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Trent Limited: Rating of [ICRA]AA+(Stable) Assigned Rationale

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Trent Limited: Rating of [ICRA]AA+(Stable) Assigned Rationale May 20, 2021 Trent Limited: Rating of [ICRA]AA+(Stable) assigned Summary of rating action Instrument* Current Rated Amount Rating Action (Rs. crore) Long-term: Proposed Non-Convertible 500.00 [ICRA]AA+(Stable); Assigned Debenture Programme Total 500.00 *Instrument details are provided in Annexure-1 Rationale While assigning the credit rating, ICRA has taken a consolidated view of Trent Limited (Trent), its nine subsidiaries and step- down subsidiaries, one joint ventures and two associate companies, given the common management and significant operational and financial linkages between them. The assigned rating factors in the Trent’s strong parentage, extensive experience of its management team as well as financial flexibility by virtue of being a Tata Group entity. ICRA expects its parent, Tata Sons Private Limited (TSPL; rated [ICRA]AAA(Stable)/[ICRA]A1+), to provide need-based fund infusion to Trent. ICRA notes that TSPL had infused Rs. 950 crore in Trent in FY2020 by way of subscription to its preferential issue of shares. The rating derives strength from Trent’s established track record in the domestic retail industry, its widespread geographic presence through about 400 stores spread across 90 cities in India as well as its diversified product offerings across various segments viz. apparel, footwear, accessories, groceries, among others. ICRA notes the established presence of Trent’s flagship format, Westside (accounting for 80% of revenues at consolidated level), which driven by high share (~100%) of private label brands in total sales mix witnessed consistently high same-store sales growth till FY2020. The rating also derives strength from the strong financial profile of the company, characterised by its net cash surplus position as well as strong liquidity position, with cash and liquid investments of Rs.752.1 crore as on March 31, 2021. The rating is however, constrained by the loss-making operations of some of the owned non-apparel formats (Landmark, Booker India) as well as those operated through joint ventures (JVs), including Star Bazaar and Massimo Dutti, necessitating regular investments to support growth as well as for loss funding. The rating also factors in the intense competition in the Indian retail industry due to the presence of numerous unorganised as well as organised players in the brick-and-mortar as well as online segments. The performance of the Indian retail sector was adversely impacted in FY2021, following the Covid-19 pandemic and subsequent Government-mandated shutdown of malls as well as non-essential stores and reduced discretionary spends. Trent reported 26% YoY decline in revenues in FY2021, with a net loss of Rs. 109.8 crore. While the sales recovered upto 96% of pre- covid levels by March 2021, ICRA notes that the retail sector remains exposed to significant short-term headwinds due to renewed Covid-19 related restrictions leading to partial closure of stores in some states since mid-March 2021, which may limit sales and profits in the near-term. ICRA however, expects Trent to continue to follow cost rationalisation initiatives, spanning across rental as well as other overheads. The Stable outlook reflects ICRA’s opinion that the Trent will maintain its strong liquidity profile and shall continue to benefit from its established presence in the apparel segment as well as operational and financial support from the Tata Group. www.icra .in Page | 1 Key rating drivers and their description Credit strengths Strong parentage of the Tata Group and extensive experience of the management – Trent, being a part of the Tata Group, enjoys financial flexibility from the Group. ICRA expects its parent, TSPL to provide need-based fund infusion to Trent. ICRA notes that TSPL had infused Rs. 950 crore in Trent in FY2020 by way of subscription to its preferential issue of shares. The company also benefits from extensive experience of its management and its established track record in the domestic retail industry. Established branded apparel player with widespread geographic presence and diversified product offerings - Trent operates about 400 stores across more than 90 cities in India as on March 31, 2021. It has widespread geographic presence across major states of India and offers diverse product offerings across varied segments including apparel, footwear, accessories, food/groceries, beauty products, among others. Trent’s flagship format, Westside, operated 174 stores in India as on March 31, 2021, with another 19 stores ready with fitouts to be commissioned in the near-term. Westside has a strong brand connect with a loyal customer base, generating ~80% of total sales. Driven by high share (~100%) of private label brands in total sales mix, Westside witnessed consistently high same-store sales of 8% growth over FY2016-FY2020. Strong financial profile characterised by net cash surplus status and strong liquidity position – Trent has limited dependence on external borrowings, with outstanding debt in the form of NCDs of Rs. 299.74 crore as on March 31, 2021. It had cash and liquid investments of Rs. 752.1 crore and non-current investments of Rs. 336.1 crore as on March 31, 2021, resulting in cash surplus position. Credit challenges Prevailing headwinds in the retail sector posed by Covid-19 related restrictions – The Indian retail industry continues to face uncertainties in the near term due to store closures following temporary local lockdowns in some states starting mid-March 2021 resulting from second wave of the pandemic. This may limit sales and profits in the near-term. ICRA however, expects Trent to continue to follow cost rationalisation initiatives, spanning across lease rentals as well as other overheads. Loss making operations of some of the owned formats as well as those operated through JVs – The performance of some of the owned non-apparel formats (Landmark, Booker India) as well as those operated through JVs, including Star Bazaar and Massimo Dutti, has remained subdued and these continue to incur losses. This in turn necessitates regular investments to support growth as well as for loss funding. Improvement in financial performance of these formats as well as quantum of funding support to JVs will remain a key monitorable going forward. Stiff competition in the Indian retail industry - The company faces stiff competition owing to the presence of numerous players in the unorganised segment along with competition from various organised players in the brick-and-mortar and online segments. Liquidity position: Strong The liquidity position of Trent is strong, supported by unencumbered cash and liquid investments of Rs. 752.1 crore as on March 31, 2021 (of which Rs. 681.49 crore are on the standalone level). As against this, there are debt repayments of Rs. 299.74 crore in July 2021, with an estimated capital expenditure (capex) spend of ~Rs. 200-250 crore in each of the next three years. The cash flow generation of the company is also expected to improve from H2 FY2022 onwards, led by demand recovery with easing of pandemic related restrictions, steady store expansions coupled with continued cost control initiatives being undertaken by the company. www.icra .in Page | 2 Rating sensitivities Positive factors – The ratings may be upgraded if the company is able to report a healthy improvement in revenues, leading to a sustained improvement in its operating profit margins (OPM), while maintaining healthy credit profile and strong liquidity position. Improvement in the operating performance of JVs, limiting incremental support in the form of investments would also be key rating monitorable. Negative factors – Significant de-growth in sales or weakening of profitability margins or higher than anticipated support in the form of investments or advances to its JV/associates would exert pressure on ratings. Significant debt-funded capex or stretch in working capital cycle resulting in adverse impact on debt coverage indicators or the liquidity position of the company would also be negative factors. Any revision in the funding support policy of TSPL towards Trent or any weakening in the credit profile of TSPL will also be negative factors. Analytical approach Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for Entities in the Retail Industry Impact of Parent or Group Support on an Issuer’s Credit Rating Parent Group- Tata Sons Private Limited (rated [ICRA]AAA(Stable)/[ICRA]A1+) ICRA expects TSPL to provide need-based fund infusion to Trent. There also exists a Parent/Group Support track record of TSPL having extended financial support to Trent in the past, whenever a need has arisen. For arriving at the ratings, ICRA has considered the consolidated financials of Trent Limited. As on March 31, 2021, the company had four subsidiaries, five stepdown Consolidation/Standalone subsidiaries, one joint venture and two associates, which are all enlisted in Annexure-2. About the company Trent Limited is a part of the retail venture of the Tata Group. With a store presence of about 400 stores as on March 31, 2021 (339 stores as on March 31, 2020), Trent operates through eight different store concepts. These include a) fashion retailing through owned formats of Westside, Zudio, Utsa, and Zara and Massimo Dutti through alliances/associations with Inditex Group, Spain (with share of Trent being 49%), b) family entertainment store, Landmark, which is engaged in retailing of toys, gadgets, stationery and books, c) grocery retailing though Star
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