Rating Rationale
March 24, 2020 | Mumbai
Shoppers Stop Limited
Rating Reaffirmed 
 
Rating Action
Rs.100 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Shoppers Stop Ltd (Shoppers Stop).

Operating performance of Shoppers Stop in March 2020 and fiscal 2021 is expected to be impacted due to measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to impact the business profile of the company as certain stores in malls and establishments have been shut down and thereby may have an impact on its credit quality, especially liquidity position. While, most of the state government's measures are applicable till March 31, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19.

Prolonged closures can significantly weaken credit profiles of firms. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely. That said, the ability of the business to revert to operational stability, and any relief measures provided by the government are key monitorables.

However, adequate liquidity of over Rs 200 crore, in the form of unutilised bank limit, cash surplus and marketable securities, will help mitigate any impact on cash flows in the near term. The management is also in process of enhancing the bank limit. Shoppers Stop also enjoys healthy financial flexibility, being a part of the K Raheja group. 

Despite moderation in operating performance, debt to EBITDA (earnings before interest, depreciation and amortisation) ratio will remain healthy below one time in the medium term, on a sustained basis. Shoppers Stop is also taking steps to reduce fixed cost through various initiatives/negotiations. In the nine months ended December 31, 2019, the company has posted comparable revenue growth of 3% year-on-year and operating margin of 6.3%.

Financial risk profile should remain healthy, aided by a comfortable capital structure (total debt of Rs 11 crore and gearing of 0.01 time as on December 31, 2019). Adequate liquidity of about Rs 200 crore, against nil term debt, deferment of capital expenditure (capex) and a negative working capital cycle will help the financial risk profile sustain in the near term. The rating continues to reflect Shoppers Stop's established position in the departmental stores category, and prudent working capital management. The rating also factors in healthy financial risk profile and financial flexibility. These rating strengths are partially offset by susceptibility of operating margin to economic downturns and increasing competition in the apparel retail segment.

Analytical Approach

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

Please refer Annexure - List of entities consolidated, which captures the list of 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 4.5 million square feet (sq ft) as on December 31, 2019. With a diverse range of offerings such as apparel, baby-care, footwear, personal accessories, and furniture, the format targets the relatively less price-sensitive, upper and upper-middle class consumers. Shoppers Stop has established a strong brand equity in this target demographic, with repeat customers (through its loyalty program - First Citizen) contributing around 84% of sales. The company has also successfully scaled up this franchise through regular store additions. The number of outlets have been nearly tripled to 89 as of December 31, 2019, from 32 as of March 31, 2010. While additions to retail space may continue at a moderate pace (4-6 stores per annum), CRISIL believes improving profitability from the recently added stores will gradually contribute to cash flows over the medium term.

* Prudent working capital management
The company complements its market position with its healthy inventory management practices. In fiscal 2019, 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 the working capital limit. Thus, Shoppers Stop has a negative working capital cycle, with inventory of 125 days, receivables of 5 days and creditors of 220 days.
 
* Healthy financial risk profile
Financial risk profile should remain healthy, with debt to EBITDA of less than one time in the near to medium term. Total debt may increase temporarily, due to expected decline in cash flow. Net cash accrual is also likely to decline in fiscal 2021 from about Rs 200 crore estimated in fiscal 2020, due to shut down of stores, following the outbreak of COVID-19. Comfort can be drawn from healthy liquidity of Rs 200 crore in the form of cash surplus, unutilised bank lines and absence of long-term debt. CRISIL will monitor the company's progress on reducing potential cash burn, creating additional liquidity through enhanced bank limit and other levers such as cutting general and administrative expenses and paring back capex. Maintaining adequate liquidity in the form of unutilised bank limits or cash equivalents remains a key rating sensitivity factor.
  
Weaknesses 
* Susceptibility of operating profitability to economic downturns 
Profitability remains sensitive to any sizeable annual additions to retail space, competitive intensity, and any economic slowdown. CRISIL believes profitability may improve only at a gradual pace, and Shoppers Stop may continue to lag behind most of its established peers, due to high competitive intensity, and low share of higher-margin private label business in its revenue. Operating profitability will also remain sensitive to any weakening in consumer sentiment and to any large store additions in future.
 
* Exposure to increasing competitive intensity in apparel retail segment
Attractiveness of the apparel segment could intensify competition, especially with the recent entry of large global brands such as The GAP Inc, Aeropostale Inc and Hennes & Mauritz AB . Competitive pressure is also increasing due to growing presence of the domestic brands.
Liquidity Strong

Shoppers Stop has adequate liquidity worth over Rs 200 crore as on March 18, 2020, aided by cash surplus, unutilised bank limit and marketable securities. Bank limit of Rs 159 crore was utilised only at 4% on an average  for 12 months ended January 31, 2020. However, the cash surplus or bank limit utilisation may moderate due to decline in cash flows in the near term. The company management is in process of enhancing the bank limit to ensure enough liquidity in the near to medium term. Strong parentage of the K Raheja group also supports financial flexibility. Moreover, the promoters, who have a long track record in sectors such as realty, hospitality, and retailing, have provided financial support in the past.  

Rating Sensitivity factors
Upward Factors
* Better than expected revenue and profitability driven by healthy same store growth and increase in contribution of private labels and
* Sustenance of healthy and credit protection metrics; for instance Debt /EBITDA below 1 time and TOL/TNW below 0.5-0.6 times

Downward Factors
. Significant deterioration of operating performance, and operating margins due to impact of corona virus mostly due to large gestation losses from new stores
. Larger than expected debt funded capex or acquisition, leading to deterioration in debt protection measures
. Sharp deterioration in liquidity.

About the Company

Shoppers Stop is a K Raheja Corp group company promoted by Mr. Chandru L Raheja. The promoters hold a 63.70% stake as on December 31, 2019. It is one of the largest departmental store chains in India, with 89 stores and retail space of 4.5 million sq ft as on December 31, 2019. The company also operates formats like Crossword and Home Stop, which are into retailing of books and home decor, respectively. 

For nine months ended December 31, 2019 company has reported revenue of Rs. 3,518 crore and PAT of Rs. 23 crore as against revenue of Rs 3,430 crore and PAT of Rs 43 crore for the corresponding period ended December 31, 2018.

Key Financial Indicators (GAAP)
As on/for the period ended March 31^ Unit 2019 2018
Revenue Rs crore 3597 3713
Profit After Tax (PAT) Rs crore 65 214
PAT Margin % 1.8 5.8
Adjusted Debt/Adjusted Networth Times 0.10 0.15
Interest coverage Times 19.17 6.09
^CRISIL adjusted

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size 
(Rs.Cr)		 Rating Assigned
NA Commercial Paper Programme NA NA 7-365 days 100 CRISIL A1+
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Upasna Trading Limited Full consolidation Subsidiary
Crossword Book Stores Limited Full consolidation Subsidiary
Shopper's Stop Services (India) Limited Full consolidation Subsidiary
Shopper's Stop.Com (India) Limited Full consolidation Subsidiary
Gateway Multichannel Retail (India) Limited Full consolidation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      29-03-19  CRISIL A1+  21-03-18  CRISIL A1+  12-10-17  CRISIL A1  CRISIL A1 
                    27-09-17  CRISIL A2+   
                    22-08-17  CRISIL A2+   
                    29-03-17  CRISIL A1   
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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