Analytical contacts:

Anuj Sethi
Director, CRISIL Ratings

Amit Bhave
Director, CRISIL Ratings

Sushant Sarode
Manager, CRISIL Ratings

Aditya Nori
Senior Analyst, CRISIL Ratings

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2014

E-tail killing brick & mortar retail? Not so fast

September 09, 2015

Key Messages

Organised retail to grow at healthy pace

Structural factors driven by improving economic indicators

Penetration of organised retail expected to improve to around 12% by 2019-20

Brick & mortar (B&M) retail to grow at a respectable pace of 13-15% over medium term

E-retail to grow at robust pace driven by higher internet penetration and funding support

Impact on B&M retailers to be a function of product category

B&M retailers taking steps to stay in the race

Adoption of omni-channel strategy, increased focus on private labels and expansion in

tier II & III cities to support profitability and growth

Strategic partnerships and consolidation to continue

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Credit outlook for CRISILs portfolio is Stable

Improving credit quality reflects stabilization of retailers post expansion phase

Large retailers are operationally better and benefit from access to capital from promoters

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Structural factors driving growth in

organized retail

An underpenetrated retail sector in India

Food & Grocery dominates the sector
Jewellery,
watches,
eyecare
11%

Unorganized
91.7%

Footwear
2%

Books and
Music
1%

Pharmacy
2%

Home dcor
and furnishings
5%

Organized
8.3%

Food and
Grocery
64%

Consumer
Durables and IT
4%

Apparel
11%

however it is the least penetrated by organized retail

Consumer Durables, and IT

31.0%

Apparel

21.7%

Footwear

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Size of retail sector - Rs. 34 trillion

19.7%

Pharmacy

9.6%

Books and music

7.5%

Homedecor and funishings

5.9%

Food and grocery

Overall ORP at 8.3%

2.6%
0%

Source: CRISIL Research; as on March 2015

5%

10%

15%

20%

25%

30%

35%

ORP: Organised Retail Penetration

4

supported by improving economic indicators

Improvement in consumer sentiment
14%
12%
10%

6%
4%
2%
0%
Q1
2012

Q2
2012

Q3
2012

Q4
2012

Q1
2013

Q2
2013

Q3
2013

Q4
2013

Q1
2014

Q2
2014

Private final consumption expenditure growth

Q3
2014

Q4
2014

Q1
2015

Q2
2015

Q3
2015

Inflation (CPI)

Rising income levels and favourable demographics

Steady rise in average household income

Q4
2015

Q1
2016

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8%

Rising urbanization with higher proportion of

population in urban areas (31% in 2014 vs.
26% in 1990)
Growth in nuclearization of families
Breakup of population in India
Source: CRISIL Research, RBI, MoSPI

translates into healthy market potential for organized

retailers
Overall retail sector to grow at a double-digit pace
64
60

CAGR 12-13%

40

34

CAGR 13-14%

30
20

10
2010

2013

2014

2015

2016

2019

2020

.growth for organized B&M retailers to mirror the overall sector trend
6,000
5,021

Rs. billion

5,000

CAGR 13-15%

4,000
3,000

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Rs. trillion

50

2,478

CAGR 19%
2,000

1,000
2010

2013

2014

2015

2016

2019

2020

Source: CRISIL Research

6

Organized retail penetration to improve to 12% by

2020
Online retail could grow to around 30% of organized retail
Overall retail

12-13%
2015
2010

22-23%

20%

2020

15%

Organised Retail
E-retail

45-50%

60%
8.3

5.8

ORP %

12

13%

E-retail as % of organized retail

~30%

Improving internet and mobile penetration to benefit online retail

600

503
427

450
278

300

219

225

354

in Million

in Million

284

300

190
150
0

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13-14%

146

150
82
75

42

0
2013

2014

2015 E

Internet users (India)

2016 P

2017 P

2013

2014

2015 E

2016 P

2017 P

3G subscribers (India)

Access to funding and favorable regulatory environment continue to be critical factors

Source: IAMAI, KPMG, IMRB,CRISIL Research

Future growth for B&M players to be function of

product category
Growth in consumer durables, books to be impacted more
25%

Revenue growth outlook

Food & grocery

15%

10%
Consumer durables

5%

0%

Books & music

High
-5%

Moderate

Low

Extent of impact

Source: CRISIL Ratings; size of bubble indicates size of organised market

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Apparel

20%

Categories where products are standardised in nature will be impacted more.

Categories where the product is either a high involvement purchase or requires higher
investment in the supply chain will be more resilient

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Large retailers are taking steps to stay in the

race

Increased focus on omni-channel

Omni channel presence to provide consumers with convenience and counter migration
Investment (Rs. Mn.)

Future Group

1000

Shoppers Stop

600

Large B&M players have started taking steps to

ensure online presence

In-house technology interface

Shoppers Stop, Reliance Retail and Croma

Aditya Birla Group

250-300

Infiniti Retail (Croma)

200

Max with Flipkart, Future Group with Amazon, Shoppers

Arvind Ltd

200

Stop and Croma with Snapdeal

Strategic partnership with online market places

Sources: CRISIL Ratings, company reports, industry sources, media reports

Agility and flexibility across channels will become key differentiator for retailers
Increased use of channels such as mobile & social media would benefit marketing and
support growth

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Retailer

However, successful integration of offline and online retail is yet to be demonstrated in India

10

Expansion in tier II & III cities and focus on private

labels to support operating performance
Increasing focus on Tier II & III cities to continue^
500

45%

300
200
34%

55%

100
66%
0
2010

Tier I

Tier II & III

2014

^for 5 retailers- Avenue Supermarts Ltd (Avenue Supermarts -DMart), Shoppers Stop, Hypercity Retail Pvt Ltd, Lifestyle International Pvt
Ltd (Lifestyle) and V-Mart Retail Ltd (V-Mart)

Large retailers are aiming towards improving share of private labels

Improved proportion of private labels#

13.2%

2010

19.2%

2014

Gross margin

Apparel

Consumer durables

FMCG

Branded

30-35%

12-15%

10-15%

Private Labels

30-70%

20%

15-20%

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No of stores

400

Increased focus on improving quality and

acceptability of private labels
Higher proportion of private labels to benefit
operating margins

#average for 4 retailers Shoppers Stop, Lifestyle, Infiniti Retail, and Future Retail Ltd (Future Retail)

Source: CRISIL Analysis

11

Date

Acquirer

Target

Segment

Type of deal

May-15

Aditya Birla Retail Ltd (ARBL)

Total Hypermarket

Food & Grocery

Acquisition

Apr-15

Future Retail Ltd

Bharti Retail

Food & Grocery

Merger

Apr-15

Pantaloon Fashion & Retail

Madura Fashion &

Lifestyle

Apparel

Merger

Feb-15

Mahindra Retail Pvt Ltd

Babyoye.com

Specialty retail

Acquisition

Nov-14

Future Consumer Enterprise

Nilgiri Dairy Farm

Convenience stores

Acquisition

Aug-14

Spar International

Max Hypermarket

Food & Grocery

Licensing

Jul-14

Wal-Mart India & Metro CC

India

Carrefour India

Food & Grocery

Acquisition of
assets

Mar-14

Tesco Plc

Trent Hypermarket

Food & Grocery

Acquisition (stake)

Source: Media reports, Company presentations

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Strategic partnerships/consolidation to continue provides

access to geography, product categories and infrastructure

Drivers for further strategic partnerships/consolidation

Increase geographical spread of stores, entry into new channels to gain market share and
scale, and benefits from strong backend infrastructure

Increase in competition from online retailers

Entry into new product categories/brands/private labels

12

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Credit quality of large retailers to remain

stable

13

CRISILs coverage of B&M retailers has been

increasing
CRISIL rates Rs.145 billion debt

Median rating of BB
25

22

81

21

21

20

80
62
60
42
40
20

15
11

47

10

26
18

1
0

0
2010

2011

2012

2013

2014

2015

Ratings spread across verticals

Consumer
durables
7%

Others
11%

Food &
Grocery
9%

AAA

AA

BBB

BB

Large retailers account for significant

proportion of rated debt
Small, 5%, 38
Medium,
8.50%, 25

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No of rated entities

100

Large, 86.5%,
18

Home
furnishing
5%
Departmen
t Stores
(including
apparel)
68%

Revenue (Rs. Cr)

Small
(category, % of rated debt, no of companies)

Medium
Large

<100
100-500
>500

Source: CRISIL Ratings

14

Increased focus on productivity has led to margin

expansion
Improving revenue per sqft

Hypermarkets

Exit from unviable Rationalisation of store

product categories
size
Increase
in Increase in proportion of
proportion of private
more profitable apparel
labels
Increased use of data
Improved
working
analytics to better plan
capital management
inventory

14,000
12,000
10,000
8,000
6,000
4,000
2,000
2010 2011 2012 2013 2014 2015 2016F

Improved operating profitability

10.0%

6.0%

OPBDIT Margin (%)

Better cost rationalization

5.7%

5.0%

6.0%

4.0%
3.0%

8.0%

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Department store

Revenue/sq.ft/annum (Rs.)

Initiatives taken by retailers

4.0%

2.6%

2.0%

2.0%

1.0%

0.0%

2010

0.0%
2010
Source: CRISIL Ratings

2011

2012

2013

2014

2015 2016F

2011

2012

Rent as % of net sales

2013

2014

2015 2016P

Employee cost as % of net sales

15

Capex increasingly funded by internal cash flows

45
40
35
30
25
20
15
10
5
-

42

7%

38
25

6%
5%

24

21

4%

3%

13

2%
1%
0%

2011

2012

2013
Capex

2014

2015

2016F

Capex as % of sales (RHS)

and improving cash generation

Net cash accruals (Rs. Billion)

30

25
20

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Rs. Billion

Phased store expansion

15
10
5

0
-5

2010

2011

2012

2013

2014

2015E

2016P

-10
Source: CRISIL Ratings;
16

.. leading to reduced dependence on external debt

overall debt levels have remained stable
250

63

150

- 43

46

2013

2014

- 26

15

2015

2016F

16
100
50

116

2010

2011

2012

Improving debt protection metrics

0.15

3.0
2.5

0.10
2.0
0.05

1.5
1.0

2010

2011

2012

2013

(0.05)

2014 2015E 2016P

0.5
-

Net cash accruals to total debt

Strong promoter support to continue

Credit profile of most of large retailers
supported by strong funding assistance from
promoters.

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Rs. Billion

200

This has reflected in more than 50% of

contribution from promoters (in the form of
equity and loans) to external funds in capital
employed

Interest coverage (RHS)

Source: CRISIL Ratings

17

and has reflected in CRISILs rating actions

Improvement in credit quality reflected in higher upgrades
16

0
2013

2014

No of upgrades

2015

No of downgrades

Improving
store
productivity
leading to better performance

Equity
infusion
improvement in
profile

leading
financial

to
risk

Downgrades

Upgrades

Drivers for rating changes in fiscals 2014 and 2015

Debt
funded
store
additions
combined with slower-than-expected
ramping up of operations

Weak liquidity owing to stretch in

working capital cycle

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Source: CRISIL Ratings

18

Business drivers

Operating metrics

Geographical diversity

Break-even stage of retailer

Product mix & vertical diversity

Profitability metrics

Store productivity

Rental management

Share of private labels

Working capital management

Omni-channel presence

Space additions as % of existing space

Metrics to be tracked across retailers

Low Risk

Moderate Risk

High Risk

% stores broken even

>75%

50-75%

<50%

Store space addition as % of total space

<20%

20-30%

>30%

Store productivity (revenue per sq.ft per

annum in Rs.)
Capex funding (% debt of capex)

>10,000 (apparel) 7000-10000 (apparel)

>15,000 (food) 10,000 15,000 (food)
<50%

50-80%

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Key credit monitorables for B&M retailers

<7000 (apparel)
<10,000 (food)
>80%
19

B&M retail and e-retail to coexist; e-retail will not only attract consumers from traditional
B&M retailers but also from unorganised segment.

Despite intensifying competition from e-retail, revenues for B&M retailers to register a
CAGR of 13-15% over the medium term.

B&M retailers with strong focus on providing differentiated customer experience with
attractive value proposition will continue to post healthy operating performance

Improving store productivity, aligning business model to changing environment, cluster

focused store expansion plan, consolidation & strategic partnerships, will help B&M
retailers remain competitive

Prudent capex spend, improving cash generation and support from promoters will help
B&M retailers to sustain credit risk profiles over the medium term.

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B&M and e-retail to co-exist

20

CRISIL Limited
www.crisil.com
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Company
Aditya Birla Retail Ltd.
Aero Club
Arvind Lifestyle Brands Ltd.
Avenue Supermarts Ltd.
Benetton India Pvt. Ltd.
Chandana Brothers Shopping Mall
Fabindia Overseas Pvt. Ltd.
Lifestyle International Pvt. Ltd.
Mahindra Retail Pvt. Ltd.
Max Hypermarket India Pvt. Ltd.
Metro Cash & Carry India Pvt. Ltd.
Ratnadeep Supermarket Pvt. Ltd.
R S Brothers Retail India Pvt. Ltd.
Reliance Retail Ltd.
Sarathas
Saravana Selvarathnam Retail Pvt.Ltd.
Shoppers Stop Ltd
TPG Wholesale Pvt. Ltd.
Vasanth and Co.

Long-Term
ABBB+
AAAABBB
AAA+
BBB+
BB
A
BBB
BBB+
AAA
BBB+
BB+
BBBA-

CRISIL Rating
Outlook
Stable
Negative
Stable
Stable
Stable
Positive
Stable
Stable
Stable
Stable
Stable
Stable
Positive
Stable
Positive
Stable
Stable
Stable

Short-Term
A2+
A2
A2+
A1+
A1+
A1+
A2
A1
A1+
A1
-

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List of select CRISIL rated retailers

22