| Future Consumer Limited | ||
| Rating placed on 'Watch Negative' | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has placed its rating on the Rs 100 crore commercial paper programme of Future Consumer Limited (FCL) on 'Rating Watch with Negative Implications'. |
| Analytical Approach |
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For arriving at the rating, CRISIL has combined the business and financial risk profiles of FCL and its subsidiaries. CRISIL has moderately combined FCL's joint ventures (JVs) to the extent of support required by the entities over the medium term. This is in line with CRISIL's criteria of consolidation. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strong management experience in retail sector The Future group, promoted by Mr Kishore Biyani, is a prominent player in Indian retail with popular supermarket chains such as Big Bazaar and Food Bazaar, and lifestyle stores such as Brand Factory and Central. The group's presence across the retail value chain gives it an edge over competitors. The management has a successful track record in the value retail business and downstream addition of fashion brands under Future Lifestyle Ltd. * Derives competitive advantage from the Future group's presence across the retail value chain and strong distribution footprint FCL derives significant synergies from group companies, albeit on an arm's length basis. Over 70% sales of FCL are through FRL, one of the market leaders in organised retail with over 1,300 large and small stores (under Big Bazaar and Eazyday) across 414 cities. FCL benefits from favourable positioning in the stores. Except for the current immediate slowdown in revenue due to Covid-19, FRL's revenue has seen strong growth. (compound annual growth rate of around 9% over fiscals 2018 and 2019 and around 6% year-on-year in the first 9 months of fiscal 2020), driven by increasing penetration of organised retail and high growth of the sector. Consequently, FCL's revenue also grew 29% over fiscals 2018 and 2019 and around 9% year-on-year in the first 9 months of fiscal 2020. Once the Covid-19 impact subsides, CRISIL believes the Future group may see resumption of healthy revenue growth. Given the strong growth drivers of organised retail and the competitive advantage available to FCL as a part of the Future group, the company is likely to sustain double-digit growth over the medium term. * Established sourcing and manufacturing capabilities FCL has a diverse product portfolio across food and beverages, and home and personal care categories. It has established sourcing capacity of 1.5 lakh tonne agri-produce with 71 sourcing hubs across the country, Agricultural Produce Market Committee (APMC) licences in 26 states, and over 50 warehousing and processing centres. Manufacturing is either in-house or through JVs across India and abroad, where the partner brings significant product expertise. FCL has tie-ups with Fonterra and Hain Celestial, which are leading players globally in their categories, to name a few. * Improved capital structure on account of equity infusion FCL has approval to raise equity of around Rs 350 crore through issuance of Rs 70 crore share warrants to promoters and Rs 280 crore compulsorily convertible debentures to existing investors, International Finance Corporation and Verlinvest SA. Of this, the company raised Rs 280 crore in the first 9 months of fiscal 2020. However, the share prices of all group entities have been under pressure resulting in steep decline in market value. That said, majority of pledging is to large foreign institutional investors which continue to be associated and aligned with the management and the group's growth strategy. The debt of listed operating entities in the group increased from Rs 10,951 crore in March 2019 to Rs 12, 778 crore in September 2019. The increased debt, along with steep decline in market value of listed entities, has impacted the financial flexibility in the group. Any further weakness in market value will further constrain financial flexibility and the group's credit quality, and will be a key rating sensitivity factor. Weaknesses * Modest scale and ROCE Due to its early stage of operations, FCL has a modest scale compared to peers. Furthermore, the company has a low RoCE due to low profitability and high working capital intensity reflected in consolidated working capital cycle of 56 days. CRISIL expects this will improve as key brands establish themselves in the market. The revenue mix is marked by a significant contribution of low margin products (staples). Consequently, operating margin has been low at around 2.75% over fiscals 2018 and 2019. Operating margin improved to around 3.5% in the first 9 months of fiscal 2020. It is expected to improve, but remain below 5%, over the medium term as the revenue share of high-margin products will improve slowly. Traction in improvement in operating margin and RoCE will remain a rating sensitivity factor. * Weak, but improving, debt protection metrics FCL has weak debt protection metrics with interest coverage of around 1.59 times (excluding the impact of lease rentals under indAS 116) and net cash accrual to total debt of 0.04 time for the first 9 months of fiscal 2020, which are sub-par for the rating category. However, cash accrual is expected to grow robustly with strong revenue growth and expected improvement in profitability and working capital cycle. Furthermore, FCL has raised equity of Rs 280 crore (through compulsorily convertible debentures issued to existing investors and promoter warrants) and has approval to raise Rs 70 crore more, to be used to reduce debt and fund growth. Consequently, interest coverage and net cash accrual to total debt ratios are expected to improve to 1.75 times and 0.08 time, respectively, by March 2021. Traction in the improvement will remain a rating sensitivity factor. * Exposure to JVs and risks related to moderate expansion plans over the medium term FCL extends support to its JVs and associates by providing inter-corporate deposits (ICDs), loans and advances, investments, and guarantees for external borrowings. As on September 30, 2019, FCL had net exposure of around Rs 73 crore to JVs and associates through investments, ICDs, and loans. Guarantees extended for JVs and associates at the end of September 2019 amounted to Rs 64.7 crore. CRISIL understands FCL will continue moderate expansion through its JVs and associates with Rs 70-100 crore additional investment over fiscals 2020 and 2021. * Exposure to intense competition and susceptibility of performance to economic downturn The Indian food and FMCG industry has both organised and unorganised players across segments and products. Competition in the industry is intensifying led by entry of foreign players, expansion by regional players, and introduction of innovative products by various players. Additionally, FCL is susceptible to economic downcycles. The Covid-19 pandemic and lockdown across regions will disrupt operations and financial risk profiles of retail outlets. Currently, the impact is minimal for FCL as grocery outlets are excluded from the lockdown. However, CRISIL believes more stringent lockdown regulations, if imposed, will have an adverse impact. |
| Liquidity Adequate |
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Liquidity is adequate driven by expected cash accrual of Rs 125 crore in fiscal 2021 and around Rs 260 crore in fiscal 2022 and cash and cash equivalent of Rs 64 crore as on September 30, 2019, supported by fund-based limits of Rs 425 crore utilised 75% on average. The company has long-term debt obligation of around Rs 56 crore in fiscal 2021 and around Rs 70 crore in fiscal 2022 and plans capital expenditure of Rs 15 crore each year. CRISIL expects internal accrual, cash and cash equivalent, and unutilised bank lines to be sufficient to meet debt obligation and incremental working capital requirement. |
| About the Company |
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FCL (earlier, known as Future Consumer Enterprise Ltd), incorporated in 1996, is a part of Future Group. FCL is a food and beverages, and home and personal care products FMCG company with over 27 brands across categories. It caters to categories such as basic foods, ready-to-eat meals, snacks, beverages, personal hygiene, and home care. FCL is engaged in manufacturing formulations, agri-sourcing, branding strategy, product design and development, packaging, quality control, and marketing of its products. |
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of Entities Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
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