Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Infiniti Retail Limited (IRL).

 

Reported revenue increased by over 90% to Rs 15,851 crore in fiscal 2023 from Rs 8,223 crore in fiscal 2022. Online sales ramped up significantly to ~Rs 4,000 crore in fiscal 2023, from ~Rs 600 crore in fiscal 2022,  particularly with commencement of the Tata Neu platform and picking up of stores expansion undertaken in the past fiscals. The company continues to open stores as it aggressively expands its presence in Tier-2 and Tier-3 stores.

 

However, operating losses (Pre-IndAS) also widened to Rs 1,072 crore from Rs 476 crore owing to contraction in gross margins due to change in product mix with higher share of revenue coming from lower-margin communication devices such as Apple and Oneplus. Further, stores added over the last couple of years were still under gestation with breakeven time at 12-18 months. 180 stores of the total 353 as on March 31, 2023, were added over the past 1.5-2.0 years; which also impacted the margins. Profitability expected to improve over the medium term, with these newly opened stores achieving breakeven and through reduction of discounts and promotion; this shall remain a monitorable.

 

Net loss increased to Rs 957 crore in fiscal 2023 from Rs 445 crore in fiscal 2022 following higher operating losses. Weaker operating performance is partially offset by regular equity infusion from Tata Digital Pvt Ltd (Tata Digital; the wholly owned subsidiary of Tata Sons Pvt Ltd [Tata Sons; ‘CRISIL AAA/Stable/CRISIL A1+’]). IRL will continue to receive support from the parent to fund its store expansion, cash losses and investment in omnichannel strategies.

 

Equity infusion of Rs 1,500 crore from the parent, Tata Digital, in fiscal 2023 supported the credit risk profile of IRL. The parent is expected to infuse further equity to fund store expansion and losses over the medium term. Ultimate parent, Tata Sons, has regularly infused equity (Rs 2,790 crore as on March 31, 2023) including through Tata Digital to fund losses and store expansions in the past. Continued strong support from Tata Sons, which holds 100% in Tata Digital, the parent company of IRL, provides comfort to the overall credit risk profile. On a standalone basis, the credit metrics remained subdued due to continued operating losses in fiscals 2022 and 2023 thereby constraining the capital structure and debt protection metrics, which will remain a key monitorable.

 

Liquidity position of the company remined strong owing to expectations of need based support from parent which has been amply demonstrated in the past. Further, unutilized working capital limit of over Rs 1,400 crore as on April 30, 2023 provide additional cushion. 

 

The ratings continue to reflect the strong market position of IRL in the consumer electronics retail segment and healthy long-term growth prospects for the organised retail sector. These strengths are partially offset by continued operational losses, stretched financial risk profile, exposure to competition from online and offline channels and susceptibility of the operating performance to economic downturns,

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the support from Tata Sons, which is the parent of Tata Digital, which holds 100% in IRL and has shown a healthy track record of support (equity infusion of Rs 2,790 crore as on March 31, 2023). Non-cumulative optionally convertible redeemable preference shares infused by Tata Digital (Rs 1,000 crore) in fiscal 2023 bearing 0.0001% interest convertible at option of issuer up to 20 years has been treated as equity. Adequate support is expected in case of any exigency, as IRL is strategically important to the parent, as 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 Tata Sons

IRL, is strategically and economically important to the Tata group. With a strong focus of the Tata group on expanding its footprint in retail, IRL is expected to remain important to the group and continue receiving need-based support. IRL receives operational, managerial and financial support from Tata Sons, which infused equity worth Rs 2,790 crore as on March 31, 2023.

 

Tata Sons has an excellent track record of extending need-based support to subsidiaries and group companies, as seen in the case of Tata Teleservices Ltd (TTSL; ‘CRISIL AA-/Stable/CRISIL A1+’) and Air India Limited (CRISIL AAA/Stable/ CRISIL  A1+). CRISIL Ratings understands that the Tata group will continue to hold majority stake in IRL (currently 100%) and will assist the company in meeting its obligations in full and on time.

 

• Strong market position in the consumer electronics retail segment

Presence of over 15 years in the consumer electronics retail segment resulted in healthy scale of operations, with revenue crossing Rs 15,000 crore in fiscal 2023 despite strong competition from regional and national chains and heavy discounting in online channels. IRL operates across six segments and four clusters and has a pan-India presence. It is further adding stores across formats and enhancing product and service offerings to boost revenue and profitability. The company has expanded across Tier-1/Tier-2 cities and had 353 stores as on March 31, 2023. Digital initiatives and store expansion plan of ~100 stores per fiscal over the medium term will drive growth.

 

Weaknesses

• Weak financial risk profile

Company has continued to report operating loss last fiscal too owing to aggressive expansions being undertaken resulting in worsened debt protection metrics. The interest coverage is expected to remain subdued at ~1-2 times over the medium term due to continued focus on expansions. However, networth (Pre Ind AS) is adequate at Rs. 593 crore in fiscal 2023 owning to infusion of Rs 1,500 crore from the parent, and is likely to improve over the medium term with further equity infusion and improving profitability.

 

Higher requirement of inventory per store for new stores and debt funding for the store addition plan may constrain the financial risk profile (as seen in fiscal 2023). Total debt increased to Rs 2,438 crore in fiscal 2023 from Rs 1,582 crore in fiscal 2022; majorly in form of working capital. Further equity infusion is expected in the future  to fund losses and partly fund capital expenditure (capex; projected at ~Rs 500 crore per annum over the medium term). Higher-than-expected, debt-funded capex will remain a key monitorable.

 

On a standalone basis, capital structure is expected remain stretched with gearing at ~5-6 times owing to expectation of PAT losses over next 1-2 years while debt protection metrics will also remain subdued during this period. 

 

• Moderation in operating efficiency because of store expansion

Continued operational losses amid higher additional investments for expansion and sales of low-margin products, such as digital, result in weak return on capital employed (RoCE), as seen from net loss in fiscal 2023. IRL saw improved performance until 2019 because of change in the brand and product mix. However, store expansions and investments in supply chain and information technology coupled with the Covid-19 pandemic-induced lockdowns led to continued weak margin since fiscals 2020 and 2021. With further growth in demand and turnaround of new stores, the margin is likely to recover gradually over the medium term.

 

• Exposure to risks related to sizeable expansion over the medium term

IRL added 108 stores in fiscal 2023. Over the medium term, ~100 stores are expected to be added each fiscal subject to availability of property and demand in Tier-2 and Tier-3 cities. The focus is expected to improve store profitability, though addition of ~100 stores over the medium term will lead to gestation losses, impacting cash generation. The expansion is aimed at growing the current markets as well as venturing into newer ones. Furthermore, IRL is prudently setting up new stores, partly through the franchise route (share of ~25%). Exposure to risks associated with implementation and execution of the expansion plans will likely persist over the medium term. The company is also investing in various digital initiatives to boost its online presence.

 

• Susceptibility to competition from online and offline channels

The company has presence in North, East, West and South India, with most of the sales being in Tier-1 cities. It is expanding in Tier-2/3 cities too but is exposed to unforeseen region-specific events and local players. Competition from online channels is expected to continue on account of its heavy discounting policies and large clientele. Revenue contribution from online channels increased to ~25% of the overall revenue for IRL in fiscal 2023 from ~7% in fiscal 2022, but strong competition from online marketplaces will remain a key risk.

Liquidity: Strong

Liquidity is supported by need-based equity infusion from the parent and financial flexibility on account of being a step down subsidiary of Tata Sons to raise funds in a timely manner at attractive interest rates. Utilisation of the working capital limit averaged 80% over the nine months through April, 2023. Cash accrual, cash and equivalents and unutilised bank lines shall only partly cover the debt obligation as well as the incremental working capital requirement, with continued reliance on the parent for support over the medium term. Liquidity is supported by need-based equity infusion from the parent and financial flexibility on account of being a step down subsidiary of Tata Sons to raise funds in a timely manner at attractive interest rates. Utilisation of the working capital limit averaged 80% over the nine months through April, 2023. Cash accrual, cash and equivalents and unutilised bank lines shall only partly cover the debt obligation as well as the incremental working capital requirement, with continued reliance on the parent for support over the medium term.

Outlook Stable

Recovery led by rise in demand of consumer appliances as well as increased store expansion and online presence will benefit the revenue trajectory, though continued moderation in profitability amid higher gestation losses will constrain the financial risk profile. Timely equity infusion from the parent will support the overall credit risk profile and also help meet financial exigencies.

Rating Sensitivity factors

Upward factors

• Increase in revenue, backed by successful roll-out and ramp-up of new stores and sustenance of operating profitability, with operating margin above 3% (Pre-IndAS) on a sustained basis
• Healthy improvement in the key credit metrics, supported by better cash generation

 

Downward factors

• Lower-than-expected equity infusion, leading to higher debt and weakening of the capital structure
• Continued sub-par performance because of intense competition, weak demand and gestation losses of new stores, resulting in higher-than-expected loss; Losses continuing at EBITDA (Pre-IND AS) level
• Downgrade in the credit rating of ultimate parent, Tata Sons by 1 or more notch

About the Company

IRL, a 100% subsidiary of Tata Digital, which in turn is a wholly owned subsidiary of Tata Sons, started operations in fiscal 2007 under the Croma brand. The company is one of the first organised consumer durables and electronics retailers in India and has strategic alliance with Australia’s largest retailer, Woolworths. As on March 31, 2023, it had 353 Croma retail outlets across India. The stores are mainly operated on a lease/revenue-sharing basis and spread across 120+ cities in India. The support office is in Mumbai.

Key Financial Indicators

Particulars	Unit	2023	2022
Reported revenue	Rs crore	15,851	8,223
Profit after tax (PAT)	Rs crore	(957)	(445)
PAT margin	%	(6.0)	(5.4)
Adjusted gearing (Pre-IndAS)	Times	4.11	N.M.
Interest coverage (Pre-IndAS)	Times	N.M.	N.M.

NM – Not Meaningful

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	702	NA	CRISIL AA-/Stable
NA	Working capital demand loan	NA	NA	NA	70	NA	CRISIL AA-/Stable
NA	Non-fund-based limit	NA	NA	NA	221	NA	CRISIL A1+
NA	Working capital term loan	NA	NA	NA	150	NA	CRISIL AA-/Stable
NA	Long-term loan	NA	NA	Dec-25	400	NA	CRISIL AA-/Stable
NA	Short-term loan	NA	NA	NA	315	NA	CRISIL A1+
NA	Channel financing	NA	NA	NA	85	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7 to 365 days	100	Simple	CRISIL A1+

*Interchangeable with overdraft