Detailed Rationale

Crisil Ratings continues its 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 ratings were placed on watch with negative implications on April 29, 2024, following 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.

 

Crisil Ratings has taken note of the completion of fundraise of around Rs. 4,239 crore in January 2025. Out of the total fundraise of Rs. 4,239 crore, around Rs. 2,379 crore is raised through preferential issue and balance is raised from QIP issuance. The preferential issue has been subscribed by Pilani Investment and Industries Corporation Ltd (Pilani, rated ‘Crisil AA+/Stable/Crisil A1+’), part of the Promoter Group aggregating Rs. 1,298 crore at an issue price of Rs. 307.45 per share and ‘Qualified Institutional Buyers’ aggregating Rs. 1,081 crore at an issue price of Rs. 272.37 per share.

 

The company having received the no observation / no objection letter from the stock exchanges earlier, have initiated the necessary processes with National Company Law Tribunal (NCLT) and have also completed the shareholders meeting on January 21, 2025, approving the Scheme of Arrangement among Aditya Birla Fashion and Retail Limited and Aditya Birla Lifestyle Brands Limited and their respective shareholders and creditors as per the NCLT order (date of order is November 27, 2024). Requisite regulatory processes with NCLT are yet underway.

 

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 54% of fiscal 2024 consolidated revenue 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. Crisil Ratings does not expect the rating on long term debt facilities of residual ABFRL to be more than a notch different from current ratings, post demerger of the MF&L business.

 

Crisil Ratings has also taken note of the completion of TCNS Clothing Co Limited (TCNS) merger into ABFRL following the receipt of final order from NCLT dated August 16, 2024, approving scheme of amalgamation of TCNS into ABFRL. The merger process was completed with the share swap record date of September 03, 2024.

 

ABFRL has done some large acquisitions over the past two - three 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. Pre Ind-AS gross debt to earnings before interest, tax, depreciation and amortisation (EBITDA) including other income ratio stood at around 11.4 times as on March 31, 2024.

 

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. Because of continuous expansions and lower-than-anticipated revenue growth, the company’s operating leverage has remained 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.

 

For the nine months ended December 31, 2024, ABFRL, on a consolidated basis, recorded on-year revenue growth of 7% to Rs. 11,376 crore on the back of integration of TCNS’s revenues (consolidated with effect from second half of fiscal 2024), ramp-up in scale of operations of other key ethnic subsidiaries i.e., ‘TASVA’, beauty brand ‘Lovechild – House of Masaba Lifestyle Pvt Ltd’, ‘Shantnu & Nikhil’ and ‘Jaypore’, and multi-fold growth in tis digital fashion business division ‘TMRW’ on the back of operational enhancements. That said, revenues under Madura business division and Pantaloons business division remained muted. Madura’s division revenue growth was constrained owing to double-digit on-year wholesale revenue decline owing to impact of one large key account and lower secondary sales, and muted retail revenue growth during the first half of fiscal 2025. Pantaloons business division revenue growth was muted for period ending December 31, 2024, owing to muted like-for-like (LFL) sales growth and store closures.

 

For the same period, consolidated EBITDA (post Ind-AS, including non-operating income) stood at Rs. 1,499 crore (13.2%), compared to Rs. 1,326 crore (12.5%) during the corresponding period of the previous fiscal. The expansion in margins is driven by 380 bps (before inter-party eliminations) margin expansion under Pantaloons business division on the back of effective inventory markdown management, superior merchandising, and focus on profitable markets, and turnaround in performance of key ethnic subsidiaries i.e., TCNS reported second consecutive quarter of positive EBITDA (post the consolidation of TCNS, the said division reported operating losses for four consecutive quarters starting September 2023 to June 2024 owing to inventory dormancy norms alignment with that of ABFRL and lower fixed cost absorption due to decline in ‘same store’ sales) and ‘TASVA’ also recorded positive EBITDA during the third quarter of fiscal 2025.

 

The financial risk profile remains moderate owing to large debt-funded acquisitions, modest debt protection metrics, and sizeable funding support to subsidiaries amidst subdued operating performance. However, with the completion of equity infusion of around Rs. 4,239 crore during January 2025, demerged ABFRL’s capital structure is expected to improve significantly (Rs. 3,759 crore net debt as on September 30, 2024). As a result, key debt protection metrics, at consolidated level, marked by gross debt to EBITDA incl. other income (pre Ind-AS) which is high at 11.4 times as on March 31, 2024, is expected to decline to due to reduction in debt levels on the back of recent capital infusion followed by narrowing operating losses of subsidiaries with improvement in scale of operations.

 

The company will continue to benefit from superior financial flexibility, as seen from its ability to raise funds, fund-based working capital lines of around Rs 2,523 crore (Rs. 259 crore utilized as on September 30, 2024), commercial paper programme of Rs. 2,000 crore (Rs. 745 crore utilsed as on September 30, 2024), and unencumbered cash and equivalent of around Rs. 769 crore at consolidated levels as on September 30, 2024 (around Rs. 531 crore on standalone basis as on September 30, 2024). 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.

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:

• 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, Ethnic, and D2C business divisions: 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 412 stores as on December 31, 2024, and a high proportion of private labels (~66%), which the management aims to increase. The company’s entry into the ethnic segment through tie-ups with ‘Sabyasachi’, ‘Tarun Tahiliani’, ‘Shantnu & 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 440.84 crore, and 51.0% stake in luxury couture business under Tarun Tahiliani for Rs 194.6 crore (17.5% additional stake purchased for Rs. 127.42 crore in July 2024). 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, and during the first quarter of fiscal 2025, the company picked up 17.10% stake in “WROGN” for around Rs. 125 crore, and during October 2024, the company further increased its stake by 15.74% for Rs. 75 crore (32.84% total equity stake in “WROGN” as of October 30, 2024). Furthermore, licensing of Reebok India operations was completed with effect from October 1, 2022, and recorded profits during fiscal 2024 in its first full year of operations.

 

• 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. Furthermore, ABFRL recently completed the equity fundraise of around Rs. 4,239 crore during January 2025 (earmarked for demerged ABFRL’s operations); Rs. 2,379 crore is raised through preferential issue and balance is raised from QIP issuance. The preferential issue has been subscribed by Pilani, part of the Promoter Group aggregating Rs. 1,298 crore at an issue price of Rs. 307.45 per share and ‘Qualified Institutional Buyers’ aggregating Rs. 1,081 crore at an issue price of Rs. 272.37 per share. With the completion of equity infusion of around Rs. 4,239 crore during January 2025, demerged ABFRL’s capital structure is expected to improve significantly with negligible borrowing at net debt level

 

These fund-raising initiatives have supported the balance sheet and bolstered networth. The company has fund-based working capital lines of around Rs 2,523 crore (Rs. 259 crore utilized as on September 30, 2024), commercial paper programme of Rs. 2,000 crore (Rs. 745 crore utilsed as on September 30, 2024), and unencumbered cash and equivalent of around Rs. 769 crore at consolidated levels as on September 30, 2024 (around Rs. 531 crore on standalone basis as on September 30, 2024). 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 owns 46.28% of equity shares in ABFRL as on January 31, 2025. With the share swap owing to the TCNS transaction, and recent equity fundraise of Rs. 4,239 crore the shareholding of the promoter group reduced to 46.28% during January 31, 2025, as against 51.97% during June 30, 2024. It is a Fortune 500 company headquartered in Mumbai, Maharashtra, with a presence in around 40 nations. The group has a 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.

 

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 Lifestyle Ltd (‘Crisil AA/Stable/Crisil A1+’) and Shoppers Stop Ltd ('Crisil A+/Stable/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: The moderate financial risk profile is largely on account of large debt-funded acquisitions and modest debt protection metrics amidst subdued operating performance due to muted demand post massive growth witnessed in the fiscal 2022-23. That said, given the strong fund-raising capabilities, as evidenced by past equity fundraises and the most recent completion of Rs. 4,239 crore equity fundraise through preferential issue and QIP issuance, the company’s capital structure at net debt level is expected to significantly improve during fiscal 2025; this coupled with the improvement in operating margins and profitability on the back of channel rationalization, tight inventory control, turnaround in profitability of some of its ethnic subsidiaries, and narrowing losses under digital fashion ‘TMRW’ business segment, gross debt to EBITDA incl. other income (pre Ind-AS) which at current is high at  around 11.4 times as on March 31, 2024, is expected to decline to below 3 times by March 31, 2026.

Liquidity: Strong

Liquidity is strong supported by fund-based working capital lines of around Rs 2,523 crore (Rs. 259 crore utilized as on September 30, 2024), commercial paper programme of Rs. 2,000 crore (Rs. 745 crore utilsed as on September 30, 2024), and unencumbered cash and equivalent of around Rs. 769 crore at consolidated levels as on September 30, 2024 (around Rs. 531 crore on standalone basis as on September 30, 2024). The company is expected to generate adequate net cash accrual to meet its debt obligation. Annual capex will be funded through accruals and debt. The company, by virtue of being a leading company of the Aditya Birla group with a 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 company achieved a 3.8% reduction in Scope 1 & 2 emissions due to renewable energy and energy efficiency measures.
• The company’s energy intensity (TJ / turnover) stood at 0.05 as on March 31, 2024 (vs. 0.04 as on March 31, 2023, and as on March 31, 2022).
• The company’s water consumption intensity (KL / turnover) stood at 15.9 as on March 31, 2024 (vs. 16.25 as on March 31, 2023; 17.9 as on March 31, 2022).
• Lost time injury frequency rate (LTIFR) for employees stood at 0.03 as on March 31, 2024, (vs. 0.03 as on March 31, 2023; and 0.08 as on March 31, 2022). The said metric for workers stood at 0.04 as on March 31, 2024, (vs. 0.02 as on March 31, 2023; 0.06 as on March 31, 2022).
• 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 on sustained basis.

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 subsequent to the merger. The Madura division holds leading brands while the departmental stores are under Pantaloons. ABFRL acquired Forever 21 in India in 2016 to ramp up its fast fashion segment. As of December 2024, the company operated on a retail area of 11.9 million square feet with around 4,080 brand outlets, 38,206 multi brand outlets, and 412 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 AAA/Stable/Crisil A1+'), chemicals (Grasim Industries Ltd, rated 'Crisil AAA/Stable/Crisil A1+'; Birla Carbon India Private Limited, rated 'Crisil AA/Stable'), telecom (Vodafone Idea Limited) etc. The group has a presence across 6 continents and operates in 40 countries. Headed by Mr. Kumar Mangalam Birla, and headquartered in Mumbai, Maharashtra. The total market capitalization of the group currently stands at around Rs. 8.6 lakh crore as of September 05, 2024.

Key Financial Indicators (Crisil Ratings adjusted financials - consolidated)

Particulars	Unit	1H’FY25*	2024	2023	2022
Revenue	Rs crore	7,072	14,044	12,418	8,136
Reported Profit after tax (PAT)	Rs crore	-430	-736	-59	-118
Reported PAT margin	%	-6.08	-5.2	-0.5	-1.5
Interest coverage (pre-Ind AS)*	Times	NM	0.7	2.9	2.1
Gross debt to EBITDA (pre-Ind AS)*	Times	NM	11.4	4.5	4.5
Net debt to EBITDA (pre-Ind AS)*	Times	NM	7.8	2.8	1.8

Note: Debt mentioned in the rating rationale exclude leases, for fiscal 2024 pre Ind-AS related ratios are as per broad estimates in the absence of similar details provided for fiscal 2023.

*Based on audited financials announced on January 16, 2025. That said, figures included in 1H’FY25 are based on limited schedules / notes to accounts.

Any other information: Not Applicable