Rating Rationale
October 31, 2020 | Mumbai
Shoppers Stop Limited
Rating downgraded to 'CRISIL A1' 
 
Rating Action
Rs.100 Crore Commercial Paper CRISIL A1 (Downgraded from 'CRISIL A1+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the commercial paper programme of Shoppers Stop Limited (Shoppers Stop) to 'CRISIL A1' from 'CRISIL A1+'.

The rating action is driven by the steep deterioration in Shopper's Stop operating performance, with revenues expected to fall by 35-40% in fiscal 2021, while operating profits are also expected to be severely impacted. In turn, cash generation is expected to be affected, leading to sizeable borrowings being raised to fund operations and capital spending. This is expected to lead to a moderation in the company's financial risk profile as well. The company's liquidity has also moderated due to sharp decline in the market value of liquid investments held, while working capital bank limit utilization too has increased to 73% in the past 6 months, from nil earlier.

Shoppers Stop's operating performance has been severely impacted by covid related lockdowns, extended of closure of malls (87% of stores) and slow recovery in demand for apparels. Due to the fixed cost intensive nature of business, the company reported a losss of Rs 194 crore, while its revenues have declined by 79% in the first half of the current fiscal. Most of the company's stores have become operational in August  The sales in second half of current fiscal are likely to improve given festive, wedding season and gradual waning impact of the covid-pandemic. The company has also taken up aggressive cost rationalization measures, including rental re-negotiations, and has set a target of Rs 450 crore of savings in the current fiscal. Yet, losses incurred in the first half of fiscal 2021 are unlikely to be offset in the second half given slowness of recovery in apparel demand.

To make up for the shortfall in cash flows, the company restored to borrowings, leading to debt levels rising to Rs.283 crores on September 30, 2020 (net debt of Rs.215 crore), from nil borrowings (on net basis) in March 2020. Weak profitability and material increase in debt levels has impacted debt metrics this fiscal. Shoppers Stop also enjoys healthy financial flexibility, being a part of the K Raheja group. Its liquidity though has moderated, with liquid surpluses declining to Rs 85 crore as on September 30, 2020 from Rs 154 crore as on March 31, 2020. Besides, availability under working capital bank lines has reduced to 23%, from 100% six months ago.

In order to strengthen liquidity and avoid further reliance on debt for funding losses, the company has announced a rights issue of Rs 300 crore, which will take place in the third quarter of fiscal 2021. While this will prevent further material deterioration in the company's balance sheet, improvement in operational performance in fiscal 2022 will remain contingent on improvement in footfalls at stores, and resurrection of demand for apparels. These will be key monitorables.

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 the company's average financial risk profile, and healthy financial flexibility, as part of the K Raheja group. These rating strengths are partially offset by susceptibility of operating performance to economic downturns, 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 September 30, 2020. 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 were at 85 as of September 30, 2020. Additions to retail space may continue at a moderate pace (4-6 stores per annum) barring fiscal 2021, which may see closure of upto 5-10% of the stores. CRISIL believes achieving business normalcy may take more than 6-12 months. Strong brand equity of Shoppers Stop along with improvement in retail traffic are likely to help the company achieve towards the second half of next fiscal.

* Prudent working capital management
The company complements its established market position with its healthy inventory management practices. In fiscal 2020, 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. However due to extraordinary circumstances caused by the pandemic, debt has increased to Rs. 283 crore to fund cash losses and capex. Negative working capital cycle, with inventory of 138 days, receivables of 3 days and creditors of 277 days will also help arrest partial liquidity erosion. 

* Average financial risk profile
Shoppers Stop financial risk profile is average, and is expected to recover post the receipt of rights issue proceeds of Rs.300 crore. . While gearing (0.27 times at March 31, 2020) and interest cover (4.25 times in fiscal 2020 (excluding impact of Ind AS 116 accounting standard) have deteriorated in the first half of fiscal 2021, these metrics should recover in the second half, as losses reduce and due to rights issue proceeds which will also be partly utilised to pare debt. Improvement in debt metrics in fiscal 2022 will be contingent on improved business performance.
 
During current fiscal, the company has been able to reduce its costs over a period of time, with implementation of zero based budgeting and optimizing employee and operational structure. The company had set itself a target of Rs.450 Crs for the fiscal year 2020-21 and has achieved Rs.315 Crs in the first six months.  While this will not only reduce the losses this year, but part of the savings will accrue next year and improve the overall operating leverage of the company which will remain a key monitorable. Additionally, the company has made several efforts to improve the online sales, and for Q2 fiscal 2021, it has increased by 50%, contributing to 8% of the total revenue.

Recovery in footfalls in retail stores leading to restoration of revenues and operating profitability to pre-covid levels will support restoring debt metrics in near to medium term and will remain key rating sensitivity factors.
 
 Weaknesses 
* Susceptibility of operating profitability to economic downturns 
Operating profitability was impacted in current fiscal due to impact of pandemic resulting in store closure and leading to negative operating leverage. Despite cost rationalisation towards rent and employee cost operating margin to remain under pressure in current fiscal. 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 at 15% of higher-margin private label business in its revenue.
 
* Exposure to increasing competitive intensity in apparel retail segment
The attractiveness of the apparel segment has led to increasing competition in the sector with established domestic players like Lifestyle International Private Limited (LIPL: 'CRISIL AA/Stable/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+').
 
Limited diversity of offerings and absence of Shoppers Stop in value retail, which is a more resilient business, is a negative for the company relative to its peers. Moreover, the company has low proportion of the more profitable private label sales of only 15%. However, CRISIL believes that Shoppers Stop's established position in the departmental stores and increased focus on online retailing should benefit revenues gradually.
Liquidity Adequate

The company's cash surplus has moderated to Rs.85 crore at September 30, 2020, from Rs 154 crore as on March 2020, while availability under bank lines has shrunk to Rs.39-40 crores, from over Rs.100 crores earlier, due to decline in cash flows in the first half of the fiscal. Prudent working capital management and cost rationalisation should prevent further deterioration in liquidity. The proposed rights issue of upto Rs 300 crore will be utilised to reduce debt levels and benefit liquidity. The company has minimal debt repayment obligations, which will be serviced through cash surplus or accruals. Nevertheless, strong parentage of the K Raheja group also supports financial flexibility. Also, 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:
* Sustained improved in operating performance leading to annual cash accrual generation of 200 crore
* Sustenance of healthy capital structure, liquidity and credit protection metrics

Downward Factors
* Continued deterioration in operating performance or delay in recovery in demand leading to higher than expected cash losses in fiscal 2021, and likely delayed recovery in fiscal 2022
* Larger than expected debt funded capex or inorganic acquisition, leading to deterioration in financial profile, liquidity and debt protection measures i.e. 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 promoters hold a 63.86% stake in the company as on September 30, 2020. It is one of the largest departmental store chains in India, with 85 stores and retail space of 4.5 million sq ft as on September 30, 2020. The company also operates formats like Crossword and Home Stop, which are into retailing of books and home decor, respectively. 

For six months ended September 30, 2020 company has reported GAAP revenue of Rs. 346 crore and loss of Rs. 194 crore as against revenue of Rs 1677 crore and loss of Rs 38 crore for the corresponding period of previous fiscal.

Key Financial Indicators (Consolidated)
As on/for the period ended March 31^  Unit 2020 2019
Revenue Rs.Crore 3481 3597
Profit After Tax (PAT) Rs.Crore -202 65
PAT Margin % -5.8 1.8
Adjusted Debt/Adjusted Networth Times 0.27 0.10
Interest coverage Times 4.2 19.1
^CRISIL adjusted (excluding the impact of Ind AS 116 accounting standard)

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size 
(Rs.Crore)		 Complexity Level Rating Assigned
NA Commercial Paper Programme NA NA 7-365 days 100 Simple CRISIL A1
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Upasna Trading Limited Full consolidation Subsidiary and strong operational and financial linkages
Crossword Book Stores Limited Full consolidation Subsidiary and strong operational and financial linkages
Shopper's Stop Services (India) Limited Full consolidation Subsidiary and strong operational and financial linkages
Shopper's Stop.Com (India) Limited Full consolidation Subsidiary and strong operational and financial linkages
Gateway Multichannel Retail (India) Limited Full consolidation Subsidiary and strong operational and financial linkages
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  24-03-20  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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