Future Retail has been downgraded - and now banks may have another problem

• Fitch Ratings placed Future Retail on ‘B-(EXP)’ while also placing it under ratings watch negative.
• Big Bazaar stores remain open to sell groceries, however it’s not going to be enough.
• The ratings agency said that groceries and other essential items carry lower margins when compared with discretionary items, such as apparel.

Kishore Biyani’s Future Retail, which runs the Big Bazaar chain of stores, has been downgraded by global ratings agency – Fitch Ratings. The agency placed Future Retail on ‘B-(EXP)’ and also placed it under ratings watch negative.

“The expected rating is based on the yet-to-be restructured FRL entity; under the restructuring, FRL will buy the in-store infrastructure assets it currently leases from Future Enterprises and the cross-guarantee arrangements between FRL and Future Enterprises will cease,” said the report.

The fact that Future Retail stock fell by 74% for the last three months also had a say in downgrade. “The sustained fall in FRL's share price has lowered FCRPL's flexibility to submit more shares as collateral. This has raised the risk of a reduction in the stake held by permitted holders, primarily the promoters - Amazon.com, Inc,” Fitch said.

Nearly all of the promoter group stake of 41.1% stake in FRL has been pledged to lenders. Certain lenders are attempting to invoke pledges on shares that amount to an 8% stake in FRL following a breach of the collateral coverage requirement.

The Future Group has also been subject to an unprecedented crisis with the nation-wide lockdown. Even as Big Bazaar stores are allowed to remain open, the footfalls have been gravely affected. The ratings agency said that groceries and other essential items carry lower margins when compared with discretionary items, such as apparel. And these sales are hugely hit.

“This will significantly hurt FRL's profitability and cash flow in the quarter ending June 2020, followed by gradual stabilisation over the following few quarters,” said the report.

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In the third quarter of FY20, Future Retail posted a 15% fall in profits in the third quarter. It saw its profits go down to ₹170.73 crore from ₹201.43 in the same quarter the previous year.

Its income too went down by 3% from ₹5,306 crore in the same quarter the previous year to ₹5144.5 crore. Even before the Covid-19 pandemic struck, the brick and mortar retail major has been under the throes of an economic slowdown last year, which has affected consumption and also taken a toll on consumer confidence, which slipped to a six-year low.

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