Detailed Rationale

CRISIL Ratings has upgraded its rating on the bank facilities of Benetton India Pvt Ltd (BIPL) to ‘CRISIL BBB+/Stable’ from ‘CRISIL BBB/Positive’.

 

The upgrade factors in the company’s improving operating performance, as reflected in operating profit of Rs 22 crore for the 15 months through March 2023 compared with a loss of Rs 29 crore for calendar year 2021 (the company changed its reporting period from calendar year to fiscal year from fiscal 2023). The improvement is expected to sustain over the medium term due to various initiatives undertaken by the company during the pandemic.

 

The rating continues to reflect the healthy market position of BIPL, aided by its strong brand recall and established distribution network. The rating also factors in the company’s asset-light franchisee model and the continued stance of support from its parent, Benetton Group SRL (Benetton Group), and ultimate parent, Edizione SPA. These strengths are partially offset by exposure to intense competition in the apparel retail industry, working capital-intensive operations, and modest, albeit improving, financial risk profile.

 

BIPL recorded revenue of Rs 925 crore for the 15 months through March 2023 as against Rs 588 crore for calendar year 2021, aided by pent-up demand and return to normalcy from the pandemic-induced disruptions. The operating margin improved to 2.4% (post royalty payment of ~4.5% of revenue) from negative territory in calendar year 2021. The turnaround was driven by efficiency improvement measures, such as rationalisation of inventory, which helped reduce discounting, shutdown of the loss-making domestic manufacturing unit and complete outsourcing of production, and closure of loss-making stores and opening of stores in locations with potential for higher profitability. Higher operating leverage due to ramp-up in operations also helped. Revenue is expected to grow 8-10% annually over the medium term, driven by store openings, scale up of e-commerce channels and entry into new segments such as accessories and footwear. Operating margins is expected to improve to 3.5-4.0% over the medium term.

 

The financial risk profile remains modest, but is expected to improve over the medium term. Total debt was ~Rs 185 crore as on March 31, 2023, as against tangible networth of Rs 129 crore, resulting in gearing of 1.43 times. The company has received Rs 82 crore from the sale of land at Manesar in June 2023, which had the loss-making manufacturing unit. The proceeds from the sale of land should help reduce debt and improve the capital structure. In the past, BIPL’s capital structure had been supported by equity infusion by the parent (Rs 330 crore over the past four years). The parent will likely continue providing need-based support.

Analytical Approach

The rating of BIPL factors in support expected from its ultimate parent, Edizione SPA, as well as parent, Benetton Group. CRISIL Ratings believes BIPL will receive need-based support from its parent and ultimate parent for timely debt servicing, considering its strategic importance, 100% ownership and continued funding support in past.

Key Rating Drivers & Detailed Description

Strengths:

• Technical, managerial and financial support from the parent as well as the ultimate parent: BIPL is a wholly owned subsidiary of the Italy-based Benetton Group, which has presence in more than 120 countries. Benetton Group works with BIPL on designs for the latter’s products. Though operations are managed locally, the board of directors includes representatives from the parent, who participate in all strategic decisions. There has been regular equity support from the parent (Rs 120 crore in 2021 and Rs 60 crore in the previous year). Also, the bank limits of BIPL have been sanctioned based on corporate guarantee from the parent. India remains a focus market for the Benetton Group and contributes 8-9% to the group’s revenue.

 

• Established brand and strong distribution network: Benetton Group has maintained strong market presence for more than two decades in India. Initially, it launched only the United Colors of Benetton brand of apparel and accessories at premium locations in top cities. Subsequently, it launched its innerwear brand, Undercolors of Benetton, in India. BIPL currently has 916 stores at the end of August 2023. 

 

• Asset-light franchisee model resulting in negligible capital outlay for expansion: BIPL has been following an asset-light strategy for expansion, with more than 90% of stores operated by franchise partners and management contract partners (typically large format stores). Under this arrangement, the company does not incur lease rental and operating expenses, although there is an arrangement for revenue sharing. Margins are broadly the same for the company-owned, company-operated (CoCo) and franchise models. Hence, BIPL has taken over some poor performing franchise stores and converted them to CoCo models in strategic locations. Expansions will be through both CoCo and franchise routes, but the share of franchise will remain dominant. The asset-light strategy will ensure modest capex requirement of Rs 10-20 crore per annum for BIPL.

 

Weaknesses:

• Working capital-intensive operations: The company had gross current assets (GCAs) of 183 days as on March 31, 2023, led by receivables of 44 days and inventory of 135 days. The company follows a sale or return (SOR) business model with large format stores and larger franchise partners, and hence receivables are realized post-secondary sales to end-customers. The SOR model also leads to large inventory. Also, the inventory is usually higher during March and September as the company stocks up for the upcoming peak seasons. Though the working capital cycle has been streamlined, it will remain on the higher side over the medium term.

 

• Exposure to intense competition and vulnerability to changes in fashion trends: Intense competition from international as well as domestic brands impacted profitability in the past, leading to operating loss, which was further exacerbated during the pandemic. Despite various cost rationalisation measures to protect profitability, exposure to intense competition will remain a key monitorable. Also, the company primarily caters to the youth segment, wherein fashion trends change rapidly. BIPL has been proactively working on addressing the same and has adopted a one-season approach to ensure there is no outdated inventory.

 

• Modest financial risk profile: Debt protection metrics have been subdued due to losses in the past five years. However, the capital structure, though battered by consistent operating losses, has been supported by equity infusion by the parent. In the four years from 2017, the parent infused equity of Rs 330 crore (latest was Rs 120 crore in calendar year 2021). As the company returns to operating profitability, the financial risk profile will improve and positive accrual will limit reliance on the parent. The capital structure is expected to improve with steady accretion to reserve resulting in gearing of 0.5-0.6 time. Interest coverage was 2.8 times for the 15 months through March 2023 and is expected at 3-4 times over the medium term with steady improvement in operating profitability.

Liquidity: Adequate

The liquidity position is supported by adequate cash accrual, moderate bank limit utilisation, low debt obligation and need-based support from the parent. Bank limit of Rs 366 crore was utilised 44% on average over the six months through August 2023 (38%, on average, for the 12 months through August 2023). Cash accrual is expected at Rs 20-30 crore per annum against annual debt obligation of Rs 10-12 crore and capex requirement of Rs 10-20 crore. No further equity infusion is expected from the parent as BIPL has turned profitable. However, support will be forthcoming during exigencies. 

Outlook: Stable

BIPL will maintain its business risk profile over the medium term, supported by strong brand presence and established distribution network. Operating profitability is expected to improve because of efficiency measures, resulting in improvement in the financial risk profile. Need-based financial support from the parent will also enhance the financial risk profile and liquidity.

Rating Sensitivity factors

Upward factors:

• Significant improvement in revenue, profitability and return on capital employed
• Improvement in key credit metrics with interest coverage ratio over 3.5 times on sustainable basis.
• Improvement in the credit risk profile of the ultimate parent (Edizione SPA) and parent (Benetton Group)

 

 Downward factors:

• Diminution in support from the ultimate parent (Edizione SPA) and parent (Benetton Group) or significant weakening in the business risk profile of Benetton Group
• Weakening financial risk profile with interest cover less than 3 times on sustained basis

About the Company

Benetton Group is a leading global player in the casual apparel market, with presence in more than 120 countries. It delisted from the Italian stock exchange in 2012. Benetton Group entered the Indian market in fiscal 1992 through a joint venture (JV), DCM Benetton India Ltd, with the Delhi-based DCM group. In December 2004, Benetton acquired the DCM group’s entire stake in the JV and renamed the company as BIPL. BIPL sells its products in India through 916 stores.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Working capital facility*	NA	NA	NA	125	NA	CRISIL BBB+/Stable
NA	Working capital facility@	NA	NA	NA	90	NA	CRISIL BBB+/Stable
NA	Working capital facility#	NA	NA	NA	60	NA	CRISIL BBB+/Stable
NA	Working capital facility$	NA	NA	NA	70	NA	CRISIL BBB+/Stable
NA	Proposed working capital facility	NA	NA	NA	21.6	NA	CRISIL BBB+/Stable

*Fully interchangeable with WCDL (Rs 125 crore), Cash credit (Rs 50 crore), export packing credit (Rs 20 crore), export post shipment

credit (Rs 20 crore), import / inland letter of credit (Rs 25 crore), vendor finance (Rs 65 crore), cash management service (Rs 0.05 crore

@Fully Interchangeable with WCDL (Rs 80 Cr.), Overdraft (Rs 20.80 Cr.), bank guarantee (Rs 5 crore), letter of credit (Rs 45 crore). vendor

bill discounting (Rs 38 crore)

#Fully interchangeable with WCDL (Rs 60 crore), Cash credit (Rs 24 crore), vendor bill discounting (Rs 60 crore), bank guarantee/letter of

credit (Rs 12.50 crore)

$Fully interchangeable with WCDL (Rs 55 crore), overdraft (Rs 25 crore), purchase invoice discounting (Rs 70 crore)