Rating Rationale
July 07, 2020 | Mumbai
Lifestyle International Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1000 Crore (Enhanced from Rs.445 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
 
Rs.100 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the long term bank loan facilities and commercial paper programme of Lifestyle International Private Limited (LIPL) at 'CRISIL AA/Stable/CRISIL A1+.
 
CRISIL expects LIPL's operating performance to moderate in fiscal 2021 due to the impact of Covid-19 pandemic. Operating income is expected to de-grow by 25-35% while operating margins are expected to contract to 3-6% (excluding the impact of Ind AS 116 accounting standard) in fiscal 2021; on account of store shut downs and drop in sales as a result of lower footfalls. As of June 2020, company has opened 72% of its total stores.

CRISIL had revised its outlook on the bank loan facilities of LIPL to 'Stable' from 'Positive' while reaffirming the rating at 'CRISIL AA' on March 30, 2020.
 
However, LIPL's adequate liquidity, in the form of moderately utilised bank limits and unencumbered cash surplus of over Rs 300 crore as of June 2020 will help mitigate any impact on cash flows in the near term. Company has also received funding of Rs 100 crore in April 2020 from promotors in the form of unsecured loans.
 
In fiscal 2020, company reported revenue growth of 10% against a revenue growth of 12% in fiscal 2019, largely on the back of store additions but offset by lower like to like sales on account of closures of stores in fourth quarter of fiscal 2020. However operating margins were stronger by nearly 40 basis points to 9.6% (excluding the impact of Ind AS 116 accounting standard) driven by improvement in profitability for Max segment and achievement of operating breakeven for Easy Buy segment in fiscal 2020.
 
The rating on LIPL continues to reflect its established market position in the departmental stores category, diversified revenue profile, and healthy operating efficiency. The ratings also factors in healthy medium term growth prospects for the organised retail sector, and the company's solid financial risk profile. These strengths are partially offset by the moderate susceptibility of LIPL's performance to economic cycles, increasing competition in the apparel retail and furniture segments, and risks related to sizeable expansions.

Analytical Approach

For arriving at the ratings of LIPL, CRISIL has not consolidated the business and financial risk profile of LIPL and group company, Max Hypermarket India Pvt Ltd (Max Hyper, rated 'CRISIL BB+/Stable'). This is because the two companies are separate legal entities without any operational dependence.

Key Rating Drivers & Detailed Description
Strengths: 
* Established position in the departmental stores segment and diversified revenue profile
LIPL is among the top three players in the domestic departmental store format. The company benefits from its diversified revenue profile due to its presence in the premium apparel segment ('Lifestyle' division contributed ~42% of revenues during fiscal 2020), value fashion segments ('Max' and 'Easy Buy' divisions accounted for ~47% of revenues), and furniture, home furnishings and household items ('Home Centre' division contributed ~11% of revenues).
 
LIPL also benefits from the Landmark group's extensive retail experience of over 40 years, particularly its sourcing strength in the Home Centre and Max divisions. The company has a pan India presence, which adds to geographical diversity of its revenues. Its future plans, involve opening stores across the country, including tier II & III cities, strengthening its position in India.
 
* Healthy operating efficiency
LIPL's operating efficiency is supported by the increasing proportion of broken even stores and well managed working capital cycle. This is reflected in LIPL's strong return on capital employed of over 40% in fiscal 2020. Furthermore, over the past few years. LIPL has been able to achieve higher scale for Max and Easy Buy segments along with improvement in operating margins. It has also achieved operating breakeven for Easy Buy in fiscal 2020. CRISIL expects LIPL's healthy operating efficiencies to help sustain its strong performance over the medium term.
 
* Healthy medium term growth prospects for the domestic organised retail industry
Although in the near term, the growth prospects of the domestic retail industry are expected to be impacted by the outbreak of COVID-19, but over the medium term the organised brick and mortar retail sector is expected to grow steadily, driven by low penetration of organised retail segment estimated at 10-11% and India's demographic advantages which include growing middle class with increasing disposable incomes. Furthermore, the apparel retail vertical segment will continue to remain attractive for the organised players, driven primarily by higher gross margins and increasing brand consciousness.
 
* Strong financial risk profile
LIPL has a strong financial risk profile, marked by a robust capital structure and healthy debt protection metrics. In fiscal 2020, total debt stood at Rs 101 cr against a net worth of Rs 1781 crore (excluding the impact of Ind AS 116 accounting standard); while the ratio of total outside liabilities by tangible networth (TOL/TNW) and interest cover continue to remain healthy at 1.2 times and over 100 times respectively (both ratios excluding the impact of Ind AS 116 accounting standard). Prudent capital spending and efficient working capital management have enabled it to limit reliance on debt. LIPL is expected to undertake annual capital expenditure (capex) of Rs.50-100 crore in fiscal 2021, funded largely through accruals. LIPL might alter their capex and dividend plans in the near term, in light of the disruptions caused by COVID-19.
 
CRISIL believes that intercorporate deposits to Max Hyper is not expected to increase from current levels of Rs.45 crore, outstanding as on March 31, 2020. Furthermore, LIPL is likely to sustain its robust financial risk profile over the medium term.
 
Weaknesses:
* Moderate susceptibility of operating performance to economic down-cycles and to large annual addition of stores
The branded apparel segment relies heavily on the disposable income of its customer segment and is susceptible to economic cycles because of the discretionary nature of purchases. Large expansion by retailers can lead to pressure on their operating margins as earnings from existing stores may not adequately offset losses from high proportion of new stores added. While large portion of LIPL's stores have broken even, significant improvement in its operating profitability from here on, is unlikely due to gestation losses from new stores. Furthermore, heightened uncertainty on account of outbreak of COVID-19 and closure of stores over an extended period of time is expected to have a sharp negative impact on revenues.
 
* Exposure to increasing competitive intensity in apparel and furniture retail segment
The attractiveness of the apparel segment has led to increasing competition in the sector with established domestic players like Shoppers Stop Limited (Shoppers Stop: 'CRISIL A1+'), Reliance Trends (Reliance Retail Limited: 'CRISIL AAA/Stable/CRISIL A1+'), Future Lifestyle Fashions Limited (FLFL: 'CRISIL A+/Stable/CRISIL A1'), Trent Limited and Aditya Birla Fashion and Retail Limited (ABFRL: 'CRISIL AA/Stable/CRISIL A1+'). Large global apparel brands, including The GAP Inc (rated 'BB-/ Negative' by S&P Global Ratings), Aeropostale Inc and H&M Hennes & Mauritz AB, have also entered the Indian markets in the recent past, thus increasing the competitive intensity. Furthermore, the furniture segment of the 'Home Centre' vertical is facing intense pressure, due to increasing competitive intensity, including from online retailers.
Liquidity Strong

Liquidity is strong, in the form moderately utilised bank lines and cash surplus of Rs 300 crore as of June 2020. Company is also planning to get additional bank lines. Support from promotors is also expected in case of exigencies. Promotors have infused Rs 100 crore in April 2020 in the form of unsecured loans to maintain liquidity.

Outlook: Stable

CRISIL believes LIPL's business risk profile will continue to benefit over the medium term from its strong franchise, leading to higher-than-industry growth, and healthy operating efficiency. Also, its financial risk profile is expected to remain healthy over the medium term, though a moderation is expected in the near term due to COVID-19.  Support from promoter, in the event of extreme exigencies is also expected.

Rating Sensitivity factors
Upward Factors
* Sustained improvement in operating performance with operating margins of 10-11% (excluding the impact of Ind AS 116 accounting standard) once stores resume operations post cessation of lockdowns.
* Sustenance of healthy financial risk profile and liquidity position
 
Downward Factors
* Elongated impact of COVID-19, leading to a sharp decline in revenues and operating profitability declining sharply to below 4-5% (excluding the impact of Ind AS 116 accounting standard)
* Larger than expected debt funded capex, leading to LIPL's TOL/TNW ratio exceeding 2 times
* Higher than expected payout to promoters/support to Max Hyper.
About the Company

LIPL, incorporated in 1997, is a part of the Landmark group, led by Mr. Mukesh Jagtiani, which has business interests mainly in the retail segment in the Middle East and North African region besides Asia; the group is also present in the hospitality and healthcare sectors.
 
LIPL set up its first Lifestyle departmental store in 1999 in Chennai. It had 83 Lifestyle departmental stores, 50 Home Centre outlets, 331 Max stores, 65 Easy Buy standalone stores and 20 SIS (Shop in Shop) as of March 31, 2020 and a combined retail space of 80.4 lakh square feet as on March 31, 2020. Lifestyle operates primarily in the premium apparel segment, footwear, watches and fashion accessories, while Max operates mainly in the value apparel segment. Home Centre operates in the furniture, household goods, and home furnishings segment. Easy Buy is an affordable, family retailer operating in regional towns.

Key Financial Indicators
As on March 31 Unit 2020* 2020 2019
Revenue Rs. Cr. 9,239 9239 8,408
Profit After Tax Rs. Cr. 370 552 426
PAT margins % 4.0 6.0 5.1
Adjusted Debt/Adjusted Networth Times 3.4 0.06 0.02
Interest coverage Times 4.31 135 116
*Including the impact on IndAS 116 accounting

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Complexity level Rating Assigned with Outlook
NA Cash Credit NA NA NA 550 NA CRISIL AA/Stable
NA Proposed Cash Credit Limit NA NA NA 200 NA CRISIL AA/Stable
NA Term Loan NA NA Jun-2023 150 NA CRISIL AA/Stable
NA Proposed Term Loan NA NA NA 100 NA CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 100 Simple CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+  30-03-20  CRISIL A1+  09-04-19  CRISIL A1+  05-03-18  CRISIL A1+  10-07-17  CRISIL A1+  CRISIL A1+ 
            29-03-19  CRISIL A1+      28-02-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  1000.00  CRISIL AA/Stable  30-03-20  CRISIL AA/Stable  09-04-19  CRISIL AA/Positive  05-03-18  CRISIL AA/Stable  10-07-17  CRISIL AA/Stable  CRISIL AA-/Stable 
            29-03-19  CRISIL AA/Positive      28-02-17  CRISIL AA-/Positive   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 550 CRISIL AA/Stable Cash Credit 355 CRISIL AA/Stable
Proposed Cash Credit Limit 200 CRISIL AA/Stable Proposed Cash Credit Limit 90 CRISIL AA/Stable
Term Loan 150 CRISIL AA/Stable -- 0 --
Proposed Term Loan 100 CRISIL AA/Stable -- 0 --
Total 1000 -- Total 445 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for rating short term debt

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