Rating Rationale
October 10, 2019 | Mumbai
Avenue Supermarts Limited
'CRISIL AA+/Stable' assigned to NCD
 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
 
Rs.200 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
Non-Convertible Debentures Aggregating Rs.323 Crore  CRISIL AA+/Stable (Reaffirmed)
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA+/Stable' rating to the Rs.200 crore non-convertible debenture (NCD) of Avenue Supermarts Limited (ASL); the ratings on the company's long-term bank facilities and debt programmes have been reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+'.

The reaffirmation reflects expectation of sustained improvement in business profile supported by strong ramp up in scale of operations, along with cluster focused store expansion and superior store productivity. Ramp up in operations will be supported by higherretail area addition and healthy like-to-like growth of about 15% going forward. As a result, CRISIL expects the company to maintain an annual revenue growth of 20-25%.

Further, CRISIL expects the company to maintain its healthy operating profitability of around 8.5% backed by faster breakeven of stores (6-12 months), superior per store revenue compared to peers, high inventory turnover as well as maintenance of gross margin at around 15% despite growing competition.

In the three months ended June30, 2019, the company posted revenue of Rs 5815 crore, a 28% growth over the corresponding period in the previous fiscal. The earnings before interest, depreciation, taxes and amortisation (EBIDTA) margin stood at 9.9% (comparable; excluding the impact of Ind-AS 116 on lease accounting) as against 9.3% in the corresponding period of the previous fiscal primarily due to higher gross margins and continued operational efficiency. In fiscal 2019, revenue stood at Rs 20075 crore, a 33% year-on-year growth while EBIDTA margin fell to 8.2% from 9.0% due to lower gross margins on account of higher discounting owing to heightened competitive intensity. The capital expenditure (capex) stood at Rs 1447 crore in fiscal 2019 as the company added 21 stores (retail area addition of 1 million square feet'sq. ft.). Moreover, some of the capex incurred in fiscal 2019 was towards stores added in the first quarter of fiscal 2020 (8 stores added with retail area addition of 0.4 million sq. ft.).

CRISIL expects ASL's financial risk profile to remain robust characterised by strong cash accruals (estimated at over Rs 1300 crore per annum), annual capex of Rs 1500 crore, strong debt protection metrics marked by interest coverage of around 36 times and ratio of net cash accrual to debt of over 100% in fiscal 2019 as well as comfortable return on capital employed ratio (RoCE) of over 26%.

The ratings reflect ASL's strong position in the domestic organised F&G retail market and solid financial risk profile, as reflected in sizeable net worth and strong debt protection metrics. These strengths are partially offset by the company's moderate though improving geographic spread, and susceptibility of operating performance to regulatory changes and competition.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of ASL and its wholly-owned subsidiaries, Align Retail Trade Pvt Ltd (ARTPL), Avenue Food Plaza Pvt 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 ASL's operations. All the 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 market position in the organised retail market: ASL's market position is reinforced by steady same-store growth and retail productivity, and short gestation for new stores. ASL operates 184 stores (as on June 30, 2019) under the D-Mart brand, which reported high same-store sales growth (irrespective of their vintage) of about 17.8% in fiscal 2019. Strong procurement abilities, lower priced products along with healthy cost control results inrobust growth in footfalls. This leads to high inventory turnover and revenue per sq. ft. and translates into industry leading retail store productivity. Aggregate revenue per square foot at Rs 35647 in fiscal 2019, is significantly higher than peers. The operating profitability of the company has seen improvement over the years with EBIDTA margin increasing from 7.1% in fiscal 2015 to 9% in fiscal 2018. In fiscal 2019, operating margin moderated to 8.2% as the company reduced prices across categories.

Currently, ASL's operations are largely concentrated in West and South India. Expected large cluster focused store addition over the next 3 years will benefit to diversify geographic reach of the company. CRISIL believes strong track record of outpacing its peers in growth, its strong merchandising and compelling value proposition, benefit from economies of scale will strengthen ASL's market share in organised F&G retail in India in the medium term.

Further, the company has also initiated to ramp up its online strategy and a platform to support future sales channels. Improvement in geographic diversity along with sustenance of healthy operating performance will be key rating drivers in the medium term.

* Solid financial risk profile
Financial risk profile is driven by sizeable networth (Rs 5588 crore as on March 31, 2019), and strong annual cash generation, despite continuing store addition. The company has been able to maintain healthy operating metrics, while adding stores, and also prepaid sizeable debt through proceeds of its initial public offering (IPO) totalling Rs1870 crore in fiscal 2017. This has translated into strong debt protection metrics.

CRISIL expects ASL's prudent expansion plan will entail a 20% per annumincrease in existing retail space of around 6.3 million sq.ft. (as on June 30, 2019) by fiscal 2020. Strong cash generation of over Rs 1300 crore per annum is expected to fund the capex partly of Rs 1500 crore, resulting in low dependence on external borrowings. Further, liquidity is expected to remain healthy.
 
Moreover in May 2019, the company has received approval from the board of directors for qualified institutional placement (QIP) of 2.5 crore shares. Partial or full QIP will result in further strengthening of financial risk profile and will support ASL to pursue large capex without depending on external debt.

Weaknesses
* Moderate though improving geographical spread
ASL's operations are concentrated mainly in Maharashtra (70 stores), Gujarat (34), Andhra Pradesh & Telangana (32), and Karnataka (16) as on March 31, 2019that means89% of stores are in West and South India. Geographical reach of ASL currently is lower than peers, who mostly have pan-India presence.  ASL plans to expand gradually in cluster fashion in North and Central India in the medium term. Timely store expansion and replication of similar strong store performance in newer geographies will remain key monitorable.

* Susceptibility of operating performance to regulatory changes and increasing competition
Liberalisation of regulations such as foreign direct investment policy for food only retail (in 2016), and multi-brand retail segment as and when it happens, will intensify competition in the domestic F&G sector, including from large international players. Competitive intensity is also increasing from other large domestic F&G retailers such as Reliance Retail Ltd (CRISIL AAA/Stable/CRISIL A1+) and Future Retail Ltd.

Also, competition is increasing due to greater focus of online retailers on the F&G segment. While ASL is a small player at present in the online F&G space, earlier entrants such as BigBasket, Grofers, Amazon Pantry are registering aggressive growth.

Liquidity: Strong
Liquidity remains strong supported by large cash accruals, expected at Rs 1400-2300 crore over fiscals 2020 to 2022 should comfortably cover annual repayment obligations of Rs 200-300 crore. Working capital limit of Rs 690 crore was utilised negligibly at 10% over the eight months through September 2019. The company also has commercial papers outstanding to the tune of around Rs 300-500 crore on an average. Liquidity is further aided by cash and equivalents of Rs 75 crore as on September 2019. The company is expected to incur capex of around Rs 1500-1900 crore per annum over fiscal 2020 and 2022 towards store expansion, which is expected to be funded primarily from internal accrual.
Outlook: Stable

CRISIL believes that ASL's credit risk profile will continue to benefit on account of improving market position in the organised retail segment, strong annual cash generation, and healthy financial flexibility.

Rating sensitivity factors
Upward factor
* Substantial improvement in geographical diversity and sales channel mix resulting in higher scale of operations with operating profitability of 8.5-9.0% on a sustained period of time.
* Sustenance of strong capital structure,for instance gearing remaining below 0.20 times sustainably and adequate liquidity.

Downward factor
* Significant weakening of operating margin due to large gestation losses from new stores, for instance, operating margin consistently remaining below 7.5%.
* Larger-than-expected debt-funded capex increasing gearing to above 0.5 time.

About the Company

ASL is engaged in the organised retail business through its D-Mart chain of stores. The company was incorporated in 2000 and is promoted by Mr Radhakishan Damani, a well-known equity market investor. Mr Ignatius Navil Noronha is ASL's chief executive officer and managing director. As onJune 30, 2019, it had 184 hypermarket stores in Maharashtra, Gujarat, Telangana, Karnataka, Andhra Pradesh, Madhya Pradesh, Chhattisgarh, NCR, Tamil Nadu, Punjab, Rajasthan and Daman.

ARTPL procures grocery items, including pulses, rice, wheat, vegetables,and fruits from local agricultural produce market committees, packages these, and supplies to ASL. AFPL runs fast-food counters outside D-Mart stores. AEL is into e-retailing of F&G and operates currently in certain regions of Mumbai.  ASL acquired 50.79% in AEL in February 2018 for Rs 49.2 crore to make it a wholly-owned subsidiary.

ASL has successfully completed its IPO in March 2017, and raised funds for debt reduction (Rs 1080 crore), capex (Rs 366.6 crore) and general corporate purpose (Rs 394.02 crore). Out of the IPO proceeds, Rs 66 crore remained unutilised as on June 30, 2019. The promoter shareholding in the company, stood at 81.2% as on June 30, 2019. The promoters need to reduce the stake to75% or below before March 2020 for complying with minimum shareholding norms as per the Securities and Exchange Board of India regulations.

In the first quarter of fiscal 2020, the company posted revenue and net profit of Rs 5815 crore and Rs 323 crore, respectively, as compared to Rs 4576 crore and Rs 245 crore, respectively, in the corresponding quarter of last year.

Key Financial Indicators
As on March 31 Unit 2019 2018
Revenue Rs crore 20075 15111
Profit after tax (PAT) Rs crore 902 806
PAT Margin % 4.5 5.3
Adjusted debt/Adjusted networth Times 0.13 0.10
Interest coverage Times 35.63 24.20

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rscrore) Rating assigned with outlook
INE192R07158 Debenture 15-Mar-2016 9.10 14-Mar-2020 16 CRISIL AA+/Stable
INE192R07125 Debenture 29-Jan-2016 9.10 29-Jan-2020 33 CRISIL AA+/Stable
INE192R07075 Debenture 20-Aug-2015 9.40 20-Aug-2020 34 CRISIL AA+/Stable
INE192R07042 Debenture 20-Nov-2014 10.00 20-Nov-2019 40 CRISIL AA+/Stable
INE192R07182 Debenture 18-Sep-2019 8.00 17-Oct-2020 100 CRISIL AA+/Stable
INE192R07190 Debenture 27-Sep-2019 8.00 24-Sep-2021 100 CRISIL AA+/Stable
NA Debenture* NA NA NA 200 CRISIL AA+/Stable
NA Proposed Fund based bank limits NA NA NA 110 CRISIL AA+/Stable
NA Working Capital Facility NA NA NA 640 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 Days 500 CRISIL A1+
*Yet to be issued

Annexure - List of entities consolidated
S No Name of Subsidiary
Fully Consolidated Subsidiaries
1 Align Retail Trade Pvt Ltd (ARTPL),
2 Avenue Food Plaza Private Ltd (AFPL)
3 Avenue E-commerce Ltd (AEL),
4 Nahar Seth and Jogani Developers Pvt Ltd
5 Reflect Wholesale and Retail Pvt Ltd
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+  04-09-19  CRISIL A1+  26-10-18  CRISIL A1+  03-04-17  CRISIL A1+  22-11-16  CRISIL A1+  CRISIL A1+ 
        26-04-19  CRISIL A1+  24-09-18  CRISIL A1+           
            05-03-18  CRISIL A1+           
Non Convertible Debentures  LT  323.00
10-10-19  		CRISIL AA+/Stable  04-09-19  CRISIL AA+/Stable  26-10-18  CRISIL AA+/Stable  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  CRISIL AA-/Stable 
        26-04-19  CRISIL AA+/Stable  24-09-18  CRISIL AA+/Stable           
            05-03-18  CRISIL AA/Positive           
Fund-based Bank Facilities  LT/ST  750.00  CRISIL AA+/Stable  04-09-19  CRISIL AA+/Stable  26-10-18  CRISIL AA+/Stable  03-04-17  CRISIL AA/Stable  22-11-16  CRISIL AA-/Positive  CRISIL AA-/Stable 
        26-04-19  CRISIL AA+/Stable/ CRISIL A1+  24-09-18  CRISIL AA+/Stable           
            05-03-18  CRISIL AA/Positive           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Fund-Based Bank Limits 110 CRISIL AA+/Stable Proposed Fund-Based Bank Limits 110 CRISIL AA+/Stable
Working Capital Facility 640 CRISIL AA+/Stable Working Capital Facility 640 CRISIL AA+/Stable
Total 750 -- Total 750 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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