Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities and commercial paper programme of Infiniti Retail Limited (IRL) continues to factor in a strong market position in the consumer electronics retail segment and healthy long-term growth prospects for the organised retail sector. These strengths are partially offset by an average financial risk profile, exposure to competition from online and offline channels, and susceptibility of operating performance to economic downturns and to risks relating to large annual addition of stores.

 

Operating performance of IRL is expected to be impacted in Q1 of fiscal 2022, however Q2 onwards as restrictions ease, the recovery is expected to drive strong growth in fiscal 2022, driven by online sales channels and new store openings. Infiniti retail continues to open new stores as it aggressively expands its presence in Tier-2 and Tier-3 stores. Company is further strengthening its online presence by investing in several digital initiative. Healthy recovery from Q2 coupled with festive demand will arrest erosion of revenue growth in fiscal 2022 as was witnessed in 2021 with revenue recovering to Rs 5449 crore for fiscal 2021 with a modest 5.5% growth. However, operating margin to remain weak on account of investment for expansion and digital and will remain around 2-4%. As a result, net loss in FY21 increased to Rs 202 crore and will reduce in fiscal 2022 with expected demand recovery and lower interest cost due to equity infusion. There was equity infusion of Rs 250 crore from Tata Sons Private Limited in April-2021 (Tata Sons; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’). CRISIL Ratings believes IRL will continue to receive support from parent to fund its store expansion, cash losses and investment in omni-channel strategies.

 

IRL has adequate liquidity in the form of unutilised bank lines of about Rs 341 crore as on 30th April, 2021, enhancement of limits and CP raise of Rs 100 crore will further support the company. However, credit metrics are expected to moderate sharply due to expected operating losses in current fiscal. Any higher-than-expected capex resulting in steep moderation in debt metrics will remain a rating sensitivity factor. 

 

Equity infusion from parent Tata Sons in April 2021 is likely to benefit credit profile of IRL. IRL received Rs 250 crore equity in FY22 and expects additional equity to fund store expansion and losses. Tata Sons has regularly infused equity (Rs 1600 crore till date) to fund losses and store expansion in the past. Continued strong support from the parent, which holds 100% in IRL provides comfort to the overall credit profile.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework factoring in the support from Tata Sons, which holds 100% in IRL and has shown a track-record of support. Support has been through equity infusion of Rs 1600 crore as of March 31,2021. Adequate support is expected in case of any exigency as IRL is strategically important to the parent, reflected in the large expansion plan to leverage the healthy growth expected in the consumer retail segment.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from the parent, Tata Sons

The company receives operational, managerial, and financial support from Tata Sons. Total equity infusion by the parent is of Rs 1600 crore till date and is expected to increase further. The support is expected to continue due to the strategic importance and ownership structure. With a strong focus of the Tata group to expand its footprint in retail, the company is expected to remain important to the group and receive need-based support.

 

• Strong market position in the consumer electronics retail segment

A presence over 14 years in the consumer the electronics retail segment has resulted in healthy scale of operations with a revenue of Rs 5450 crore- in fiscal 2021despite strong competition from regional and national chains and heavy discounting in online channels. The company is present across six segments and four clusters (North, South, East and West with 26%, 25%, 2% and 47%contribution, respectively) with a pan-India presence. IRL has a presence across segments in consumer durables and electronics and a wide assortment of products. The footprint is being expanded by adding stores across formats and by enhancing product and service offerings, to improve overall revenue and profitability. Expansion has been across tier-1/tier-2 cities with 192 stores as of May 31, 2021. The digital initiatives and store expansion plan of 75-100 stores per fiscal –in the next 2-3 fiscals will drive growth over the medium term.

 

Weaknesses

• Average Weak financial risk profile

The interest coverage ratio at 0.7 time in fiscal 2021 is expected to improve slightly despite expected low profitability on account of impact on profitability in Q1. Further, Networth is 41.53 as on 31st March 2021, however expected to improve in fiscal 2022 due to Rs 250 crore infusion. 

 

Higher requirement of inventory per store for new stores and debt funding for store addition plan will result in moderation in working capital for fiscal 2022 with short term debt mostly being used for working capital requirement. Total debt increased from Rs 625 crore to Rs 702 crore in fiscal 2021. However, any higher than expected debt-funded capex will remain key monitorable. Equity infusion in future is expected to fund losses and investments. IRL is planning to add franchise 30-40% of the stores through FOCO model which will reduce the requirement of investment and inventory which in turn will improve the working capital for fiscal 2022.

 

As a result of equity infusion in fiscal 2022 and further expected in near to medium term, gearing will remain range bound while debt metrics are expected to remain weak due to expected low profitability during the current fiscal.

 

• Moderating operating efficiency due to store expansion, slowing growth

Weakening operating profitability on account of higher additional investments for expansion coupled with sales of low margin category like digital (contributing 58% of overall sales), as a result, return metrics like RoCE will continue to remain weak, as seen from net loss in fiscal 2021 and expected PAT level losses in fiscal 2022. IRL had seen improved performance till 2019 due to a change in brand and product mix. However, slowing growth, store expansion and investments in supply chain, IT have led to continued weak margin for fiscals 20 and 21 resulting in weak operating efficiency. With recovery in demand and turnaround of new stores, margin are likely to recovery gradually.

 

• Exposure to risks relating to sizeable expansion plans over the medium term

IRL added 33 stores in fiscal 2021. In the medium term, 75-100 stores are expected to be added each fiscal subject to availability of property and demand in tier 2 and 3 cities. The focus is expected to be on store profitability, however addition of 80-90 stores in fiscals 2022 and 2023 combined will lead to gestation losses, impacting the cash generation of the firm. The expansion is aimed at both growing the existing markets as well as venturing into newer markets. Further, IRL is prudently setting up new stores partly through franchise route as well. Exposure to risks associated with implementation and execution of the expansion plans should persist over the medium term.  Company is also investing in various digital initiative to boost online presence and is in talks with TCS to build an integrated platform to better cater to the online demand.

 

• Vulnerability to competition from online and offline channels

The company has a presence in North, East, West, and South India with most of the sales being in tier 1 cities. It is expanding in tier-2/tier -3 cities, but is exposed to unforeseen region-specific events and local players. Competition from online channels to continue with their heavy discounting policies and large customer base. Online revenue contribution increased to 2-3% of revenue in fiscal 2021 for IRL but will still remain key risk due to strong competition from online marketplaces.

Liquidity: Strong

Liquidity is expected to remain moderate. Average utilisation of the fund-based limit of crore was 49%over six months through April 2021. Cash accrual, cash and cash equivalents, and unutilised bank lines should be sufficient to meet interest obligation as well as incremental working capital requirement, over the medium term. Timely funding support from parent and ability to raise funds in timely manner also support liquidity position.

Outlook: Stable

Recovery led by increase in demand of consumer appliances will benefit revenue trajectory though moderation in profitability due to higher gestation losses will put pressure on the business profile, however equity infusion from the parent will support the overall credit profile. Continued and timely support from the parent is expected for operations and to meet any financial exigencies.

Rating Sensitivity Factors

Upward Factors

• Increase in scale of operations, backed by successful roll-out and ramp up of new stores along with sustenance of operating profitability with operating margin above 3% on a sustained basis
• Healthy improvement in key credit metrics, supported by better cash generation with RoCE more than 10-12% and interest coverage improving to over 5 times

 

Downward Factors

• Lower-than-expected equity infusion leading to higher debt and weakening of capital structure
• Continued sub-par performance due to stiff competition, weak demand, gestation losses of new stores resulting in higher than expected loss
• Change in rating of parent by one notch

About the Company

Infiniti Retail, a 100% subsidiary of Tata Sons, started operations in fiscal 2007 under the brand Croma. The company is one of India’s first organised consumer durables and electronics retailer, and has a strategic alliance with Australia’s largest retailer, Woolworths. As on March 31, 2021, it had 192 Croma retail outlets across India. The stores are mainly operated on lease/revenue-sharing basis. The support office is in Mumbai. The stores are spread across 39 major cities of India.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with Outlook
NA	Working Capital Demand Loan%	NA	NA	NA	522	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	118	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	131	NA	CRISIL A1+
NA	Commercial Paper	NA	NA	7 to 365 Days	100	Simple	CRISIL A1+

%Interchangeable with overdraft