Press Release Max Hypermarket India Limited April 07, 2021 Ratings Amount Facilities/Instruments Ratings Rating Action (Rs. crore) CARE BBB-; Negative Reaffirmed; Long Term Bank Facilities 115.63 (Triple B Minus; Outlook: Outlook revised Negative ) from Stable 115.63 Total Bank Facilities (Rs. One Hundred Fifteen Crore and Sixty-Three Lakhs Only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The revision in the rating outlook of Max Hypermarket India Private Limited (MHIPL) from ‘Stable’ to ‘Negative’ reflects the expectation of longer than anticipated time for the company to turn around operations to generate profits and the likelihood of restrictions in various cities amid a second wave of COVID19. The rating continues to derive strength from the company being part of Landmark group with experienced and resourceful promoters, their proven and continued financial support to fund capex and losses. The rating also takes into account the partnership with Netherlands based retail group Spar International, well placed location of its stores and synergies derived from group companies. CARE also takes note of the turnaround in store level PBT during FY20 before the company’s operations were disrupted by COVID19 pandemic. Weak standalone financial risk profile with the company continuing to make cash losses, geographic concentration risk and intense competition from organized, unorganized and e-commerce players continue to constrain the rating. Outlook: Negative The revision of outlook from ‘Stable’ to ‘Negative’ is on account of the expectation of longer than anticipated time for the company to turn around operations to generate profits and the likelihood of restrictions in various cities amid a second wave of COVID19 pandemic. The outlook shall be revised to ‘Stable’ if the company is able to make a faster recovery from COVID19 induced disruptions and turn profitable. Rating Sensitivities Positive factors - Factors that could lead to positive rating action/upgrade Turnaround of company’s operations at net level with PBILDT margin>4% and cash profit. Negative factors - Factors that could lead to negative rating action/upgrade Aggressive debt funded expansion and lower than expected support from the promoters Detailed description of the key rating drivers Key Rating Strengths Part of Landmark Group with experienced and resourceful promoters MHIPL is a part of Landmark Group, one of the prominent players in retail and hospitality sector in the world is promoted by Mr Mukesh Jagtiani and is headquartered in Dubai, UAE. The group has 2200 outlets in 24 countries encompassing 30 mn sqft of space with estimated annual revenues of USD 6 Billion. Landmark Group comprises of well - known brands of retail stores (Lifestyle, MAX, Home Centre, Easybuy, Splash and SPAR), leisure (Funcity) and hotel segment (Citymax Hotels). Mr Mukhesh Jagtiani along with his wife Mrs Renuka Jagtiani holds 99.9% shares in MHIPL. Both have accomplished track record in owning and operating retail business of multiple formats across various geographies. Hypermarket format in partnership with SPAR International The SPAR brand is operated in India by MHIPL with license agreement between Max Hypermarkets India Pvt. Ltd. and SPAR International. SPAR International is a Netherland based retail group with annual turnover of 37 billion euros. The landmark group launched SPAR brand Hypermarkets in India in 2008 and derives technical expertise from SPAR international. Each hypermarket store offers wide variety of products in every category ranging from grocery (18%), 1 CARE Ratings Limited Press Release fruits and vegetables (6%), bakery, dairy (2%), meat (3%), poultry and fish, wine, beer and spirits (1.8%), home textiles (6.3%), personal care, crockery utensils, plastics and kitchen appliances, electronics (1.6%) and more. The gross margin under food and grocery segment is about 18% and for home segment it is 24%. Proven and committed financial support from promoters The current financial risk profile of MHIPL has been characterized by continuous losses. The retail industry being highly fixed cost intensive, the company has incurred substantial expenses towards establishment of stores, training of staff, inventory posting etc. The promoters have so far brought in equity of Rs. 1021 crores into the business till March ’21. Till now, the company had funded capex with a mix of equity, debt and internal accruals. During FY21, the company has not added any additional stores. The debt contracted by MHIPL is covered by corporate guarantee of Landmark Retail Holdings 1 Limited (investment arm of promoters). Moreover, there is also support from group companies in the form of Inter corporate deposits. Out of the Rs. 60 Cr ICDs from Lifestyle International Pvt Ltd, Rs. 15 Cr was paid off in January, 2020 by means of equity. During FY21, the company received equity worth Rs. 75 Cr to fund cash losses and service debt obligations. In the likelihood of the COVID19 impact to persist in the near term, funding support from the promoters is expected to continue. Well placed location and Synergies derived from group companies The majority of the hypermarkets are located in reputed malls having high footfalls. The company aims to bank upon the high movement in such malls and provide unique retail shopping experience to the consumers. Company’s brand stores are different from value retail formats which are located in one off standalone establishments/ non-prime areas. The company has recently ventured into an online website to ensure omni channel presence. However, the sales from the same is very minimal. Moreover, under new format adopted by the company all SPAR hypermarkets are opened in malls along with group’s fashion stores (Lifestyle/Max fashion/ Home centre), a move aimed at increasing its bargaining power on rentals. Further functions such as Taxation, MIS, Treasury and housekeeping are common for the group. MHIPL at present has customer base of 60 lakh consumers who also get to enjoy loyalty reward points under Landmark group. The management team is headed by the Managing Director Mr. Vipin Bhandari and is ably assisted by an experienced management team. Key Rating weaknesses Weak standalone financial risk profile MHIPL’s financial risk profile is characterized by continuous losses. Even though the company continued to report net loss in FY20, the company’s cash loss reduced from Rs. 82.88 Cr in FY19 to Rs. 30.42 Cr in FY20. However, during 9MFY21, the operations got impacted due to COVID19 and the net loss reported for the period was Rs. 103.14 Cr. The company had total debt of Rs. 184.82 Cr (including lease obligations) on an eroded net worth of Rs. (52.21) Cr as on March 31, 2020. Longer than expected delay for the business to turn profitable, albeit major turnaround in FY20 During FY20, the store PBT saw a major turnaround with the company reporting store level PBT of Rs.14.35 crores against PBT level losses reported during previous years. The company adopted number of measures to achieve certain level of discipline to achieve such efficiency like rationalization of man power and space optimization of existing stores. The major measures were done at the inventory front and as a result the company rationalized the inventory to the extent of Rs. 54 Cr in FY20 against previous year. In spite of the major turnaround in FY20, the company’s operations were disrupted by the COVID19 pandemic and related restrictions. During the national lockdown, out of the 25 stores, 20 stores which were in malls were shut down and were acting as stock point for online delivery. The mall stores were operational from June ’20 following opening of malls and MHIPL clocked sales of Rs.75 – 80 Cr/month during Nov & Dec ’20 against Rs.100-110 Cr/month during pre- COVID period. At the online front, the company has its own website sparindia.com garnering an average of Rs. 2.5 Cr/month since the December. Geographic concentration risk Currently the operations of the company are largely concentration in South (with 20 stores), especially in Karnataka. The company is expected to further expand by assessing the general market scenario. Intense competition from organized, unorganized as well as e-commerce space Retailing is a highly fragmented industry with presence of large number of organized and unorganized retailers. ‘SPAR Hypermarkets’ face intense competition from some major retail chains like Food Bazaar, D-Mart, More, Nilgiri’s, 2 CARE Ratings Limited Press Release Reliance Fresh, Spencer’s, etc., as well as from unorganized local kirana stores. Entry of foreign players and e-retailers has intensified the competition leading to further pricing pressure on traditional retailers. Further, low switching cost provides threat of substitution besides giving high bargaining power to customers. As such retailers are driven to offer discounts/ continue promotional pricing to retain customers/ convert sales. Liquidity: Adequate Company’s liquidity profile is driven by funding support from promoters. The company works on a negative working capital cycle and the cash losses are funded by equity infusion by promoters. During FY21, the promoters infused equity to the extent of Rs. 75 Cr for funding cash losses and for debt servicing. The working capital utilization was 30% for the 12 months ended Dec-20 and as on March 25, 2021 the company had liquid investments of Rs. 20 Cr. The company did not avail moratorium under RBI’s COVID19 package. Analytical approach: Standalone along with operational and financial support from Landmark Retail Holding 1 Limited. Applicable Criteria Liquidity Analysis of Non-Financial Sector Entities Rating Methodology - Organized Retail Companies Criteria on assigning Outlook and credit watch to Credit Ratings CARE's policy on Default Recognition Rating Methodology: Notching by factoring linkages in Ratings Financial ratios: Non-Financial sector About the Company Max Hypermarkets India Pvt Ltd [MHIPL] was incorporated in 2004 by Mr Mukesh Jagtiani, who is also Chairman and Founder of Landmark Group, based out of Dubai, UAE.