Detailed Rationale

CRISIL Ratings has reaffirmed its short-term rating on the commercial paper programme of Shoppers Stop Limited (Shoppers Stop) at ‘CRISIL A1’.

 

The reaffirmation reflects the expected improvement in performance in the second-half of fiscal 2022 driven by recovery in retail mobility, increase in footfalls and pent-up demand, which will partially offset the operating losses incurred in the first-half of the fiscal due to the second wave of Covid-19. Sales in 2022 are expected to increase by around 45% year-on-year although operating profits are likely to remain low due to the losses incurred. Cash balance remained comfortable at Rs 151 crore as on September 30, 2021, after rights issue of Rs 300 crore in November 2020; consolidated long-term debt outstanding was Rs 236 crore. In August 2021, the board approved sale of its 100% stake in Crossword Bookstores Ltd  in four tranches at a business valuation of Rs 41.6 crore to focus on its core business. During the month of October 2021, the company has completed first tranche of stake sale of 51% in Crossword.

 

In order to strengthen liquidity and avoid further reliance on debt for funding losses, the company had taken rights issue of Rs 300 crore in November 2020. To make up for the shortfall in cash flows, it restored to borrowings in fiscal 2021 as well as in the first-half of the current fiscal, leading to high consolidated gross debt of Rs 236 crore as on September 30, 2021 (Rs 186 crore as on March 31, 2021). Weak profitability has impacted debt metrics this fiscal. While raising equity prevented material deterioration in the balance sheet in the short-term (as reflected in decline in standalone net debt on September 30, 2021, from September 30, 2020), expected improvement in operational performance in the second-half of 2022 will remain contingent on improvement in footfalls at stores and resurrection of demand for apparels (key monitorables). Normalisation of revenue and profitability over the next six months will also remain a key rating driver.

 

Shoppers Stop also enjoys healthy financial flexibility, being a part of the K Raheja group. Liquidity remains adequate, with liquid surpluses of Rs 150 crore as on September 30, 2021. Utilisation of working capital limit (Rs 149 crore) remained low at 35% in the past 12 months.

 

The rating continues to reflect the established position of Shoppers Stop in the departmental stores category, prudent working capital management, above-average financial risk profile, and healthy financial flexibility for being a part of the K Raheja group. These strengths are partially offset by susceptibility of operating performance to economic downturns and increasing competition in the apparel retail segment.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of Shoppers Stop and its subsidiaries, which are collectively referred to as Shoppers Stop.

 

Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths
* Established position in the departmental stores category

Shoppers Stop is one of India’s largest departmental store chains, with retail space of 4.2 million square feet (sq ft) as on September 30, 2021. With a diverse range of offerings (apparel, baby care, footwear, personal accessories and furniture), the format targets the relatively less price-sensitive, upper- and upper-middle-class consumers. The company has established a strong brand equity in this target demographic, with repeat customers (through its loyalty program, First Citizen) contributing around 75% to sales. The company has also successfully scaled up this franchise through regular store additions. The number of outlets were 80 as on September 30, 2021, and there are plans to add another 20 by end of 2023 with focus on smaller stores in tier 2/3 cities. Strong brand equity and improvement in retail traffic are likely to help the company towards the second-half of this fiscal.

 

Shoppers Stop is strongly focussing on developing omni-channels and has seen 103% year-on-year growth in sales in the second quarter of 2022 (with contribution of 8% in the overall sales). Private label and exclusive brands also showed a 90% growth with significant volume growth and contribution of 14%.

 

* Prudent working capital management

Inventory management practices are robust. In fiscal 2021, over 60% of revenue was derived from merchandise procured on consignment or sale-or-return basis. This optimal mix ensures an adequate gross margin while reducing susceptibility to inventory build-up during a slowdown, or to unsuccessful store additions. Besides, quick cash conversion on sales also minimises dependence on working capital limit. However, due to extraordinary circumstances caused by the pandemic, debt remained at Rs 236 crore as on September 30, 2021, to fund cash losses and capital expenditure (capex). Negative working capital cyclehas also helped to arrest partial liquidity erosion. 

* Average financial risk profile

Despite receipt of rights issue proceeds due to losses incurred, gearing was healthy at 0.29 time as on March 31, 2021. Interest coverage ratio had deteriorated in 2021 but should recover in fiscal 2022 with improvement in profitability. Better metrics will be contingent on recovery of business in the second-half of fiscal 2022.

 

The company has been able to reduce its costs over the last 18 months by implementing zero-based budgeting and optimising employee and operational structure. Cost-cutting measures taken in fiscal 2021 and the first-half of 2022 saved Rs 433 crore and Rs 202 crore, respectively, in operating cost compared with 2020 levels. Additionally, the company has made efforts to improve online sales by investing Rs 40 crore in the current fiscal on technology and developing omni-channels. Cash accrual is estimated to improve gradually in current fiscal and in 2023; with capex of Rs 90-110 crore annually, debt is likely to reduce in the fiscal as well. Interest coverage ratio is expected to improve to above 3 times in fiscals 2022.

 

 Weaknesses 
* Susceptibility of operating profitability to economic downturns 

Operating margin is expected to be impacted in the current fiscal by the second wave of the pandemic. Despite rationalisation towards rent and employee costs, margin will remain under pressure. Improvement in profitability from the third quarter of 2022 will help offset losses incurred in the first-half of the fiscal. However, the company may continue to lag behind most of its peers due to high competitive intensity and low share (15%) of higher-margin private label business in revenue.

 

* Exposure to increasing competition in the apparel retail segment

The attractiveness of the apparel segment has led to the entry of established domestic players such as Lifestyle International Pvt Ltd ('CRISIL AA/Stable/CRISIL A1+') Reliance Retail Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Trent Ltd and Aditya Birla Fashion and Retail Ltd ('CRISIL AA/Stable/CRISIL A1+').

 

Limited diversity of offerings and absence of Shoppers Stop in value retail, which is a more resilient business, is a negative compared to peers. Moreover, the company has low proportion of the more profitable private label sales. However, its established position in the departmental stores segment and increased focus on online retailing should benefit revenue gradually.

Liquidity: Adequate

Cash surplus remained comfortable at Rs 151 crore as on September 30, 2021, including investments in mutual funds, while bank utilisation remained moderate at 35% for the 12 months through August 2021. Prudent working capital management and cost rationalisation should further support liquidity. The rights issue of Rs 300 crore was utilised to reduce previous long-term debt in fiscal 2021. Debt obligation of Rs 75 crore and Rs 103 crore in fiscals 2022 and 2023, respectively, will be serviced through cash surplus or accrual. Strong parentage of the K Raheja group also supports financial flexibility. Promoter funding, as seen in the past, aids liquidity as well.

Rating Sensitivity factors

Upward Factors

• Normalisation of revenue and profitability to pre-Covid levels, leading to annual cash accrual of Rs 150-200 crore
• Sustenance of healthy capital structure and recovery in credit protection metrics, along with continued high cash surplus

 

Downward Factors

• Steady deterioration in operating performance or delay in recovery in demand in fiscal 2022
• Larger-than-expected debt-funded capex or inorganic acquisition weakening overall financial risk profile, with total debt remaining above Rs 250 crore

About the Company

Shoppers Stop is a K Raheja Corp group company promoted by Mr Chandru L Raheja. The promoter holds a 65.41% stake in the company as on September 30, 2021. Shoppers Stop is one of the largest departmental store chains in India with 80 stores and retail space of 4.2 million sq ft as on September 30, 2021. The company also operates Home Stop, which is into retailing home decor.

 

For the six months ended September 30, 2021, the company reported GAAP revenue of Rs 847 crore and loss of Rs 109 crore, against revenue of Rs 353 crore and loss of Rs 218 crore for the corresponding period previous fiscal.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31^	Unit	2021	2020
Revenue	Rs crore	1749	3481
Profit After Tax (PAT)	Rs crore	-267	-142
PAT Margin	%	-15.3	-4.1
Adjusted debt/adjusted networth#	Times	0.29	0.27
Interest coverage	Times	-	4.2

^CRISIL Ratings adjusted (excluding the impact of Ind AS 116 accounting standard)

#excluding IND-AS adjustment of Rs 523 crore in networth

Any other information: Not applicable