| Aditya Birla Fashion and Retail Limited | ||||||||||
| ‘CRISIL AA+/Watch Negative’ assigned to Non Convertible Debentures; Long-term rating continues on 'Watch Negative'; Short-term rating reaffirmed | ||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||
| 1 crore = 10 million | ||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL AA+’ rating to Rs.350 crore non-convertible debentures (NCDs) of Aditya Birla Fashion and Retail Limited (ABFRL) and placed the rating on ‘Rating Watch with Negative Implications’. The ratings on the company’s existing long-term bank facilities and non-convertible debentures continue 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. Post completion of the proposed demerger, ABFRL intends to raise fresh capital of Rs 2,500 crore not later than March 2025 to strengthen its balance sheet and invest in growth opportunities. 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 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.
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 - 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, (it 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. 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 quarter ended June 30, 2024, ABFRL, on consolidated basis, recorded revenue growth of around 7% on-year to Rs. 3,428 crore driven by store expansions and revenue growth in newly acquired businesses, even as like-for-like stores remained muted. For the same period, consolidated EBITDA (post Ind-AS) stood at around Rs 406 crore (11.8%), compared with Rs 353 crore (11.0%) in the corresponding period of the previous fiscal. Because of continuous expansions and lower-than-anticipated revenue growth, the company’s operating leverage continues to remain impacted, resulting in muted profitability. Consolidated profitability is driven by continued healthy performance of the lifestyle products segment within the Madura brands as well as in Pantaloons division, while subsidiaries (led by digital brands under TMRW) and ethnic segment (primarily TASVA under Indivinity and TCNS) dragged overall profitability. ABFRL has been focusing on improving diversification from lifestyle brands, whose share came down to around 46% of total revenue during fiscal 2024 from 50-55% three-four fiscals ago. During fiscal 2024, the consolidated revenues increased by around 13% to Rs. 14,044 crore while post Ind-AS EBITDA margins contracted to 11.2% (12.7% in fiscal 2023).
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 expected equity infusion of Rs. 2,500 crore by March 2025 in the demerged ABFRL, its capital structure is expected to improve significantly with negligible borrowing at net debt level. 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 below 3 times by fiscal 2026 due to narrowing operating losses of subsidiaries with improvement in scale of operations and reduction in debt levels due to capital infusion.
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 1,879 crore, and unencumbered cash and equivalent of around Rs. 738 crore as on June 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:
CRISIL Ratings has amortised the following brands, trademarks and rights:
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:
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 417 stores as on June 30, 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, 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 440.84 crore, and 33.5% stake in luxury couture business under Tarun Tahiliani for Rs 67.18 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, and during the first quarter of fiscal 2025, the company picked up 16% stake in “WROGN” for around Rs. 125 crore. 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.
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. 1,879 crore and unencumbered cash and equivalent over Rs. 738 crore as on June 30, 2024, 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. In addition, post the completion of the proposed demerger, ABFRL shall raise fresh capital of Rs 2,500 crore not later than March 2025 to strengthen its balance sheet and the funds shall be utilized towards the reduction of debt levels.
The Aditya Birla group owns 51.97% of equity shares in ABFRL as on 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.
While the shareholding of the Aditya Birla group is expected to reduce slightly below 50% following share swap owing to the TCNS transaction, the group will remain the largest shareholder in the company.
Weakness:
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 AA-/Watch Developing /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.
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.
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, the company shall raise Rs. 2,500 crore capital by end of this fiscal, which will enable the reduction of debt levels; this coupled with the improvement in operating margins and profitability on the back of channel rationalization and narrowing losses under the ethnic and D2C business segments, 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 unutilised fund-based working capital lines of around Rs 1,879 crore and cash surplus of around Rs 738 crore as on June 30, 2024. 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
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:
Downward factors:
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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 June 2024, the company operated on a retail area of 11.9 million square feet with 4,190 brand outlets and 417 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 captialization of the group currently stands at around Rs. 8.6 lakh crore as of September 05, 2024. |
Key Financial Indicators (consolidated)
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. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be issued *Two way interchangeability from fund to non-fund and non-fund to fund based |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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