Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long term bank loan facilities and commercial paper programme of Lifestyle International Private Limited (LIPL) at 'CRISIL AA/Stable/CRISIL A1+’.

 

The ratings of LIPL continues to reflect its established market position in the departmental stores category, diversified revenue profile, and healthy operating efficiency. The ratings also factors in healthy medium term growth prospects for the organised retail sector, and the company's solid financial risk profile. These strengths are partially offset by the moderate susceptibility of LIPL's performance to economic cycles, increasing competition in the apparel retail and furniture segments, and risks related to sizeable expansions.

 

LIPL’s operating performance is expected to recover in fiscal 2022, with revenues growing year-on-year by 25-30% to ~Rs.6500-7000 crore, due to lesser impact of second covid wave, compared with severe impact seen in fiscal 2021. The company’s stores operated for few days in April and June 2021, compared to complete nationwide lockdown in first quarter of last fiscal. In the current fiscal, LIPLs’ operating profitability or the earnings before interest, taxes, depreciation and amortization (EBIDTA) margin is also expected to improve due to better scale of operations.

 

Earlier, in the first half of fiscal 2021, LIPL’s operating performance was impacted owing to nationwide lockdown leading to store closures as well as sharp decline in the discretionary consumption spending on apparel products. With the overall recovery in the economy, the company’s revenues gradually recovered to over 80% on year in third quarter and over 100% year on year in the fourth quarter of fiscal 2021 while the EBITDA also reached near to pre-pandemic levels.  The company also carried out several cost optimization initiatives such as conversion of fixed rentals to variable, reduction in employee costs and cutting down of discretionary expenses. However, weighed down upon by a weak first half, LIPL’s overall estimated revenues registered a decline of ~40%, and was close to break-even at EBITDA levels (excluding the impact of IND AS 116 account standard) in fiscal 2021.

 

However despite moderation in business performance, the company’s financial risk profile remained strong with nil debt and cash surplus of around Rs 350 crore as on March 31, 2021. LIPL is expected to continue adding about 70-80 stores annually, which can be funded with internal accruals, resulting in continuing healthy balance sheet. The company is expected to have moderate debt intra-year to fund temporary working capital needs, as cash flows normalise. Liquidity too remains healthy, with cash surplus of Rs.246 crore on May 31, 2021, coupled with unutilised bank limits of around Rs 100 crore.

Analytical Approach

For arriving at the ratings of LIPL, CRISIL Ratings has followed a standalone approach.

Key Rating Drivers & Detailed Description

Strengths

* Established position in the departmental stores segment and diversified revenue profile

LIPL is among the top three players in the domestic departmental store format. The company benefits from its diversified revenue profile due to its presence in the premium apparel segment ('Lifestyle' division contributed ~36% of revenues during fiscal 2021), value fashion segments ('Max' and 'Easy Buy' divisions accounted for ~52% of revenues), and furniture, home furnishings and household items ('Home Centre' division contributed ~12% of revenues).

 

LIPL also benefits from the Landmark group's extensive retail experience of over 40 years, particularly its sourcing strength in the Home Centre and Max divisions. The company has a pan India presence, which adds to geographical diversity of its revenues. Its future plans, involve opening stores across the country, including tier II & III cities, strengthening its position in India. Even during the pandemic, the company added 79 stores, taking its total stores pan India to 606 (including 11 popup stores). In the current fiscal too, LIPL is proposing to add 70-80 stores, which will enable it to be better placed compared with its peers, as the economy revives.

 

* Healthy operating efficiency

LIPL's operating efficiency is supported by the increasing proportion of broken even stores and well managed working capital cycle. This is reflected in LIPL's strong return on capital employed of over 40% in fiscal 2020. Furthermore, over the past few years, LIPL has been able to achieve higher scale for Max and Easy Buy segments along with improvement in operating margins. It also achieved operating breakeven for Easy Buy in fiscal 2020. Even though, the operating efficiency was impacted in fiscal 2021 and is expected to gradually recover in the current fiscal, it is expected to improve to historic levels over the medium term, supported by established market position and well managed working capital cycle.

 

* Healthy medium term growth prospects for the domestic organised retail industry

Although currently and in the near term, the growth prospects of the domestic retail industry are expected to be impacted by the COVID-19 pandemic, but over the medium term the organised brick and mortar retail sector is expected to grow steadily, driven by low penetration of organised retail segment estimated at 10-11% and India’s demographic advantages which include growing middle class with increasing disposable incomes. Furthermore, the apparel retail vertical segment will continue to remain attractive for the organised players, driven primarily by higher gross margins and increasing brand consciousness.

 

* Strong financial risk profile

LIPL has a strong financial risk profile, marked by a robust capital structure and healthy debt protection metrics. In fiscal 2021, despite the pandemic impact, total debt was nil at the end of the fiscal and the ratio of total outside liabilities by tangible net worth (TOL/TNW) was healthy at 1.3 times (excluding the impact of Ind AS 116 accounting standard). Prudent capital spending and efficient working capital management have enabled LIPL to limit reliance on debt. The company plans to add over 70 stores in the current fiscal and capital expenditure (capex) would be funded largely through accruals.

 

Support extended to associate (Max Hypermarket Ltd) in the form of inter-corporate deposits (ICD), which stood at Rs 30 crore as on March 31, 2021, has been repaid partially (Rs. 15 crores) and remaining Rs 15 crores will be fully repaid by end of fiscal 2022.

 

CRISIL Ratings expects LIPL is likely to sustain its robust financial risk profile over the medium term. The company is also part of the over USD 5 billion Landmark group, which is an established player in the retail space in the UAE, Africa, India and South East Asia. Promoter support, if required, is also expected to be forthcoming, as demonstrated in the past.

 

Weaknesses:

* Moderate susceptibility of operating performance to economic down-cycles and to large annual addition of stores

The branded apparel segment relies heavily on the disposable income of its customer segment and is susceptible to economic cycles because of the discretionary nature of purchases. 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 LIPL's stores have broken even, significant improvement in its operating profitability from here on, is unlikely due to gestation losses from new stores. Furthermore, the operating performance is expected to be impacted in the current fiscal as well due to the impact of second wave.

 

* Exposure to increasing competitive intensity in apparel and furniture retail segment

The attractiveness of the apparel segment has led to increasing competition in the sector with established domestic players like Shoppers Stop (Shoppers Stop Limited: CRISIL A1), Reliance Trends (Reliance Retail Limited: CRISIL AAA/Stable/CRISIL A1+), Trent Limited and Aditya Birla Fashion and Retail Limited (ABFRL: CRISIL AA/Stable/CRISIL A1+). Large global apparel brands, including The GAP Inc (rated 'BB-/ Positive' by S&P Global Ratings), Aeropostale Inc and H&M Hennes & Mauritz AB (rated 'BBB/ Stable' by S&P Global Ratings) have also entered the Indian markets in the recent past, thus increasing the competitive intensity. Furthermore, the furniture segment of the 'Home Centre' vertical is facing intense pressure, due to increasing competitive intensity, including from online retailers.

Liquidity: Strong

Liquidity is strong, in the form unutilised bank lines of Rs 100 crore and cash equivalents of more than Rs 200 crore as of May 2021. Support from promotors is also expected in case of exigencies. Cash accruals are expected to be at healthy level in fiscal 2022 against nil term debt obligation.

Outlook : Stable

CRISIL Ratings believes LIPL's business risk profile will continue to benefit over the medium term from its strong franchise, leading to higher-than-industry growth, and healthy operating efficiency. Also, its financial risk profile is expected to remain healthy over the medium term, and benefits from low leverage philosophy of LIPL’s management.  Support from promoter, in the event of extreme exigencies is also expected.

Rating Sensitivity factors

Upward factors

• Revenues restoring to pre-pandemic levels, and witnessing 8-10% growth thereon, with operating margins stabilising at 10-11% (excluding the impact of Ind AS 116 accounting standard).
• Sustenance of healthy financial risk profile and debt metrics; for instance, Total outside liabilities to tangible net worth (TOL/TNW) ratio below 1.5-1.6 times.
• Sustenance of healthy liquidity position

 

Downward factors

• Weak business performance, resulting in moderation in revenues below Rs.4500-4600 crores, and sustained operating losses.
• Larger than expected debt funded capex or acquisitions, leading to LIPL's TOL/TNW ratio exceeding 2.5 times.
• Higher than expected payout to promoters

About the Company

LIPL, incorporated in 1997, is a part of the UAE based Landmark group, led by Mr. Mukesh Jagtiani, which has business interests mainly in the retail segment in the Middle East and North African region, and India besides South East Asia; the group is also present in the hospitality and healthcare sectors. Currently the Landmark group operates over 2,200 outlets, encompassing over 30 million square feet across 24 countries.

 

LIPL set up its first Lifestyle departmental store in 1999 in Chennai. It had 82 Lifestyle departmental stores, 53 Home Centre outlets, 373 Max stores, 77 Easy Buy standalone stores and 21 SIS (Shop in Shop) as of March 31, 2021 and a combined retail space of 81.8 lakh square feet as on March 31, 2021. Lifestyle operates primarily in the premium apparel segment, footwear, watches and fashion accessories, while Max operates mainly in the value apparel segment. Home Centre operates in the furniture, household goods, and home furnishings segment. Easy Buy is an affordable, family retailer operating in regional towns.

Any other information: Not applicable

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
NA	Cash Credit	NA	NA	NA	725	NA	CRISIL AA/Stable
NA	Proposed Cash Credit Limit	NA	NA	NA	200	NA	CRISIL AA/Stable
NA	Proposed Term Loan	NA	NA	NA	75	NA	CRISIL AA/Stable
NA	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1+