term The leverage weakened to 3.1 times as on March 31, 2020, from 1.6 times a year earlier, while interest coverage declined to 3.2 times in fiscal 2020 from 4.8 times in the previous fiscal, due to lower margins and increased debt. Leverage and interest coverage are expected to weaken significantly in fiscal 2021 and shall gradually improve to 2.6 times and 3.0-3.5 times, respectively, by fiscal 2022. FLFL intends to keep leverage below 2 times on a sustained basis. Any extended closure of stores will impact accrual and hence weaken the debt protection metrics, and remains a key monitorable. CRISIL understands that the company has received relief in debt obligation for September 2020 wherein most of the overdue letter of credit has been converted to fund-based limit or the due date has been extended. Also, interest due in the moratorium period was converted to funded interest term loan to be repaid over fiscal 2021 and principal obligation during the moratorium period was shifted by six months. That said, the liability for September 2020 shall be close to Rs 50 crore and the company will be able to meet it through cash flow. FLFL is in discussion with its lenders to convert some non-fund-based limits due from October 2020 onwards to fund-based limits, and the conversion remains a key monitorable. * Exposure to increasing competition in the apparel retail segment and susceptibility to economic downturns The apparel retail sector remains intensely competitive. 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 RIL) and large global apparel chains, such as Marks and Spencer Plc and Inditex SA, have also captured 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 economic cycles. |
| Liquidity Stretched |
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Closure of stores has significantly impacted cash flow and liquidity. With conversion of interest during the moratorium period to funded interest term loan, increase in the tenure of principal repayment, and conversion of non-fund-based liability to fund-based limits, the company has debt obligation of Rs 50 crore in September 2020 as against expected collections above Rs 200 crore. Also, while fund-based facility of Rs 550 crore has been fully utilised, the company plans to avail an additional line of Rs 30 crore which shall support liquidity. The company also plans to convert non-fund-based facility due from October 2020 onwards into fund-based limits, and the conversion remains a key monitiorable. Timely completion of the restructuring exercise remains highly critical for the liquidity position of the company. |
| About the Company |
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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. |
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| *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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
^Interchangeable with letter of undertaking and bank guarantee | ||||||||||||||||||||||||||||||||||||
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