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).

 

The operating revenue of IRL is expected to improve in fiscal 2022, with recovery in sales from the second quarter onwards, driven by easing of restrictions, store openings and improvement in online sales. The company continues to open stores as it aggressively expands its presence in tier-2 and tier-3 stores. It is strengthening its online presence by investing in several digital initiatives. Revenue is expected to increase by over 50% year-on-year in fiscal 2022 from Rs 5,449 crore in fiscal 2021. However, IRL is expected to incur operating losses on account of investments for expansion and the digital segment. As a result, net loss in fiscal 2022 is expected to increase to over Rs 300 crore. Weaker operating performance is partially offset by regular equity infusion from Tata Sons Pvt Ltd (Tata Sons; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’). IRL will continue to receive support from the 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 200 crore as December 31, 2021, and tie-up of additional limits will provide further support. However, the credit metrics are likely to moderate sharply because of expected operating losses in the ongoing fiscal. Any higher-than-expected operating losses resulting in steep moderation in the debt metrics will remain a rating sensitivity factor. 

 

Equity infusion of Rs 250 crore from the ultimate parent, Tata Sons, in April 2021 supported the credit risk profile of IRL; the parent is expected to infuse additional equity to fund store expansion and losses in early fiscal 2023. Tata Sons has regularly infused equity (Rs 1,484 crore to date) 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.

 

The rating continues to factor in 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 an average financial risk profile, exposure to competition from online and offline channels and susceptibility of the operating performance to economic downturns and to risks related to large annual addition of stores.

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 1,484 crore as on December 31, 2021). 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

The company receives operational, managerial and financial support from Tata Sons. It has infused total equity of Rs 1,484 crore to date, which is expected to increase by another Rs 250-500 crore in fiscal 2023. The support is expected to continue on account of the strategic importance and ownership structure. With a strong focus of the Tata group on expanding 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

Presence of over 15 years in the consumer electronics retail segment has resulted in healthy scale of operations, with revenue estimated at Rs 8,000 crore in fiscal 2022 despite 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 in fiscal 2021, respectively) and has a pan-India presence. IRL has presence across segments in consumer durables and electronics along with 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. The company has expanded across tier-1/tier-2 cities and had 220 stores as on December 31, 2021. Digital initiatives and store expansion plan of 80-100 stores per fiscal in the next 2-3 fiscals will drive growth over the medium term.

 

Weaknesses:

Weak financial risk profile

Interest coverage ratio of 0.7 time in fiscal 2021 is expected to remain constrained and stay below 0.4 time in fiscal 2022 on account of low profitability. Furthermore, networth is expected to remain weak infiscal 2022 despite infusion of Rs 250 crore in the ongoing fiscal, but it will likely improve over the medium term owing to equity infusion and better profitability.

 

Higher requirement of inventory per store for new stores and debt funding for the store addition plan will result in moderation in the working capital in fiscal 2022, with short-term debt mostly being used for the working capital requirement. Total debt increased to Rs 1,322 crore in January 2022 from Rs 702 crore in fiscal 2021. Equity infusion in future is expected to fund losses and investments. IRL is expected to incur annual capital expenditure (capex) of Rs 300 crore in fiscals 2023 and 2024. Higher-than-expected, debt-funded capex will remain a key monitorable.

 

As a result of equity infusion in fiscal 2022 and further infusion expected in the near to medium term, gearing will remain range-bound, while the debt protection metrics will likely remain weak, with low profitability.

 

Moderation in operating efficiency because of store expansion

On account of weakening of operating profitability amid higher additional investments for expansion and sales of low-margin products, such as digital, return metrics such as return on capital employed (RoCE) will remain weak, as seen from net loss in fiscal 2021 and expected profit after tax (PAT)-level losses in fiscal 2022. IRL saw improved performance until 2019 because of change in the brand and product mix. However, slowing growth, store expansions and investments in supply chain and information technology led to continued weak margin in fiscals 2020 and 2021, resulting in weak operating efficiency. With recovery in demand and turnaround of new stores, the margin is likely to recovery gradually.

 

Exposure to risks related to sizeable expansion over the medium term

IRL added 32 stores and 47 stores in fiscal 2021 and year to date fiscal 2022. Over the medium term, 80-100 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 be on improved store profitability, though addition of 80-100 stores in fiscals 2022 and 2023 will lead to gestation losses, impacting the cash generation of the firm. 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 as well. 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 and is in talks with Tata Consultancy Services to build an integrated platform to better cater to the online demand.

 

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/tier-3 cities but is exposed to unforeseen region-specific events and local players. Competition from online channels is expected to continue on account of their heavy discounting policies and large clientele. Revenue contribution from online channels increased to 5-10% of the overall revenue for IRL in fiscal 2022 from below 5%, 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 fund-based limit averaged 78% over the 12 months through December 2021. Cash accrual, cash and equivalents and unutilised bank lines will sufficiently cover the debt obligation as well as the incremental working capital requirement over the medium term.

Outlook: Stable

Recovery led by increase in demand of consumer appliances will benefit the revenue trajectory, though moderation in profitability amid higher gestation losses will put pressure on the business risk profile. Equity infusion from the parent will support the overall credit profile. Timely support from the parent is expected to continue for operations and to meet any 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 the operating margin above 3% on a sustained basis
• Healthy improvement in the key credit metrics, supported by better cash generation, RoCE of 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 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
• Change in the rating of the parent by one 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 a strategic alliance with Australia’s largest retailer, Woolworths. As on December 31, 2021, it had 220 Croma retail outlets across India. The stores are mainly operated on a lease/revenue-sharing basis. The support office is in Mumbai. The stores are spread across 40 major cities of India.

 

In the first half of fiscal 2022, IRL reported revenue of Rs 2,804 crore and PAT of negative 151 crore against Rs 1,993 crore and Rs 125 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs.Crore	5,449	5,173
PAT	Rs.Crore	-202	-205
PAT Margin	%	-3.7*	-4.0*
Adjusted debt/adjusted networth	Times	-	8.7
Interest coverage	Times	0.68	1.14

*Reported; inclusive of deferred tax asset

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	702	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