India Ratings downgrades Shoppers Stop to 'A1'

India Ratings has cut the rating for Shoppers Stop Ltd’s (SSL) short-term debt and commercial paper to “A1” from “A1+” on deterioration in liquidity position from lower-than-expected cash flows.

The rating action also takes into account the hike in capital expenditure than the original estimates. The downgrade reflects deterioration in SSL’s financial profile in year ended March 2012 due to continued pressure on its consolidated margins.

The consolidated margins for FY12 dipped to 11.8 per cent from 13.6 per cent for FY11. This was due to unfavourable economic conditions, opening of more new stores than the initial plans and continued losses at Hypercity Retail (held 51 per cent by SSL).

 

In H1 FY13, consolidated margins fell to 2.1 per cent from 3.6 per cent in H1FY12.

The downgrade also reflects SSL’s deteriorated liquidity position in FY12 due to weaker-than-expected cash flows along with higher-than-expected capex. The consolidated free cash flow (FCF) was negative Rs 184.4 crore for FY12, compared to negative Rs 118.7 crore in FY11).

In FY12, SSL opened 13 new stores as against the expectation of eight stores, taking the tally to 51 stores at end-FY12. The company targets to have 75 stores by end-FY15.

Its total adjusted debt rose to Rs 2,100 crore in FY12 from Rs 1,570 crore in FY11, due to higher-than-expected capital expenditure.

This together with weak margins led to fixed charge coverage ratio declining to 1.17x in FY12 from 1.40x in FY11, and net financial leverage increasing to 6.40x from 5.17x. The financial leverage is likely to remain high in the short term till the company starts accruing the benefits from the new stores.