Detailed Rationale

CRISIL Ratings has placed its ‘CRISIL AA+’ rating on the long-term bank facilities and non convertible debentures of Aditya Birla Fashion and Retail Ltd (ABFRL) on ‘Rating Watch with Negative Implications’, and has reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities and commercial paper programme.

 

The rating action follows an announcement on April 19, 2024, by the company that its board of directors have approved a scheme of arrangement between ABFRL and Aditya Birla Lifestyle Brands Ltd (ABLBL) and their respective shareholders and creditors. The scheme, inter alia, provides for demerger, transfer and vesting of the Madura Fashion and Lifestyle business (MF&L) from ABFRL to ABLBL. The MF&L business comprises four lifestyle brands (Louis Phillippe, Van Heusen, Allen Solly and Peter England), casual wear brands (American Eagle and Forever 21), a sportswear brand (Reebok) and an innerwear brand (Van Heusen). The balance retail portfolio, inclusive of Pantaloons (Masstige), along with the ethnic, luxury and digital portfolios will remain under ABFRL. Post completion of the proposed demerger, ABFRL intends to raise equity capital of Rs 2,500 crore by March 2025 to strengthen its balance sheet and invest in growth. The demerger is subject to requisite approvals and will be executed through a scheme of arrangement under the National Company Law Tribunal.

 

The shareholders of ABFRL will have identical shareholding in the newly formed entity. The demerger is likely to impact the credit risk profile of ABFRL as the MF&L business accounts for around 60% of consolidated revenue (fiscal 2023) with superior profitability as well as return on capital.

 

CRISIL Ratings will continue to engage with the management of ABFRL and monitor developments in this regard, and will resolve the watch after consummation of the transaction and obtaining clarity on its impact on the credit profile of ABFRL.

 

In March 2024, the outlook on the long-term rating was revised to ‘Negative’ from ‘Stable’ after factoring in subdued operational performance, resulting in a sharp moderation in the debt protection metrics. ABFRL has done some large acquisitions over the past two fiscals, which resulted in debt increasing significantly. This, along with subdued demand for retail apparel, write-down of slow moving inventories and lower-than-expected ramp-up of business at recent acquisitions materially impacted operating profitability and cash accrual in fiscal 2024. Gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio is estimated at 10 times as on March 31, 2024, (reported gross debt / Ebitda ratio stood at 4.5 times a year earlier).

 

The ratings continue to factor in the company's strong business risk profile, backed by the healthy market position of apparel brands in the Madura division and moderate value proposition of the Pantaloons division. The ratings also derive support from the company’s superior financial flexibility and the strong management of the Aditya Birla group. These strengths are partially offset by exposure to intense competition in the apparel retail sector in India, susceptibility to economic down cycles, and the company’s moderate financial risk profile.

 

ABFRL, on consolidated basis, recorded revenue growth of 11% on-year to Rs 10,589 crore in the first nine months of fiscal 2024, driven by new acquired businesses and store expansions, even as like-for-like stores witnessed degrowth. Some recovery was seen in the third quarter of fiscal 2024 with start of the festival season.

 

In the first nine months of fiscal 2024, Ebitda (including other operating income) stood at Rs 1,326 crore (12.3%), compared with Rs 1,385 crore (14.4%) in the corresponding period of the previous fiscal. Ebitda on pre-IndAS basis is estimated at Rs 330-350 crore (operating margin of around 3.2%) for the first nine months of fiscal 2024, post rental outgo of around Rs 330 crore per quarter.

 

Because of continuous expansions and lower-than-anticipated revenue growth, the company’s operating leverage was impacted, resulting in muted profitability. Consolidated profitability is driven by continued healthy performance of the lifestyle products segment within the Madura brands, while subsidiaries (led by digital brands under TMRW) and innerwear segment (within other lifestyle business) dragged overall profitability. ABFRL has been focusing on improving diversification from lifestyle brands, whose share came down to around 45% of total revenue in the first nine months of fiscal 2024 from 50-55% three-four fiscals back.

 

The financial risk profile remains moderate owing to large debt-funded acquisitions, stretched working capital cycle and sizeable support to subsidiaries amid subdued operating performance owing to muted demand post massive growth witnessed the previous fiscal. The gross debt to Ebitda (including other operating income) ratio (pre-Ind AS) stood at 4.5 times as on March 31, 2023, as against 4.5 times as on March 31, 2022. The ratio is estimated at around 10 times in fiscal 2024 post equity infusion from GIC. The board of ABFRL, on May 24, 2022, approved fresh equity infusion of Rs 2,195 crore by way of 7.5% stake dilution on post-issue basis to Caladium Investment Pte Ltd, an affiliate of GIC, Singapore. The first tranche of around Rs 770 crore was received in September 2022 and the balance Rs 1,425 crore was received in March 2024. 

 

The company will continue to benefit from superior financial flexibility, as seen from its ability to raise funds, unutilised fund-based working capital lines of around Rs 800 crore, and unencumbered cash and equivalent of around Rs 466 crore as on September 30, 2023. Besides, as the leading consumer-facing company of the Aditya Birla group, ABFRL will continue to receive managerial and financial support from the group in case of high debt levels.

 

CRISIL Ratings had taken note of the announcement by ABFRL regarding acquisition of TCNS Clothing Co Ltd (TCNS; ‘CRISIL AA-/Watch Developing/CRISIL A1+’). TCNS is a leading player in ethnic wear for women with over 4,000 outlets (675 exclusive brand outlets and more than 3,200 multi-brand outlets and lifestyle stores) in more than 100 cities as on March 31, 2023. This acquisition has strengthened ABFRL’s business risk profile through stronger presence in the ethnic wear segment. ABFRL acquired 51% stake for Rs 1,626 crore with effect from September 26, 2023. ABFRL shall issue shares in the ratio of ­­­­11 shares of ABFRL for every 6 shares of TCNS to the balance stakeholders of TCNS. TCNS will thereafter be amalgamated with ABFRL. The entire process will be completed in the near term. Amidst muted cash accrual, the acquisition has been funded primarily through debt.

Analytical Approach

CRISIL Ratings has factored in the expected need-based managerial and financial support from the Aditya Birla group in case of an exigency.

 

CRISIL Ratings has combined the business and financial risk profiles of ABFRL and its subsidiaries. This is because all these companies are in the same business and have strong financial and operational linkages. 

 

CRISIL Ratings has amortised goodwill as follows:

• Goodwill generated at the time of acquisition of the erstwhile Pantaloons Fashion and Retail Ltd (PFRL) from the Future group
• Goodwill generated from the merger of PFRL with the Madura division and the acquisition of exclusive franchise rights for Forever 21
• Goodwill on acquisition of Jaypore E-Commerce Pvt Ltd, Finesse International Design Pvt Ltd, Sabyasachi Calcutta LLP, House of Masaba Pvt Ltd, and also on acquisition of various direct to customer (D2C) companies/businesses under the D2C arm, Aditya Birla Digital Fashion Ventures Ltd (ABDFVL).
• Goodwill on acquisition of TCNS

 

CRISIL Ratings has amortised the following brands, trademarks and rights:

 

• Brands/trademarks on acquisition of Jaypore E-Commerce Pvt Ltd, Finesse International Design Pvt Ltd, Sabyasachi Calcutta LLP, House of Masaba Pvt Ltd and on acquisition of various D2C companies/businesses under ABDFVL
• Franchisee rights arising on acquisition of online and offline rights to the global brand Reebok for the Indian market and other ASEAN countries.

 

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:

• Strong business risk profile backed by the apparel brands in the Madura division and robust value proposition of the Pantaloons division: The Madura division includes apparel brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England, which have strong positioning. The franchise model of store expansion limits capital requirement, which helps sustain strong return on capital employed. Pantaloons has pan-India presence with 446 stores as on December 31, 2023, and a high proportion of private labels (60-65%), which the management aims to increase. The company’s entry into the ethnic segment through tie-ups with Sabyasachi, Tarun Tahiliani, Shantanu & Nikhil, Jaypore and House of Masaba may bolster its market position as this segment has less competition and huge untapped potential.

 

The company had expanded its presence in the ethnic apparel retail segment through acquisition of 51% stake in Sabyasachi Calcutta LLP, owner of the Sabyasachi brand, for around Rs 398 crore, and 33.5% stake in luxury couture business under Tarun Tahiliani for Rs 67 crore. ABFRL continues to invest in its ethnic portfolio and acquire select brands to widen its portfolio. In November 2022, its wholly owned subsidiary, ABDFVL, announced partnership with eight digital-first lifestyle brands for around Rs 289 crore. Licensing of Reebok India operations was completed with effect from October 1, 2022.

 

• Strong financial flexibility: While ABFRL has shown a large appetite for acquisitions, it has also shown strong fund-raising ability to partly fund these acquisitions in recent years. ABFRL raised equity of around Rs 1,000 crore through rights issue and Rs 1,500 crore through stake sale to a strategic investor, Flipkart; it has recently raised equity of Rs 2,195 crore (Rs 770 crore received in September 2022 and the balance in March 2024) from GIC. These fund-raising initiatives have supported the balance sheet and bolstered networth. The company had unutilised fund-based working capital lines of around Rs 800 crore and unencumbered cash and equivalent over Rs 466 crore as on September 30, 2023, to meet debt obligation, fund acquisitions and cover working capital requirement. Besides, the company has successfully accessed the capital markets, raising long-term debentures at attractive coupon rates for funding organic and inorganic growth.

 

• Robust management and experience of the Aditya Birla group: The Aditya Birla group owned 51.85% of equity shares in ABFRL as on March 31, 2024. It is a Fortune 500 company headquartered in Mumbai, Maharashtra, with presence in 40 nations. The group has presence in various industries such as metals, cement, fashion and retail, financial services, fibre, textiles and chemicals. Key personnel in ABFRL are from the Aditya Birla group. Furthermore, ABFRL is the group's flagship company in the retail sector and is expected to benefit from the group's experience of handling businesses in multiple industries.

 

While the shareholding of the Aditya Birla group expected to reduce slightly below 50% following share swap owing to the TCNS transaction, the group will remain the largest shareholder in the company.

 

Weaknesses: 

• Intensifying competition for the apparel retail sector in India: ABFRL is one of the largest listed fashion and retail companies in India, with strong brands such as Louis Philippe, Van Heusen and Pantaloons. The apparel retail sector is competitive. Apart from the Aditya Birla group, many of India's large corporate groups, including Tatas and Reliance Retail Ltd (a step-down subsidiary of Reliance Industries Ltd ['CRISIL AAA/Stable/CRISIL A1+']) also have significant presence in the apparel retail space. Additionally, the sector has established players such as Lifestyle International Pvt Ltd ('CRISIL AA+/Stable/CRISIL A1+'), Raymond Ltd (‘CRISIL AA/Stable/CRISIL A1+’) and Shoppers Stop Ltd ('CRISIL A1+'). Large global apparel chains such as Marks and Spencer Plc and Inditex SA have also entered into joint ventures with local partners, further intensifying competition. However, CRISIL Ratings believes the strong brand equity of Madura and the unique positioning of Pantaloons, as well as recent acquisitions in the ethnic segment, will help ABFRL sustain its position as one of the leaders in the domestic apparel sector.

 

• Susceptibility to economic downturns: ABFRL remains susceptible to economic downturns owing 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 and jewellery and apparel are impacted the most while non-discretionary segments such as food and grocery and pharmacy are impacted less. For instance, temporary store closures, restricted mobility and curtailed discretionary spending because of the Covid-19 pandemic restricted growth in fiscal 2021 and fiscal 2022. Also, revenue growth slowed down considerably from the fourth quarter of fiscal 2023 owing to muted discretionary demand amid large base of the previous fiscal.

 

• Moderation in the financial position owing to expansion and acquisitions: Gross debt increased to Rs 4,821 crore (excluding lease liabilities) as on September 30, 2023, from around Rs 2,306 crore as on March 31, 2023, owing to acquisition of TCNS and large working capital requirement. This weakened the financial risk profile considerably. While additional equity infusion from GIC of around Rs 1,425 crore in March 2024 has reduced debt levels, it remains elevated around Rs 3,000 crore as on March 31, 2024. The gross debt to Ebitda ratio (pre-Ind AS including other operating income) is expected around 10 times in fiscal 2024, compared with around 4.5 times as on March 31, 2023. Similarly, interest coverage ratio is expected to remain modest at 1.1-1.5 times in fiscal 2024.

Liquidity: Strong

Liquidity is strong supported by unutilised fund-based working capital lines of around Rs 800 crore and cash surplus of around Rs 466 crore as on September 30, 2023. The company is expected to generate adequate net cash accrual to meet its debt obligation. Annual capex will be funded through accrual and debt. The company, by virtue of being a leading company of the Aditya Birla group, with strong retail presence also has robust fund raising ability.

 

Environment, social and governance (ESG) profile

The ESG profile of ABFRL supports its credit risk profile.

 

The retail sector has low environmental impact, primarily in the form of low emissions and water consumption and increasing focus on the use of sustainable packaging. The sector has moderate social impact because of direct bearing on the health and wellbeing of its workers and customers.

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

ESG highlights

• The share of renewable energy in total energy consumption has declined by around 6% year-on-year to around 26.4% in fiscal 2023. However, the company is working towards increasing the use of renewable energy and its share in overall energy consumption will improve over the medium term.
• Intensity of greenhouse gas (GHG) emissions increased by nearly 11% on-year in fiscal 2023.
• Lost time injury frequency rate (LTIFR) decreased by more than 50% in fiscal 2023, and remains below the sector average.
• The company’s attrition increased to 35.5% in fiscal 2023 from 22% in the previous fiscal and remains elevated above sector’s average.
• The governance structure of ABFRL is characterised by 50% of the board comprising independent directors, a split between the positions of Chairman and Chief Executive Officer, extensive financial and non-financial disclosures and robust internal control systems.

 

ESG is gaining importance among investors and lenders. ABFRL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given its access to domestic capital markets.

Rating Sensitivity factors

Upward factors:

• Strong revenue growth and improving operating profitability, including from newly acquired brands, resulting in significant increase in cash generation on a sustained basis
• Sustained improvement in debt protection metrics, supported by healthy cash generation and higher than expected equity raise; for instance gross debt to EBITDA (pre Ind AS) ratio less than 1.0-1.3 times on sustained basis

 

Downward factors:

• Slower-than-expected revenue growth, continued losses in new acquisitions, impacting operating profitability and cash generation
• Material increase in debt levels to fund acquisitions, capex and investments in subsidiaries, leading to continued moderate debt protection metrics; for instance, gross debt to EBITDA (pre Ind AS) ratio remaining over 2.75-3.0 times.

About the Company

ABFRL is the apparel retail venture of the Aditya Birla group, which merged the Madura division (formerly, a division of Aditya Birla Nuvo Ltd) with the erstwhile PFRL on January 9, 2016, with appointed date of April 1, 2015. PFRL was renamed ABFRL after the merger. The Madura division holds leading brands while departmental stores are under Pantaloons. ABFRL acquired Forever 21 in India in 2016 to scale its fast fashion segment. As of March 2023, the company operated retail area of 10.8 million sq ft, with 3,546 brand outlets and 431 Pantaloons stores.

About the Group

The Aditya Birla Group, is a USD 65 billion (as of March 31, 2023) global conglomerate, with presence across diversified segments including cement (Ultratech Cement Limited, rated 'CRISIL AAA/Stable/CRISIL A1+'), metals (Hindalco Industries Limited, rated 'CRISIL A1+'), fashion and retail (ABFRL), financial services (Aditya Birla Capital Limited, rated 'CRISIL A1+'), chemicals (Grasim Industries Ltd, rated 'CRISIL AAA/Stable/CRISIL A1+'; Birla Carbon India Private Limited, rated 'CRISIL AA/Stable/CRISIL A1+), telecom (Vodafone Idea Limited) etc. The group has presence across 6 continents and operates in 40 countries. Headed by Mr. Kumar Mangalam Birla, and headquartered in Mumbai, Maharashtra. the total market captialization of the group currently stands at ~Rs. 7.5 lakh crores.

Key Financial Indicators(reported; consolidated)

Particulars	Unit	2023	2022
Revenue	Rs crore	12,418	8,136
Profit after tax (PAT)	Rs crore	(59)	(118)
PAT margin	%	(0.5)	(1.5)
Interest coverage (pre-Ind AS)	Times	3.0	2.1
Gross debt to Ebitda (pre-Ind AS)	Times	4.5	4.5
Net debt to Ebitda (pre-Ind AS)	Times	2.8	1.8

Note: Debt mentioned in the rating rationale exclude leases and Ebitda includes other operational income.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE647O08107	NCD	09-Sep-2021	5.55	09-Sep-2024	400	Simple	CRISIL AA+/Watch Negative
INE647O08115	NCD	30-Jan-2023	7.55	30-Jan-2026	500	Simple	CRISIL AA+/Watch Negative
INE647O08123	NCD	12-Sep-2023	7.57	12-Sep-2030	750	Simple	CRISIL AA+/Watch Negative
NA	NCD@	NA	NA	NA	150	Simple	CRISIL AA+/Watch Negative
NA	Commercial paper	NA	NA	7-365 days	2000	Simple	CRISIL A1+
NA	Long Term Loan	NA	NA	15-Mar-2025	8	NA	CRISIL AA+/Watch Negative
NA	Long Term Loan	NA	NA	29-Mar-2028	500	NA	CRISIL AA+/Watch Negative
NA	Long Term Loan	NA	NA	25-Apr-2030	600	NA	CRISIL AA+/Watch Negative
NA	Fund-Based Facilities	NA	NA	NA	1090	NA	CRISIL AA+/Watch Negative
NA	Fund-Based Facilities*	NA	NA	NA	508	NA	CRISIL AA+/Watch Negative
NA	Non-Fund Based Limit	NA	NA	NA	700	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	542	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	52	NA	CRISIL AA+/Watch Negative

@Yet to be issued.

*Two-way interchangeability from fund to non-fund and non-fund to fund based