Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/Stable/CRISIL A1+’ ratings to the bank loan facilities of Shoppers Stop Limited (Shoppers Stop). CRISIL Ratings has withdrawn its rating on Rs.100 crore commercial paper program basis the company’s request. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings reflect the established position of Shoppers Stop Limited (SSL) in the retail industry particularly the departmental stores category, its prudent working capital management, healthy financial risk profile, brand loyalty and strong financial flexibility, enjoyed by being a part of the K Raheja group. These strengths are partially offset by susceptibility of operating performance to economic downturns and increasing competition in the apparel retail segment.

 

During fiscal 2024, the company reported year-on-year growth of around 7% on a consolidated basis, with reported net revenue of Rs 4,317 crore. Growth was majorly driven by new store addition as the company added 55 new stores in fiscal 2024. However, the same store sales growth (SSSG) was flattish amidst slowdown in discretionary consumption witnessed across the industry. Growth is likely to pick up in fiscal 2025, led by improved demand sentiment; especially in the second half with the onset of festive season, higher volume, aided by scale up of newer stores and ongoing expansions.

 

The operating margins for fiscal 2024 moderated at ~4.57% against 6.1% in fiscal 2023. The moderation in margins were on account of the inventory write off of around Rs.34 crore; investment in technology and launch of Intune which led to increased fixed cost, besides major onetime income of circa ~Rs.26 Crs in fiscal 23These new stores were under gestation during fiscal 2024. However, going forward owing to higher volume offtake, inventory write offs reducing to normal levels, coupled with ramp up of newly opened stores, the margin shall improve and sustain in the range of 5-6% over near to medium term. Company has efficient working capital management with negative operating cycle.

 

The business risk profile remains healthy, marked by widespread presence in the premium and luxury segments. The company also ventured into the value segment in fiscal 2024, by launching Intune as their value brand catering to the young generation. SSL has more than 249 stores (excluding Shop-in-shop) across 62 cities and caters to more than 1,000 brands. SSL through its distribution business of subsidiary– Global SS Beauty has entered into partnerships and distribution rights with multiple international brands

 

Financial risk profile continues to remain healthy with adjusted networth (Pre IND AS) of Rs.661 crores as on March 31, 2024 and overall borrowings (excluding lease liabilities) of Rs.174 crore resulting in gearing of 0.26x. Going forward the financial risk profile would remain comfortable with gearing of in the range of 0.35-0.5x despite the debt funded capex undertaken by the company. Debt protection metrics like interest coverage and net cash accruals to total debt stood at comfortable levels of 21x and 1.2x respectively during fiscal 2024. Despite expectation of external debt in fiscal 2025, the above-mentioned debt protection metrics shall remain healthy. Interest coverage is expected to remain in the range of 12-15x over medium term.

 

The company to fund its capex primarily from internal funds. Overall liquidity remains strong, supported by cushion available in working capital limit and financial flexibility with the company’s ability to access capital markets, as demonstrated earlier. Expected cash accrual of Rs 230-250 crore along with some incremental external borrowing should suffice to fund capex and working capital expenses in fiscal 2025.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Shoppers Stop and its subsidiaries, which are collectively referred to as Shoppers Stop.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the departmental stores category and entry into the value segment: Shoppers Stop is one of India’s leading retail store chains, with retail carpet space of 4.3 million square feet (sq ft) as on March 31, 2024. With a diverse range of offerings (apparel, baby care, footwear, personal accessories, and furniture), the format targets the relatively less price-sensitive, upper- and upper-middle-class consumers. The company has established a strong brand equity in this target demographic, with repeat customers (through its loyalty program, First Citizen) contributing to around nearly 78% of sales. The company has also successfully scaled up this business through regular store additions. It had 112 department stores as on March 31, 2024, and plans to add 12-15 more stores by end of fiscal 2025, with focus on smaller outlets in tier 2/3 cities. The company has also ventured into the value segment via launch of Intune, which are relatively smaller stores (5,000-5,500 sq ft). As on March 31, 2024, the company has opened 22 Intune stores across India and aims to add around 60 more stores in fiscal 2025. Shoppers Stop through its distribution channel by way of its subsidiary Global SS beauty has also entered into distribution partnerships with international brands which should support growth over the medium term.

 

• Prudent working capital management: Inventory management practices are robust. In fiscal 2024, over 70% of revenue was derived from merchandise procured on consignment / concessionaire / sale-or-return (SOR) basis. This optimal mix ensures an adequate gross margin, while reducing susceptibility to inventory build-up during a slowdown, or to unsuccessful store additions. Besides, quick cash conversion on sales also minimises dependence on the working capital limit.

 

• Healthy financial risk profile: The capital structure of the company continues to remain healthy with adjusted gearing at 0.26x as on March 31, 2024 and is expected to remain comfortable in the range of 0.35-0.5x over the medium term despite availment of debt to fund the capex. The debt protection metrics continues to remain healthy with adjusted interest coverage over 20x in fiscal 2024; same is expected to remain healthy in the range of 12-15x over the medium term. Net cash accruals to Total Debt (NCATD) is also expected to remain healthy at below 1x over the medium term.

 

Weaknesses:

• Moderate susceptibility of operating performance to economic down-cycles, inflationary pressures, and large annual addition of stores: The branded apparel segment relies heavily on the disposable income of its customer segment and hence, remains susceptible to economic cycles, given the discretionary nature of purchases. Large expansion by retailers can exert pressure on operating margin as earnings from existing stores may not adequately offset losses from new stores. While a large portion of stores had break even, significant improvement in operating profitability is unlikely due to gestation losses from new stores and inflationary pressure on raw material cost over the medium term.

 

• Exposure to increasing competition in the apparel retail segment: The attractiveness of the apparel segment has led to increasing competition with presence of large domestic players such as Lifestyle , Reliance Trends and Pantaloons, apart from numerous smaller players entering the market. Large global apparel brands, including GAP ,H&M have also entered the Indian market in the past, thus increasing the competitive intensity.

Liquidity: Strong

The company continues to fund its capex primarily from internal funds. The overall liquidity position continues to remain strong supported by cushion available in working capital limits and financial flexibility with the company’s ability to access capital markets as demonstrated in the past. Going forward the company is likely to generate cash accruals of Rs.230-250 crores in fiscal 2025 which along with some incremental external debt would be sufficient to fund capex and working capital requirements. Fund based bank limits of Rs.148 crores were utilized moderately at ~50% on an average over the past 12 months through May-2024. Strong parentage of the K Raheja group also supports financial flexibility and overall liquidity.

 

ESG profile

The environment, social and governance (ESG) profile of SSL supports its strong credit risk profile.

 

The retail sector has low environmental impact, primarily in the form of low emissions and water consumption and increasing focus on the usage of sustainable packaging. The sector has moderate social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

Key ESG highlights of SSL:

• Shoppers Stop’s energy consumption has reduced by ~5% in fiscal 2024 on a year-on-year basis. 
• The company has transitioned to 100% recyclable paper bags made from corn, eliminating the use of plastic packaging and shopping bags.
• At the standalone level, the company's attrition rate of permanent employees is relatively high at ~47% in fiscal 2024, though it has reduced by ~8 percentage points during fiscal 2024 from the previous year.  Also, the company has maintained its gender diversity level with share of female employees at ~29% during the fiscal 2024.
• The company's governance structure is characterized by ~60% of its board being independent directors, ~20% women board directors and extensive financial disclosures.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG will play a key role in enhancing stakeholder confidence and access to capital markets. As informed by the management, the company has already engaged with one of the leading consultants to understand the ESG maturity and materiality by benchmarking both Indian and Global Standards, review the existing data management system and ESG focus areas across the value chain for comprehensive coverage of ESG aspects

Outlook: Stable

CRISIL Ratings believes SSLs business risk profile would continue to be strong over the medium term supported by its strong brand and established distribution network in domestic retailing business. Also, its financial risk profile is expected to remain strong over the medium term benefiting from the low leverage philosophy of SSL management.

Rating Sensitivity factors

Upward factors

• Sustained improvement in operating performance with significant increase in scale of operations while maintaining operating margins over 5% leading to steady improvement in cash accruals.
• Maintenance of strong financial risk profile with efficient working capital management
• Build-up of surplus cash

 

Downward factors

• Lower than anticipated growth with slower than expected ramp up of newly added stores; operating margins (Pre IND-AS) falling below 4% on a sustained basis.
• Larger than expected debt funded capex or inorganic acquisition, or elongation in working capital, leading to material moderation in debt metrics

About the Company

Shoppers Stop is a K Raheja Corp group company, promoted by Mr Chandru L Raheja, in 1991. It is one of India’s leading omni-channel retailers in the apparels and non-apparel segments. The promoter holds 65.54% stake in the company as on March 31, 2024.

 

The company mainly operates through retail and departmental stores. Shoppers Stop is one of the largest departmental store chains in India. The company also operates beauty segment stores, Home Stop (retailing home décor) and airport stores. As on 31st March 24, it has 112 department stores, 7 premium home concept stores, 87 specialty stores, 22 Intune stores and 21 airport doors with retail chargeable carpet space of 4.3 million sq ft as on March 31, 2024. The company is listed on the Bombay Stock Exchange and National Stock Exchange.  

Key Financial Indicators

As on/for the period ended March 31^	Unit	2024	2023
Revenue	Rs.Crore	4317	4042^^
Profit After Tax (PAT)	Rs.Crore	77	116
PAT Margin	%	1.8	2.9
Adjusted debt/adjusted networth#	Times	0.26	0.21
Adjusted Interest coverage	Times	20.9	22.3

^CRISIL Ratings adjusted (excluding the impact of Ind AS 116 accounting standard)

^^Includes Miscellaneous income of Rs.20 crore

#excluding IND-AS adjustment of in networth

Any other information: Not Applicable