Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper programme of Lifestyle International Private Ltd (LIPL). at 'CRISIL AA+/Stable/CRISIL A1+’. CRISIL Ratings has also withdrawn its rating on bank facilities of Rs 145 crore and proposed bank facilities of Rs. 55 crore upon receipt of no dues/no objection from the lenders and upon request from the company. The withdrawals are in line with the CRISIL Ratings policy on withdrawal of ratings.

 

The ratings continue to reflect LIPL’s robust business risk profile, driven by its strong market position led by diversified presence pan India and across different value segments and product portfolios. Revenue registered 4% decline on-year to Rs 8,903 crore in the nine months ended December 31, 2023, on account of muted demand for apparel segment after massive growth witnessed in the previous fiscal. On like-to-like (LTL) basis, revenue de-growth was in double digits, however contribution from new area additions restricted the overall revenue de-growth.. Revenue growth is expected to recover over the medium term, driven by normalization in demand scenario, ramp-up of newly added stores over the past 2-3 fiscals and further expansion.

 

The ratings also factor in the company’s strong operating efficiency, as reflected in industry-leading return on capital employed (ROCE) and efficient working capital management. Operating margin moderated to ~16% (post IND AS) in the first nine months of fiscal 2024 from 18.5% in fiscal 2023 owing to increased discounting to liquidate inventory and loss of operating leverage amidst revenue de-growth. After adjusting for lease rentals, operating margins (Pre IndAS) stood at ~8.1% in the first nine months of fiscal 2024, against 11.1% for full year fiscal 2023. However, it is expected to recover going forward with the inventory liquidation exercise largely completed, introduction of cost-reduction measures, efficiency improvements and increasing share of private labels, which will remain a monitorable.

 

Revenue growth is expected to go back to levels of ~8-12% per annum, over the medium term, while maintaining operating margin at 17-20% (post IND AS).

 

The company’s financial risk profile remained strong, driven by expected healthy adjusted networth (excluding lease adjustments) of above Rs 3,000 crore by end of fiscal 2023 and debt-free balance sheet. It is expected to remain debt free over the medium term as strong annual cash accrual,  would be more than sufficient to fund annual capital expenditure (capex) of Rs 400-450 crore. It plans to open more than 100 new stores per annum over the medium term.

 

These strengths are partially offset by moderate susceptibility of operating performance to economic down-cycles and inflationary pressures, risks related to sizeable expansion and exposure to increasing competitive intensity in the apparel and furniture retail segments.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Well diversified product base with scaled up presence in both premium luxury and value buy apparel segments: LIPL is among the top three players in the domestic department store format. The company benefits from its diversified revenue profile due to its presence across various segments such as premium apparel (Lifestyle; ~41% of revenue during fiscal 2023), value fashion (Max and Easy Buy; ~49% of revenue) and furniture, home furnishings and household items (Home Centre; ~10% of revenue).

 

LIPL has a pan India presence with 838 retail outlets spread across the country (North: 19%; South: 55%; West: 13%; East: 13%) which adds to its geographical diversity. The company plans to open more than 100 stores in fiscal 2025, including tier II and III cities, further augmenting its geographical reach.

 

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.

 

• Healthy operating efficiency: LIPL's operating efficiency is supported by the increasing proportion of stores that have broken even and well managed working capital cycle. This is reflected in its strong RoCEs. Furthermore, over the past few years, the company has been able to achieve higher scale for Max and Easy Buy segments which have a higher share of private labels resulting in improved operating margin. Well managed inventory levels of 100-120 days have ensured that net working capital cycle remains range-bound at 5-20 days reducing its dependency on external working capital borrowing. While some moderation is expected in fiscal 2024 due to subdued demand, subsequent normalization going forward would result in sustained healthy operating efficiencies.

 

• Strong financial risk profile: LIPL has a strong financial risk profile, with an estimated adjusted networth of above Rs 3,000 crore as on March 31, 2024 and a debt-free balance sheet. The total outside liabilities to tangible networth (TOLTNW) ratio which stood at 0.80 time (excluding lease adjustments) in fiscal 2023 is expected to remain under 1 time over the medium term. Strong cash accrual and prudent working capital management have enabled LIPL to limit reliance on external borrowings.

 

• CRISIL Ratings expects LIPL to sustain its robust financial risk profile over the medium term as well. The company is also part of the USD 7 billion Landmark group, which is an established player in the retail space in the UAE, Africa, India and Southeast Asia. Promoter support, if required, is also expected to be forthcoming, as demonstrated in the past.

 

Weaknesses:

• Moderate susceptibility of operating performance to economic downturns, inflationary pressures, and large annual addition of stores: LIPL remains susceptible to economic downturns due to the discretionary nature of its products. This renders revenue and profitability vulnerable to economic cycles. In a cautious spending scenario, discretionary segments such as gems, jewellery and apparel are impacted the most while non-discretionary segments such as food, grocery and pharmacy are impacted less. For instance, temporary store closures, restricted mobility, and curtailed discretionary spending because of the first and second waves of the Covid-19 pandemic restricted growth during fiscal 2021 as well as the first quarter of fiscal 2022. Also, revenue growth has slowed down considerably from the fourth quarter of fiscal 2023, due to muted discretionary demand on the back of the large base of the previous fiscal.

 

Furthermore, large expansion by retailers can lead to pressure on their operating margins as earnings from existing stores may not adequately offset losses from the high proportion of new stores. While a large portion of LIPL's stores have broken even, any further improvement in its operating profitability from here on is unlikely due to gestation losses from new stores.

 

• Exposure to increasing competitive intensity in the apparel and furniture segments: The attractiveness of the apparel segment has led to increasing competition in the sector with established domestic players such as Shoppers Stop (Shoppers Stop Ltd; CRISIL A1+), Reliance Trends (Reliance Retail Ltd; CRISIL AAA/Stable/CRISIL A1+), Trent Ltd and Aditya Birla Fashion and Retail Ltd (ABFRL: CRISIL AA+/Negative/CRISILA1+). Large global apparel brands, including The GAP Inc (rated 'BB/ Negative 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 market in the recent past, 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 driven by cash and cash equivalent of more than Rs 360 crore as of March 2023. Furthermore, bank limits (mostly non-fund-based) of Rs 800 crore were utilised at 12% on average over the past six months providing significant cushion. Support from the promoters is also expected in case of exigencies. Annual cash accrual of more than Rs. 800 crore per annum should be more than sufficient to fund capex requirement of Rs 400-450 crore per annum and incremental working capital requirement.

Outlook: Stable

CRISIL Ratings believes LIPL's business risk profile would continue to be strong 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 robust over the medium term, and benefit from the low leverage philosophy of LIPL’s management.

Rating Sensitivity factors

Upward factors:

• Significant revenue growth and sustained improvement in operating performance while maintaining operating margin (post IND AS) above 20%
• Sustenance of healthy financial risk profile and liquidity position

 

Downward factors:

• Lower-than-anticipated growth with slower-than-expected ramp up of newly added stores; operating margin (post IND AS) falling below 12-13%
• Larger-than-expected debt-funded capex, dividend payout, share buyback or capital reduction, impacting the debt protection metrics and capital structure materially

About the Company

Incorporated in 1997, LIPL is the flagship company of the UAE-based Landmark group, led by Mr Mukesh Jagtiani and Ms Renuka Jagtiani, which has business interests mainly in the retail segment in the Middle East and North African regions, and India besides Southeast 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 department store in 1999 in Chennai. It has 111 Lifestyle department stores, 93 Home Centre outlets, 496 Max stores, 138 Easy Buy standalone stores and combined retail space of more than 11 million square feet as on December 31, 2023. Lifestyle operates primarily in the premium apparel segment, footwear, watches and fashion accessories, while Max operates 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.

Key Financial Indicators

As on March 31'	Unit	2023	2022
Revenue	Rs.Crore	11,694	7806
Profit After Tax (PAT)	Rs.Crore	700	269
PAT Margin	%	6.4	3.4
Adjusted debt/adjusted networth	Times	0.00	0.00
Interest coverage	Times	22.8	34.4

For the first nine months of fiscal 2024, revenue was Rs 8,903 crore with operating margin at ~16% (post IndAS).

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	800	NA	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	100	Simple	CRISIL A1+
NA	Cash credit	NA	NA	NA	145	NA	Withdrawn
NA	Proposed Cash Credit Limit	NA	NA	NA	55	NA	Withdrawn