Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AA/Positive’ rating to Rs. 500 crore proposed non-convertible debentures of Aditya Birla Fashion and Retail Limited (ABFRL). CRISIL Ratings has also reaffirmed its ratings on the company's other debt instruments and bank facilities at 'CRISIL AA/Positive/CRISIL A1+’.

 

CRISIL Ratings has withdrawn its rating on Rs 500 crore of Non-convertible debentures and as the same were redeemed. The withdrawal is in line with CRISIL Rating’s withdrawal policy (See Annexure 'Details of rating withdrawn' for details).

 

The continuation of positive outlook reflects CRISIL's expectation of strengthening of the company’s business risk profile driven by ramp of new stores aiding profitability and strong financial risk profile reflected in a comfortable capital structure and strong debt protection metrics.

 

The board of ABFRL, on 24 May 2022, had approved fresh equity infusion of ~Rs 2,195 crore by way of ~7.5% stake dilution on post-issue basis to an affiliate (Caladium Investment Pte Ltd) of GIC, Singapore. The first tranche of ~Rs 770 crore has been received in September, 2022 and balance ~Rs 1,425 crore is expected by March, 2024.

 

Revenue growth momentum continued into the first half of current fiscal with company recording revenues of Rs. 5949 crore compared to Rs. 2866 crore in the corresponding period previous fiscal (108% growth YoY) and Rs. 4373 crore in pre-covid H1 fiscal 2020 (36% growth). The growth was driven by strong performance of the lifestyle brands within Madura segment (Madura revenue: ~Rs. 3796 crore) as well as the turnaround in Pantaloons (Revenue: ~Rs. 2113 crore) segment. With sustained increase in store count, scaling up of recent strategic acquisitions in ethnic space & digital brands, revenue on the whole is expected to log healthy double-digit growth over the medium term.

 

In H1 fiscal 2023 EBITDA recorded was Rs 865 crore (14.5%) as compared Rs 145 crore (5.1%) in the corresponding period previous fiscal and Rs. 653 crore (14.9%) in pre-covid H1 fiscal 2020. EBITDA margins for Madura segment improved to ~15.3% in H1 fiscal 2023 from 6.8% (H1 fiscal 2022) & 15.0% (H1 fiscal 2020) and for Pantaloons segment improved to 18.7% (H1 fiscal 2023) from 7.9% (H1 fiscal 2022) and 17.2% (H1 fiscal 2020) driven by aggressive store expansion, pent up demand post Covid as well as strong E-commerce sales. Benefits of operating leverage are expected to drive operating margins going ahead.

 

Fiscal 2022 revenue rose by 55% to ~Rs 8,136 crore driven by strong recovery post relaxation of covid curbs leading to higher footfalls and strong traction seen during festive season. Ebitda margin (on post Ind AS basis) went up by ~290 bps to 14.2% on year driven by improved operating leverage. As of March-2022, net debt (excluding lease liabilities) stood at ~Rs 500 crore.

 

Backed by the strong market position of its apparel brands, addition of new stores and expanding presence in the ethnic wear segment, CRISIL Ratings expects double-digit revenue growth over the medium term. Operating margins are also expected to rise, albeit gradually, driven by increasing scale of operation and superior product mix.

 

The company has focused on expanding presence in the ethnic apparel retail segment through acquisition of 51% stake in Sabyasachi Calcutta LLP, owner of brand “Sabyasachi” for ~Rs 398 crore and 33.5% stake in luxury couture business under “Tarun Tahiliani Brand” for Rs 67 crore. Going forward, the company may continue to carry out acquisition of select brands to widen its portfolio and invest in the Ethnic portfolio. In November, 2022 ABFRL’s wholly owned subsidiary, Aditya Birla Digital Fashion Ventures Limited (ABDFVL), announced partnership with 8 Digital-First lifestyle brands at a cumulative amount of ~Rs 289 crore. Further, acquisition of Reebok India operations was completed w.e.f. October 1, 2022.

 

Capex is expected at ~Rs 700 crore p.a. mainly towards expansion of own stores in the Pantaloons format while growth in the Madura division would continue through the asset-light franchisee model. CRISIL Ratings expects the capex and any acquisitions to be funded through accruals and cash with low reliance on external debt.

 

The ratings continue to factor in company's strong business risk profile, backed by the solid market position of apparel brands of Madura division and strong value proposition of Pantaloons division as well as superior financial risk profile. The ratings also factor in strong management of Aditya Birla Group (ABG). These strengths are partially offset by intense competitive landscape for the apparel retail sector in India and susceptibility of performance to economic down cycles.

Analytical Approach

CRISIL Ratings has amortized goodwill of Rs 1,168 crore generated at the time of acquisition of the erstwhile Pantaloons Fashion and Retail Ltd (PFRL) from the Future group. CRISIL Ratings has also amortized goodwill of Rs 628 crore and Rs 64 crore generated from the merger of Madura division with the PFRL and the acquisition of exclusive franchise rights for Forever 21, respectively. The goodwill on acquisition of Jaypore E-Commerce Pvt Ltd, Finesse International Design Pvt. Ltd. and Sabyasachi Calcutta LLP has also been amortized over a period of five years from the date of acquisition.

 

CRISIL Ratings has fully consolidated the business and financial risk profiles of company’s subsidiaries, Jaypore E-commerce Pvt Ltd (100% stake), TG Apparel & Decor Pvt Ltd (100%), Finesse International Design Pvt Ltd (58.69%) as well as the partnership firm, M/s Sabyasachi Calcutta LLP in which it holds 51% stake and Indivinity Clothing Retail Pvt Ltd wherein it holds 80%. These acquisitions are strategic, enjoys strong brand reputation thus will play significant role in future growth.

 

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 strength of apparel brands in the Madura division and strong value proposition of Pantaloons division

The Madura division of ABFRL has the leading apparel brands, namely Louis Philippe, Van Heusen, Allen Solly, and Peter England, which enjoy a strong brand positioning. The franchise model of store expansion helps reduce capital requirement, thereby leading to sustenance of strong return on capital employed. Pantaloons currently has a pan-India presence, with a network of 396 stores with a high proportion of private labels (~62%), which the management aims to increase further in future. Moreover, the company’s foray into Ethnic segment like tie-ups with Sabyasachi Brand, Tarun Tahiliani, Shantanu & Nikhil, Jaypore and House of Masaba can further bolster its position in the market as this segment face less competition and huge untapped potential.

 

• Strong financial risk profile and financial flexibility

As of March 2022, ABFRL’s net debt excluding lease liabilities stood at ~Rs 500 crore significantly down from ~Rs 2509 crore as of March 2020, led by equity infusion of ~Rs 2500 crore through right issue and stake sale to a new strategic investor, Flipkart. The equity infusion of ~Rs 2,195 crore by March 2024 would further strengthen the financial risk profile; out of the same, Rs. 770 Crs. has already been received till September, 2022.

 

• Strong management setup and experience of ABG

ABG owns 56.08% of equity shares in ABFRL at September 30, 2022. Key personnel in ABFRL are from ABG. Furthermore, ABFRL is the group's flagship company in the retail sector. It is expected to benefit from the group's experience of handling businesses in multiple industries.

 

Weaknesses:

• Intensifying competitive landscape for the apparel retail sector in India

ABFRL continues to be one of the largest listed fashion and Retail Company in India. The competitive landscape for the apparel retail sector remains high. Apart from ABG, many of India's large corporate groups, including the Tata group and Reliance Retail Ltd (a step-down subsidiary of Reliance Industries Ltd [rated 'CRISIL AAA/Stable/CRISIL A1+']) have ventured into apparel retail. Additionally, the sector has established players such as Lifestyle International Pvt Ltd (rated 'CRISIL AA/Positive/CRISIL A1+') and Shoppers Stop Ltd (rated 'CRISIL A1+'). Large global apparel chains such as Marks and Spencer Plc and Inditex S.A. have also entered into joint ventures with local partners to capture a slice of the market. However, CRISIL Ratings believes the strong brand equity of Madura, and the unique positioning of the Pantaloons division should continue to benefit ABFRL.

 

• Susceptibility to economic down cycles

ABFRL remains susceptible to economic down cycles due to the discretionary nature of its products. This renders the revenue and profitability vulnerable to economic cycles.

Liquidity: Strong

CRISIL Ratings expects net cash accruals (NCA) of Rs 500-700 crore and Rs 800-900 crore for fiscal 2023 and 2024, respectively which will cover the scheduled debt maturity of around Rs 434 crore and Rs 330 crore due in FY23 and FY24, respectively. The capital expenditure including inorganic acquisitions of Rs 600-700 crore p.a. is expected to be funded majorly through accruals and cash balance. Further, the utilization of fund based bank lines of Rs 1,477 crore remain nil as of November-2022 while the cash & equivalents stood at Rs 1132 crore at September 30, 2022.

 

ESG Profile

CRISIL Ratings believes that ABFRL’s ESG profile supports its already strong credit risk profile. The retail sector has a moderate environmental and social impact, primarily driven by activities linked with supply chain and labour - intensive operations.

 

ABFRL’s focus on addressing these ESG risks support its already strong credit risk profile.

 

Key ESG highlights:

• ABFRL is continuously taking initiatives to reduce carbon footprints through initiatives like increasing renewable energy consumption and implementing measure to reduce energy intensity. Also, the company has achieved the zero waste to landfill goal across its facilities in FY2022.
• Company is committed in ensuring safety and security of its employees, for which trainings for close to 14000 man-hours were conducted.
• The governance structure is characterised by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

 

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

Outlook: Positive

CRISIL Ratings believes ABFRL’s credit profile could strengthen driven by improvement in both operating profitability as well as the financial risk profile.

Rating Sensitivity factors

Upward factors:

• Strong revenue growth and improvement in operating performance leading to sustained operating margin of 8-9% on a pre Ind AS basis and ~15% on post Ind AS basis.
• Sustenance of strong financial risk profile with Net debt to EBITDA below 0.8x on pre Ind AS basis.

 

Downward factors:

Outlook may be revised to stable on:

• Deterioration in operating performance leading to operating margins below 7.5%
• Significant weakening of debt protection metrics with net debt to EBITDA sustaining over 1.2 times

About the Company

ABFRL is the apparel retail venture of ABG, 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 subsequent to the merger of the Madura division and PFRL. The Madura division is the holder of leading brands in the country, while departmental stores are under the Pantaloons format. ABFRL also acquired Forever 21 in India in 2016 to scale its fast fashion segment. As on Sep-2022, the company operated on a retail area of 9.7 million square feet, with 3197 brand outlets and 396 Pantaloons stores.

Key Financial Indicators

Particulars (On Ind-AS 116 basis)	Unit	2022	2021
Revenue	Rs crore	8,136	5249
Profit after tax (PAT)	Rs crore	(118)	(736)
PAT margin	%	(1.5)	(14.0)
Interest cover	Times	3.19	1.25
Adjusted net debt to EBITDA	Times	2.79	5.02

 

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-Sept-21	5.80	09-Sept-24	400	Simple	CRISIL AA/Positive
INE647O08099	NCD	22-May-20	8.75	22-May-23	325	Simple	CRISIL AA/Positive
NA	NCD@	NA	NA	NA	575	Simple	CRISIL AA/Positive
NA	Commercial Paper	NA	NA	7-365 days	2000	Simple	CRISIL A1+
NA	Long-Term Loan	NA	NA	Mar-25	8	NA	CRISIL AA/Positive
NA	Fund based limit	NA	NA	NA	1090	NA	CRISIL AA/Positive
NA	Fund based limit*	NA	NA	NA	387	NA	CRISIL AA/Positive
NA	Non-fund based limit	NA	NA	NA	700	NA	CRISIL A1+
NA	Non-fund based limit*	NA	NA	NA	426	NA	CRISIL A1+
NA	Proposed Long-Term Bank Loan Facility	NA	NA	NA	389	NA	CRISIL AA/Positive

@Yet to be issued.

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

 

Annexure - Details of Rating withdrawn

ISIN	Type of instrument	Date of allotment	Coupon Rate (%)	Maturity date	Issue size (Rs cr)	Complexity Levels
INE647O08081	NCD	11-Nov-19	8.60%	11-Nov-2022	500	Simple

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Jaypore E-commerce Pvt Ltd	Full consolidation	Subsidiary
TG Apparel & Decor Pvt Ltd	Full consolidation	Subsidiary
Finesse International Design Pvt Ltd	Full consolidation	Subsidiary
Sabyasachi Calcutta LLP	Full consolidation	Subsidiary
Indivinity Clothing Retail Pvt Ltd	Full consolidation	Subsidiary
Sabyasachi Inc., USA	Full consolidation	Subsidiary
Aditya Birla Digital Fashion Ventures Limited	Full consolidation	Subsidiary
Aditya Birla Garments Limited	Full consolidation	Subsidiary
House of Masaba Lifestyle Private Limited	Full consolidation	Subsidiary
Pratyaya E-Commerce Private Limited	Full consolidation	Subsidiary
Imperial Online Services Private Limited	Full consolidation	Subsidiary
Awesomefab Shopping Private Limited	Full consolidation	Subsidiary