Fitch has assigned a sub-investment (speculative) grade to Next, the consumer durables and electronics retailing arm of the Videocon group, even as the chain has said that it plans to double its turnover in the next financial year by adding new stores and private labels.
The agency, which assigned Next a rating, of ‘BB+’, said the grade was constrained by low margins in consumer durable retailing and the working capital-intensive nature of the business. These factors, it said, put pressure on the company’s cash flow.
The company’s level of negative free cash flow (free cash flow is operating cash flow minus capital expenditure) was a substantial 46 per cent of its revenue for fiscal year 2008, leading to further liquidity pressure, Fitch said. For the year ending March 2008, Next earned a net profit of Rs 2.1 crore on a revenue of Rs 664.4 crore. For the nine months ending December 2008, Next did a business of Rs 630 crore for a net profit of Rs 2.1 crore. The company has talked of Rs 1,500 crore revenue in FY 2009.
Fitch noted there had been a significant increase in debt, largely to fund the working capital requirement. Leverage levels were expected to remain high given the significant inventory requirement and expected capex plans, it said.
Next is planning to open 200 outlets in the next six months. This will take its store count to 600. The chain has plans to open 1,500 outlets in the next three years. Last year, Videocon had announced a plan to invest Rs 800 crore to expand Next and its music and lifestyle chain, Planet M, in the next three years. The company CEO, Sunil Mehta, was not available for comment on the rating.
Next is planning to launch its store brands in washing machines, air conditioners, computers and mobiles in the next six months. Currently, it sells smaller appliances such as juicers, mixers and others.
As we enter category B and C towns, there is a good demand for value-for-money products. “But we will keep the share of private labels under 20 per cent as we want to focus on retail,” Mehta said in an interview before the rating was assigned.
However, Fitch noted Next’s favourable terms with vendors, substantial increase in sales over the recent years, improvements in key store-level operating metrics, higher average sales per square foot per annum and higher gross margins.
It also said that the working capital risk was somewhat mitigated by the franchisee model adopted by Next. The model — wherein some part of these risks are covered by minimum guarantee contracts — contributes 33 per cent of its revenue
Currently, India’s consumer durable market is estimated at Rs 32,000 crore and has players such as Next, Tata’s Croma, Reliance Digital, Future Group’s EZone and Electronic Bazaar, apart from thousands of stand-alone stores. The growth rate in the durables market is expected to be 10-12 per cent this year, compared with 10 per cent in 2008.
Next has started selling toys, DVDs, DTH (direct-to-home) and gaming products, as well as handicams and IT products. “Currently, we sell these products in select places, but we will include them in all our stores,” Mehta said.
The chain had shifted 30 to 40 stores to less expensive locations in the past year to achieve better economies, he said. It has stores of 2,500-3,000 sq ft, 3,500-6,000 sq ft as well as flagship stores of 15,000-20,000 sq ft. “We are entering new cities and towns which have potential market value. Wherever we do not have representation, we will go there,” Mehta had said.
