Future Lifestyle Fashions: Ratings downgrade

Kishore Biyani led Future Lifestyle Fashions stock has snapped a 10-day gaining streak and is locked in a lower circuit of 5% at Rs 148.20 following the ratings downgrade amid cash flow worries.
Ratings agency Crisil has downgraded the company’s long-term and short-term bank facilities, NCDs and commercial papers. The downgrade reflects the deterioration in the business risk profile given the delayed recovery in cash flows than earlier.
NCDs have been downgraded to A+ with a stable outlook from the earlier rating of AA- with a negative outlook.
The stock was locked in an upper circuit of 5% for the last 10 sessions, its biggest winning streak on record.
Future Lifestyle was seen approaching lenders to seek ad-hoc working capital limits to enhance liquidity as the temporary closure of outlets during the lockdown triggered by Coronavirus disease (Covid-19) has hit cash flows. It is also negotiating with operational creditors to restructure terms of payment.
However, the sharp fall in the share price of listed group entities has impacted the overall financial flexibility of the group and restricted its ability to raise capital.
Future Lifestyle ratings strength is also hit by a moderate return on capital employed, high operating cycle, coupled with susceptibility to economic cycles and increasing competition in the fashion retail industry.
Future Lifestyle Fashions manages the lifestyle fashion business and has a portfolio of brands covering menswear, women’s wear, footwear, and accessories. As on December 31, 2019, the firm had 354 stores, covering an area of 73 lakh square feet.

FLFL has emerged as a leading branded fashion player with a portfolio of over 25 brands, of which 18 are either owned or licensed.

The company operates its retail outlets in three broad formats, namely Central (big-box fashion retailer), Brand Factory (liquidation channel) and EBO/Planet Sports.
We believe that Brand Factory will continue to reel under the stress of a consumption slowdown for the next 3-4 quarters.

Management earlier had expected the debt to reduce from FY20E and was earlier targeting to improve ROCE by another 300bps by FY21E, which we believe now looks tough given the sharp reduction in demand and big cut seen in operating & free cash flows ahead

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