Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the bank facilities and commercial paper of Avenue Supermarts Limited (ASL) at 'CRISIL AA+/Stable'. CRISIL Ratings has also withdrawn its rating on the Rs 85 crore proposed fund based bank limit facility at the company’s request. The withdrawal is in-line with CRISIL Ratings’ policy on withdrawal of bank loan ratings.

 

CRISIL Ratings has withdrawn its rating on the Rs 200 crore commercial paper programme of ASL at the company's request and on independent confirmation that there is no amount outstanding. This is in line with the CRISIL Ratings policy on withdrawal of ratings.

 

The ratings continue to reflect the strong market position of the company in the domestic organised food and grocery (F&G) retail market and its robust financial risk profile. These strengths are partially offset by modest, though improving, geographic reach and susceptibility to regulatory changes and intense competition.

 

Operating performance improved substantially year-on-year in the first nine months of fiscal 2022, with strong recovery in same-store demand compared with pre-pandemic levels, relaxation of constraints and store additions. Although sales were impacted in fiscal 2021 because of Covid-related curbs, restrictions on sale of non-food products and lower footfall, performance remained resilient, with only marginal degrowth of 3% and healthy cash accrual.

 

Furthermore, healthy operating profitability of 7.5-9% should sustain over the medium term despite moderating to 6.7% in fiscal 2021 because of suboptimal fixed cost coverage and lower proportion of high-margin merchandise in total sales. Overall profitability will be backed by faster breakeven of stores, superior per-store revenue compared with peers, stable proportion of non-F&G sales, high inventory turnover as well as maintenance of the gross margin at around 15% despite increase in competitive intensity.

 

Financial risk profile should remain robust over the medium term, driven by strong cash accrual, absence of any long-term borrowings and healthy liquidity.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ASL and its wholly owned subsidiaries, Align Retail Trade Pvt Ltd (ARTPL), Avenue Food Plaza Private Ltd (AFPL), Avenue E-commerce Ltd (AEL), Nahar Seth and Jogani Developers Pvt Ltd and Reflect Wholesale and Retail Pvt Ltd. The subsidiaries are an integral part of the operations of ASL. All the five companies are referred to as ASL.

 

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 position in the organised retail segment: The market position is reinforced by steady same-store growth (barring fiscal 2021), retail productivity and short gestation for new stores. ASL operates 263 stores (as on December 31, 2021) under the DMart brand.

 

Strong procurement abilities and low-priced products along with high cost control will lead to greater footfall. This results in high inventory turnover and revenue per square foot (sq ft) and translates into industry-leading retail store productivity. Aggregate revenue per sq ft at Rs 27,306 in fiscal 2021 (Rs 32,879 in fiscal 2020) is higher than most retailers in the same segment. Though operating profitability has improved over the years, it weakened in fiscal 2021 because of the impact of Covid-19.

 

Operations of the company are largely concentrated in West and South India. Expected large cluster-focused store addition over the next three years will help diversify geographical reach. Track record of outpacing peers in growth, strong merchandising and compelling value proposition and benefits of economies of scale will strengthen the market share of ASL over the medium term. However, the impact of industry consolidation and intensity of competition (mainly from online retailers) will remain key monitorables.

Comfortable financial risk profile and adequate liquidity

Networth was sizeable at Rs 12,084 crore as on March 31, 2021, while strong annual cash generation continued despite steady store addition. The company has been able to maintain healthy operating metrics while adding stores and has prepaid debt through proceeds of its qualified institutional placement (QIP) in fiscal 2020. Out of the total QIP proceeds of Rs 4,098 crore, Rs 2,285 crore remained unutilised as of March 2021, which has translated into strong debt protection metrics. The company incurred capital expenditure (capex) of over Rs 1,300 crore in fiscal 2021 and increased retail space to 8.8 million sq ft (which further increased to 10.3 million sq ft as on December 31, 2021) from 7.8 million sq ft.

Prudent expansion plans will entail a sizeable increase of about 20% per annum in retail space to over 10 million sq ft by fiscal 2023. Strong cash generation of Rs 1,800-Rs 2,500 crore per annum is expected to be sufficient for capex, resulting in low dependence on external borrowings. Furthermore, liquidity is expected to remain healthy.

Weakness
Susceptibility to increasing competition

Consolidation in the industry will increase the bargaining power of competitors in the brick-and-mortar retail segment, which may impact the gross margin of the company over the medium term.

The competitive intensity is also increasing because of higher focus of e-retailers in the F&G space. While ASL is a small player in the online F&G space, other players, such as BigBasket and Grofers, and entrants, such as JioMart, are registering aggressive growth. Though e-retail is a small proportion of overall rating, it will remain a key monitorable over the medium term.

Liquidity: Strong

Liquidity is backed by healthy cash accrual, minimal debt and cash and equivalents of over Rs 2,400 crore as on March 30, 2021. Utilisation of fund-based working capital limit of Rs 395 crore was negligible over the six months through December 2021. The capex to be incurred for opening stores over the next three fiscals is expected to be funded through internal accrual.

 

ESG profile

The environment, social and governance (ESG) profile of ASL supports its strong 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 usage of sustainable packaging. The sector has moderate social impact because of its 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.

 

Key ESG highlights of ASL:

• The company’s ESG disclosures are in line with the guidelines framed by the Ministry of Corporate Affairs and publish Business Responsibility Report., and it is in the process of further strengthening the disclosures over the medium term.
• ASL has obtained the Gold-certified Green Building Certification issued by the Indian Green Building Council and US Green Building Council for 98 of its buildings (including retail outlets), which refers to a structure and the application of processes that are environmentally responsible and resource efficient throughout a building’s life cycle, from planning to design, construction, operation, maintenance, renovation and demolition.
• The company has installed solar panels on 102 store rooftops, with solar power contributing 17% to its total power requirement. The company is also undertaking water conservation and plastic package waste management by encouraging users to carry their own bags, replacing tubs with paper pouches and focussing on usage of sustainable building material.
• ASL has multiple community outreach programmes and encourages local sourcing wherever possible.
• The company has gender diversity, with 2,276 permanent women employees constituting 22.4% of the total workforce in fiscal 2021.
• The governance structure of ASL is characterised by a split chairman and chief executive officer position, extensive financial disclosures, presence of an investor grievance committee and a board comprising three independent directors out of seven members.

 

CRISIL Ratings believes that as ASL’s ESG strategy evolves over the medium term, more quantitative information on relevant parameters and goals is desirable.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG and embedding sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

The credit risk profile of ASL will remain healthy over the medium term on account of its improving market position in the organised retail segment, strong annual cash generation and healthy financial flexibility.

Rating Sensitivity factors

Upward Factors

• Substantial increase in revenue, improvement in geographical diversity and sustenance of operating profitability at 8.5-9.0% over the medium term
• Sustenance of a strong capital structure, with gearing below 0.20 time and adequate liquidity

 

Downward Factors

• Significant decline in the operating margin to below 7% because of large gestation losses from new stores
• Larger-than-expected, debt-funded capex weakening gearing to above 0.5 time

About the Company

ASL is engaged in the organised retail business through its DMart chain of stores. The company was incorporated in 2000 and has Mr Radhakishan Damani, an equity market investor, as its promoter. Mr Ignatius Navil Noronha is the chief executive officer and managing director. As of December 2021, ASL had 263 hypermarket stores across 13 states and one union territory.

ARTPL procures grocery items (including pulses, rice, wheat) from local agricultural produce market committees and packages and supplies the items to ASL. AFPL runs fast-food counters outside the DMart stores. AEL is into e-retailing of F&G and operates in certain regions of Mumbai and few other cities.  ASL acquired a 50.79% stake in AEL in February 2018 for Rs 49.2 crore to make the latter a wholly owned subsidiary.

 

In the first nine months of fiscal 2022, revenue and profit after tax (PAT) of ASL were Rs 22,190 crore and Rs 1,066 crore, respectively, compared with Rs 16,731 crore and Rs 686 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable